9

9.11 – Ramifications of the Attack and Its Aftermath

On Corporations, Insurers and Counsel:

The Occurrence Question

Colin Croly

Katy-Marie Wilson

Introduction

In the aftermath of September 11, 2001, issues have arisen regarding the ability of reinsureds to add together or aggregate more than one original claim arising out of the tragedies in New York, Washington, D.C. and Pittsburgh, for the purpose of presenting these claims to reinsurers. When resolving these issues, claimants should be mindful particularly of relevant English law.

To respond to the problem precisely, of course, one would need to know what claims or losses the reinsureds were seeking to aggregate and what contract provisions governed the claims presented. Therefore, what follows is an attempt to give relevant guidance by citing the broad principles of English law.

II.

The Broad Principles of English Law

The recent past has seen a plethora of cases analyzing the issue of aggregation. Usually, these determinations have concerned the proper definition of “event” / “occurrence” for the purposes of reinsurance aggregation. They have otherwise discussed the application of a deductible and/or an assessment of the number of relevant events, referring to “each and every loss” defined as “. . . every loss and/or occurrence . . .” or “series of losses or occurrences . . . arising out of one event.” Initially, when discussing the concept of aggregation, it may be helpful to note certain key passages from the leading authorities: “In my judgment, the three requirements of a relevant event are that there was a common factor which can properly be described as an event,[1] which satisfied the test of causation and which was not too remote for the purposes of the clause.”[2] In the words of Lord Mustill, “[i]n ordinary speech, an event is something which happens at a particular time, at a particular place, in a particular way.”[3] In Kuwait Airways Corp. v. Kuwait Insurance Co. SAK,[4] Rix J. in the commercial court commented as follows:

Whether or not something which produces a plurality of loss or damage can properly be described as one occurrence therefore depends on the position and viewpoint of the observer and involves the question of degree of unity in relation to cause, locality, time, and, if initiated by human action, the circumstances and purposes of the persons responsible.[5]

The court also noted that, “[i]n assessing the degree of unity regard may be had to such factors as cause, locality and time and the intentions of the human agents.”[6] Finally, in AXA Re v. Field,[7] the court determined that “event” and “cause”/ “originating cause” were different phenomena. The word “originating” suggests a conscious choice to open up the widest possible search for a unifying factor in the history of the losses for which aggregation is sought.

The attacks of September 11, 2001 are unprecedented in their magnitude and scope, but they are not entirely without parallel in previous insurance or reinsurance disputes. For example, there is the arbitration award in what has come to be known as the Dawson’s Field case. Although arbitration awards are usually confidential, this award had become so well known that it was, for all practical purposes, already in the public domain when permission was sought and obtained to refer to it in Kuwait Airways Corp. v. Kuwait Insurance Co. SAK.[8] The judgment in the Kuwait Airways case relies heavily on the Dawson’s Field award.

The Dawson’s Field award itself arose out of the 1970 hijacking of four aircraft by members of the Popular Front for the Liberation of Palestine. The hijacking occurred pursuant to a PFLP plan to hold the aircraft and passengers hostage in exchange for the release from prison of a number of Palestinian guerrillas. The plan did not succeed because the governments holding the imprisoned guerrillas refused to negotiate with the hijackers. After the aircraft had been flown from a variety of other locations and all the hostages released, one of the aircraft was exploded in Cairo, and the remaining three were exploded at Dawson’s Field in Jordan some days later.

The dispute, later referred to arbitration, arose between the aircraft insurers and their excess of loss reinsurers under a contract setting the indemnity limit and excess point by reference to “. . . each and every loss . . . and/or occurrence and/or series of occurrences arising out of one event.”[9] The question at issue before the arbitrator was whether loss of the aircraft arose out of one event. The arbitrator determined that, although destruction of the first aircraft in Cairo was a separate loss, demolition of the three remaining aircraft at Dawson’s Field constituted one event because their destruction was the direct consequence of a decision or order to detonate explosive charges which had been placed in the aircraft within a few short minutes, affording no one an opportunity to approach the aircraft between the first and third explosions.[10] In that regard, the arbitrator noted the following:

I turn next to “occurrence”. As a word this is more or less interchangeable with ‘event’. Both denote something which happens, a happening. . . .

. . . .

. . . [B]oth sides gave numerous examples which would or would not in their view be regarded as loss or damage resulting from a single occurrence, such as . . . the loss of several ships in an attack on a convoy by a single submarine . . . . On which side of the line each of these is to be placed depends in my view on the position in which the person who has to make the determination is placed and on the way in which he will therefore approach the question. The crews of a submarine and of ships which are attacked or sunk in a convoy would no doubt regard each attack and sinking as a separate occurrence. An admiral at Naval Headquarters might regard the whole attack and its results as one occurrence; a historian almost certainly would. . . . Whether or not something which produces a plurality of loss or damage can properly be described as one occurrence, therefore depends on the position and viewpoint of the observer and involves the question of degree of unity in relation to cause, locality, time and, if initiated by human action, the circumstances and purposes of the persons responsible.[11]

In the Kuwait Airways case, the tribunal determined that certain previous authorities (in particular, the Dawson’s Field award) justified the following propositions:

An “occurrence” (which is not materially different from an event or happening, unless perchance the contractual context requires some distinction to be made) is not the same as a loss, for one occurrence may embrace a plurality of losses. Nevertheless, the losses’ circumstances must be scrutinised to see whether they involve such a degree of unity as to justify their being described as, or as arising out of, one occurrence. The matter must be scrutinised from the point of view of an informed observer placed in the position of the insured. . . . In assessing the degree of unity regard may be had to such factors as cause, locality and time and the intentions of the human agents. An occurrence is not the same thing as a peril, but in considering the viewpoint or focus of the scrutineer, one may properly have regard to the context of the perils insured against.[12]

Under the circumstances, the loss of 15 aircraft belonging to Kuwait Airways Corporation following the Iraqi invasion of Kuwait and capture of its airport on August 2, 1990 arose out of a single occurrence, notwithstanding that the aircraft were subsequently flown out of Kuwait individually (some were destroyed in other places only months later, and some were eventually returned). The presiding judge distinguished the Kuwaiti aircraft losses from the Dawson’s Field situation because the underlying policies in the Dawson’s Field arbitration covered a kidnap and ransom, requiring a “wait and see” approach before deciding whether or not a loss had occurred.[13] In the Kuwait Airways case, however, the losses occurred at the moment the hostile forces first seized the aircraft. Appeals were taken from other aspects of this judgment to the Court of Appeal and subsequently to the House of Lords, but there was no appeal regarding the “number of occurrences.” Indeed, the Kuwait Airways judgment was cited with approval by the Court of Appeal in a later case affecting aggregation of losses.[14]

The most recent case dealing with aggregation is Lloyds TSB General Insurance Holdings Ltd. v. Lloyds Bank Group Insurance Co. Ltd.[15] It was decided by the Court of Appeal on November 8, 2001. Lloyds TSB and Abbey National were each sued by numerous investors in relation to pension mis-selling. The largest individual claim was £35,000, but the aggregated claims totalled nearly £100 million. The question before the Court of Appeal concerned whether the advice given to the investors should be treated as a series of claims for purposes of the deductible (all would then fall within the deductible) or as one claim for purposes of measuring whether the deductible was met (thus giving rise to liability under the policy limits of £100 million). The relevant deductible clause provided as follows:

That if a series of third party claims shall result from any single act or omission (or related series of acts or omissions) then, irrespective of the total number of claims, all such third party claims shall be considered a single third party claim for the purposes of the application of the Deductible.

The Court of Appeal concluded that, although the series of claims did not result from a single act or omission, the series of claims were a related series of acts or omissions. Two of the three judges held this view because the series of acts or omissions could be related; they had a single underlying cause or common origin. These judges appear to have relied on the underlying failure of management as the feature that related the series of acts or omissions. The third judge found it unnecessary to relate the series of omissions (as he identified them) to a single underlying cause. He considered that the omissions were related and constituted a related series of omissions because they each involved the same failure to give Best Advice, although the consequences of each omission were different. He found sufficient unity in the similarity of the claims. Given these findings, the Court of Appeal decided that the claims could be aggregated, giving rise to a liability of £100 million under the insurance policy.

III.

The Facts of September 11, 2001

The following facts are relevant to the events of September 11, 2001. It is these facts between insureds, insurers and reinsurers that will likely determine the “number of events” at issue:

· Four aircraft were hijacked and crashed.

· The four flights originated from three airports: two aircraft departed from Boston and one each from Newark and Washington, D.C.

· Two aircraft belonged to American Airlines and two to United Airlines.

· A separate aircraft struck each of the twin towers of the World Trade Center (“WTC”); one hit the Pentagon, and one crashed in a rural area southeast of Pittsburgh.

· From the time of the first hijacking (which appears to have occurred shortly after take-off) until the time of the fourth crash, a little more than two hours elapsed.

· The hijackings were part of a single plan devised and executed by persons acting in concert.

IV.

Analysis of Number of Occurrences or Events

Against the factual background and applying the legal authorities noted above, the courts will decide how many “occurrences” or “events” (taking these terms, for the time being, as synonymous) took place. Various market sectors are likely to be involved in these losses. Their relevant exposure is discussed below.

A. Aircraft Hull and Liability

This discussion obviously begins by focusing on four separate losses -- one for each hijacked aircraft. It might be argued, however, that if any of the underlying policies covered airline fleets as a basis for aggregating losses to separate aircraft, then there would be two losses, one for each airline. Given that circumstance, could it also be argued that all losses arose from the same occurrence or event? Resolving a similar issue, the judge in Kuwait Airways concluded as follows:

The position is, therefore, that the aircraft were all lost on August 2. There is unity of time. There is also unity of location . . . . There is unity of cause, for, whichever of the insured perils is the appropriate one, it operates alike in respect of all aircraft. There is unity of intent. . . . [T]he Iraqis intended to exercise dominion over those aircrafts and to fly them out of Kuwait to Iraq as soon as they could logistically do so . . . . In my judgment the occurrence is the successful invasion of Kuwait, incorporating the capture of the airport and with it KAC’s aircraft on the ground; at its narrowest it is the capture of the KAC fleet at Kuwait airport. On either view, it seems to me, those matters are appropriately described as one occurrence.[16]

In the present matter, “unity of time” and “unity of cause” are likely to be established. Furthermore, in the cases at least where the aircraft were flown into the WTC and the Pentagon, the losses were caused by a suicide mission carried out in execution of a pre-conceived plan. The mobile phone calls between passengers and relatives before the fourth aircraft crashed would seem to suggest a similar objective. Location, however, is somewhat more problematic.

In both Dawson’s Field and Kuwait Airways, once it was determined that the losses took place on the day of invasion, it was plain that there was unity of location. In the present circumstances, while the triangle bounded by New York, Washington, D.C. and southeastern Pennsylvania is arguably small enough to constitute a single location, it is equally plausible that three separate locations are involved. It is also arguable, though less so, that each tower of the WTC could be considered a separate location, allowing the prospect of four locations and, therefore, four occurrences and events.

In Dawson’s Field, the arbitrator offered the following observations:

I accept their contention that if the aircraft became total losses by hijacking (which I reject) then the hijackings could not be aggregated for any purposes under the Clauses. Since the aircraft were hijacked by different persons and in widely separated localities, it would be impossible to treat the hijackings as a single occurrence. I also reject the contention faintly and more or less formally advanced by the Claimants that the hijackings arose out of one event viz the PFLP’s overall plan. I agree that a plan cannot by itself constitute an event.[17]

In contrast, the judge in Kuwait Airways concluded:

In my judgment, the occurrence is the successful invasion of Kuwait, incorporating the capture of the aircraft and with it KAC’s aircraft on the ground; at its narrowest, it is the capture of the KAC fleet at Kuwait Airport. On either view, it seems to me those matters are appropriately described as one occurrence. If, however, I had found that the aircraft were not lost until taken away and/or that the annexation decree had operated as a separate cause and occasion of loss in respect of aircrafts still at that time at the airport then I would have found there to be several occurrences.[18]

In the final analysis, the outcome is likely to depend on how a court or arbitral tribunal assesses the relative importance of strong unity of cause but much weaker unity of location. Thus, it is impossible to predict the outcome with any certainty.

B. Property Damage, Business Interruption and Harm to Those at Crash Sites

It appears unlikely that there will be any (or any substantial) claims under these categories with respect to the Pennsylvania crash. In addition, one might expect that the United States government purchased no relevant insurance with respect to the Pentagon crash.

Whether or not this assumption proves correct, the answer to the “number of occurrences/events” question in this context is likely to be the same as that articulated in the previous section (i.e., either one comprehensive occurrence, or one occurrence in each of New York, Washington, D.C. and Pennsylvania) for the very same reasons. Some limitation applies for the restricted/non-existent losses in Washington, D.C. and Pennsylvania. In any case, it does not seem that a strong argument can be advanced for two separate occurrences at the WTC. Given the eventual collapse of contiguous buildings and the business interruption losses, it will be difficult to demonstrate that the cause of such losses was the separate collapse of the North or South Tower of the WTC, respectively.

C. Liability of Airport Operators or Airlines or Other

It has been suggested that at least some responsibility for the events of September 11 lies with the three airports from which the aircraft departed, since lapses in security allowed the hijackers to board the aircraft with concealed weapons. The 1997 report of the General Accounting Office adds substance to these claims, warning of “serious vulnerabilities” in the system. Likewise, a survey by the Federal Aviation Administration found that domestic screeners failed to detect 20% of the weapons hidden in carry-on luggage.[19] A further difficulty is caused by the fact that neither the American government nor the airport authorities are responsible for vetting passengers or their luggage. Under American law, that responsibility lies with the airlines, which collectively sub-contract that duty to a handful of private security companies.

With respect to the events issue, it is unlikely that any liability which arguably attaches to the airport operators or others could be said to arise out of one event or occurrence. Even if the security failures were similar in nature, they were separate at each airport and, arguably, with relation to each boarding. In this regard, it would be instructive to compare Cox v. Bankside Members Agency Ltd.,[20] in which the court employed a similar approach when ruling that the underwriting and management of accounts undertaken by three separate Lloyd’s underwriters in the LMX Spiral market was not one, but three “originating causes” of the losses caused to names on their Syndicates. It is therefore possible to argue that the number of relevant occurrences is four, if the security lapses with respect to each boarding were sufficiently distinguishable from one another, or three, if the fault is attributed to the systems in place at each airport.

D. Life

Individuals will have been covered under life insurance schemes and personal accident accounts often sponsored by their employers. Life insurers often purchase catastrophe insurance to cover events where, for example, more than three people die as a result of one event.

E. Other Liabilities

It is also conceivable that claims for death or personal injury at the WTC may be made against the owners or managers of the complex. These might allege inadequate safety or escape systems, or simply that advice about evacuation provided to individual occupants of the buildings proved to be tragically incorrect. As a category, these claims are not only more speculative than the other claims earlier identified (all of which are readily foreseeable to some degree), but they will precipitate other issues such as causation. In other words, can some of the additional deaths or injuries be attributed to separate acts or omissions of the WTC or those responsible for its management, or were they simply among the consequences of the initial attack(s)?

F. Clash Covers

Probably the most difficult aggregation question of all concerns whether reinsureds who are exposed to losses falling into more than one category are entitled to claim reinsurance recoveries under their clash covers on grounds that all of their losses arose from one catastrophic occurrence or event. For the reasons already discussed, the proposition that there were two events at the WTC is by no means unarguable, although the two aircraft that flew into the WTC may be regarded as part of a single event. It can be reasonably argued as well that there were three events in relation to the aircraft, personal injury and property damage losses, or even more events if aggregation is sought for any losses arising from the liability of airport operators or others.

G. Cause-Based Aggregation?

Thus far, issues have been analyzed on the basis that the relevant contract provisions are not materially dissimilar to that quoted earlier in the Dawson’s Field arbitration. However, if the relevant policy wording limits the liability of insurers or reinsurers (or the entitlement of their insureds to aggregate claims) by referring to concepts such as “one originating cause” or “the same source or original cause,” it is strongly arguable that all of the losses proceeded from the same cause. That cause would be identified as the plan to hijack four aircraft more or less simultaneously and fly them into high profile commercial or political targets in the Northeastern United States. Although, as the arbitrator observed in Dawson’s Field, a plan is not necessarily an occurrence, a plan (or its successful execution) could certainly be described as a cause.[21]

H. “Sole Judge”

It is also possible that some reinsureds, under the terms of their excess of loss contracts, will be made the “sole judge” of what constitutes each loss or one event. This type of language is commonly encountered in Risk XL contracts; it is found more rarely, though still encountered, in general or Catastrophe XL covers. In Brown v. GIO Insurance Ltd.,[22] the court determined that if a reinsured decides what constitutes a loss or an event by reason of such provision, that decision is binding on the reinsurers provided only that it is reasonable and made in good faith. As matters presently stand, it would be very difficult for a reinsurer to dispute the good faith or reasonableness of any determination by a reinsured that all of the September 11 losses arose from one, three, or four events.

Conclusion

As indicated at the outset, the discussion above involves matters of general principle. It bears repeating, however, that the application of all known facts to particular contract wording may lead to different results.

ENDNOTES