Court Affirms Limit on Replacement Cost for World Trade Center

The replacement cost insurance policies on the World Trade Center entitle the insureds to monies sufficient to rebuild the buildings as they were prior to being destroyed in the terrorist attack of September 11, 2001, but not to build “bigger and better” buildings, a U.S. District Court judge in Manhattan has ruled.

Developer Larry Silverstein and fellow insureds had sought to force insurers to pay up to an estimated $700 million extra to reflect the cost of rebuilding under post-September 11 codes using modern materials.

But U.S. District Judge Harold Baer in Manhattan rejected Silverstein’s plea. Baer found that while the insureds may have wished they had purchased a policy that reimbursed for “expenses associated not just with reconstructing WTC as it stood in September 2001, but with building it the way a savvy developer would build it in 2006,” they did not in fact buy such a policy.

Instead, he wrote, the replacement policies they purchased “unambiguously establish that the most the insureds can recover on a replacement cost basis is the amount it would cost to reproduce the WTC beam-for-beam, pane-for-pane, as it stood early on the morning of September 11, 2001.”

Most insurers on the WTC properties had not issued final policies at the time of the terrorist attack but had issued binders. Three binder policies were at issue in this case: a Travelers policy used by Allianz Global Risks US Insurance Co. (Allianz Insurance Co.), Gulf Insurance Co., Travelers Indemnity Co., and Zurich American Insurance Co.; an Insurance Services Office (ISO) policy, which bound Royal Indemnity Co.; and a third, the IRI policy, which bound Industrial Risk Insurers. All three contracts provided coverage on a replacement cost basis.

In Baer’s view, the issue was whether the replacement cost coverage provided by the policies encompasses all the costs necessary to construct a “hypothetical complex of buildings that would be functionally equivalent to the original WTC, given the present-day political and technological conditions.”

Silverstein argued that the policies and case law precedents required insurers to pay to rebuild to meet today’s building codes, safety requirements, technology capabilities and other standards, not those of the original building.

Baer summarized — and dismissed — the insureds’ argument:

“In short, they claim the appraising insurers should be required to pay not just for brand new buildings, but for far better properties than the insureds would have owned if the attacks of September 11 had never occurred. Boiled down to its essence, the logic of the insureds’ claim is that the WTC was considered safe, modern, and politically acceptable when it was built; therefore, the measure of replacement cost is the amount that would be required to erect safe, modern, and politically acceptable buildings today. This is incorrect. Insurance against technological change and shifts in the political winds may very well exist in the marketplace. But no court has ever found that such coverage is included in a replacement cost policy.”

Baer found that none of the insured’s arguments were supported by the language of the policies or by case law.

“Specifically, there is no mention in any of the contracts of pragmatic imperatives, contractual obligations to third parties, or public policy concerns. If the parties had intended to allow the insureds to take those factors into account – i.e., to build a bigger and better building and thereby recover an additional $700 million – it stretches credulity to suggest they would not have made this understanding explicit. Read as a whole then, the Travelers, ISO and IRI policies are each unambiguous with respect to the issue before me…,” Baer wrote.

Insurers have estimated that Silverstein’s plans for better buildings would cost about $700 million in additional payments. However, the case and cost estimates were complicated by the fact that Silverstein does not actually intend to rebuild the Twin Towers or anything like them at Ground Zero.

In separate cases, Silverstein attempted to recover $7 billion on $3.5 billion in policies from dozens of insurers by arguing that the Twin Tower attacks of Sept. 11 were two separate events. While he did not totally succeed in these cases, a federal appeals court recently upheld rulings that entitle him to a total of $4.6 billion in insurance proceeds.