“Very large, sophisticated companies have risk management people who do nothing but make sure insurance issues are taken care of. But then you've got smaller businesses that don't take that kind of care,” he said.

In fact, “you may get a situation [where] insureds may be looking to their insurance agents and saying you should have gotten coverage for me on something like this,” he agreed.

“Certainly the initial litigation issues that might come up will look to see who is ultimately liable for all of the damage here,” said Mr. Pegno.

“There's been a tremendous amount of restraint and distaste for anyone commencing any lawsuits–passenger lawsuits and lawsuits against anyone else who might be blamed for this terrible tragedy. That's very appropriate,” he said. “But you have to figure that somewhere down the road, with all the money that's at stake and with all the lawyers out there, that that type of litigation will be coming.”

Potential targets, he added, would include airlines for lack of security. “Thats not to say that they would be liable for this–or that such a lawsuit would be appropriate. But you could certainly see them as a potential target of a lawsuit,” he said.

“Right now, the sentiment is that the terrorists are ultimately to blame, not security people at any of the airlines. But I'm sure that that's a thought on other lawyers' minds,” said Mr. Pegno, who has represented insurance companies, among other clients.

Will there be litigation between different types of insurance companies–a property insurer, for example, seeking to recover from an airline insurer?

“Its certainly a possibility,” Mr. Pegno said, explaining that such subrogation suits would be brought in the name of a business to whom an insurance company has paid a claim.

Giving a typical subrogation example, he said that if an insured has a fire in its building that is caused by another building tenant, the insurer could pay the insured and then have the insured “essentially sign over” rights to recovery against the other tenant. That would allow the insurer to bring a suit in the insureds name.

“Whether thats going to happen here or not is hard to tell. This is a very singular event,” he said.

Adam Klauber, managing director for Cochran, Caronia Securities in Chicago, sees potential for such terror attack-related suits. The liability limits on airline policies are $1.5 billion per crash, Mr. Klauber said. “The way those will likely be hit is by other insurance companies going after those limits,” he added.

The loss of 50 or more lives on a plane is horrible, “but it probably doesn't add up to $1.5 billion,” he said. Noting the financial difficulties of the airlines, he also said “the airlines just don't have the money to pay much more than that,” suggesting that some lawsuits would be a waste of time.

Jerry Oshinsky, a partner for Dickstein, Shapiro, Morin & Oshinsky in Washington, D.C., who represents policyholders in cases against insurance companies, said that while classic subrogation lawsuits are “conceivable,” he believes insurers “are all going to try to work things out through their industry associations.”

“A lot is going to depend on where the action really is. Who has the money on this? Is it really the property insurers money, the airline insurer's money, or somebody else–a reinsurer over in Europe who really has the ticket on this,” he said. “I would think that they would really try to work this all out among themselves–to try to figure out some fair proportionate payment. But thats a total guess.”

Mr. Oshinsky isnt alone in “guessing” about the extent of liability issues.

“Our range of $5-$20 billion” for liability insurance losses “is essentially an educated guess,” consultants at Tillinghast-Towers Perrin wrote in a recent report. The report said: “The low end of the range reflects the basic facts of the situation: plaintiffs will be very sympathetic, and defendants with very deep pockets, while the high end assumes a broad set of actions, involving many plaintiffs and many defendants.”

Mr. Pegno said other legal issues likely to arise as a consequence of the terrorist attacks will focus on policy language–pointing, for example, to possible disagreements over act-of-war exclusions.

Noting that many companies have announced through the media that they're not going to try to invoke those exclusions, Mr. Pegno isnt altogether satisfied that the issue has been resolved. “You don't know what all the insurers are going to do. Some may be more willing than others to step forward and cover these types of events,” he said.

Mr. Oshinsky, on the other hand, said, “I don't really think there's going to be a great deal of litigation over traditional coverage issues” like war exclusions. He did say, however, that there are questions with respect to terrorist exclusions. “If there is a terrorist exclusion, it is conceivable, if not likely, that it only applies to terrorism overseas,” he said.

Turning to a very different set of coverage issues, Mr. Oshinsky said, “There's an interesting property insurance question that arises if your building was not physically damaged, but you can't access the building because part of New York is closed down.” Noting that a company might lose business if its workers could not get into their offices, he wondered aloud whether business interruption insurers would cover such situations. (For a related article, see “FC&S Ponders Business Income Claims” in last week's edition, page 51.)

Shifting gears from simply raising the question to actually arguing the case, he said: “I would argue, number one, that certainly the losses you have incurred are as a consequence of physical damage.” He went on to point out that there are policies that expressly cover the loss of business caused by an order of a governmental authority.

What if you don't have that provision in your policy? “Then you have to look at your policy and see what it says. Is the business interruption coverage freestanding or is it tied to damage to your property?” he said.

“Sometimes you have contingent time element business interruption coverage–where you can't operate because something has happened to somebody who is in business with you,” he continued. For example, he noted that he had once successfully represented a magazine publisher that was unable to put out its magazine when its printers facility was shut down by an ice storm.

“There was no physical damage to my client, but my client was out of business for a few days because of the physical loss incurred by its supplier,” he said. “I'd want to look at that issue in connection with business not specifically and directly physically damaged” in the World Trade Center attacks, he said.

Asked about the possibility of finding coverage for a client with contingent business interruption coverage whose supplier was not in the World Trade Center, but blocks away (shut down by an order of the city of New York), Mr. Oshinsky said he could find arguments for coverage. In such a situation, the policyholders lawyer would argue that his potential client would be covered for damages that “arise out of” physical damage.

Suggesting that physical damage to a building that housed neither of the parties involved in the business relationship could trigger coverage anyway, he drew an analogy to a case in which a building owner recovered lost-time damages under a commercial general liability policy. In that case, he said, employees of a subcontractor had suffered injuries on the job.

“It cost the owner more money to have the building built,” he said, explaining that “even though the building owner did not suffer bodily injury, his claim arose out of bodily injury that had been suffered by employees of the subcontractor.”

Mr. Oshinsky said a big issue in determining business interruption insurance losses from the World Trade Center attacks is likely to be valuation. “The question is not always whether there's coverage, but how much. What did you really lose? I could see that as a fertile area for discussion, if not litigation,” he said.

Here, he said, insureds have to supply documentation on several questions: How many sales would they have made? What customers did they lose? Did customers go elsewhere? What was gross revenue before and after the event? What did they make in the first six months of the year? The last six months?

He went on to describe the complexity of such cases, using an example of a generic pharmaceutical manufacturer that he had represented. Noting that the drug maker had to try to substantiate hypothetical projections of income it could have made had cultures for drugs in the process of being brought to market not been destroyed in a fire, he said that coverage valuations can take years to play out.

“The business interruption claims here are going to be massive,” Mr. Pegno said, adding that insureds will face problems in proving such claims where records were totally destroyed or completely inaccessible for extended periods of time. “You could conceive of there being possible litigation along those lines,” he said.

While some firms in the area of the World Trade Center are reported to have had centralized off-site record-keeping, thats not always the case, he said, using his own law firm as an example. “Our records, of what we've been doing in terms of business, are here. It would be tremendously difficult for us to establish with any real amount of precision what the [value of a] business interruption” was if the premises were destroyed, he said.

“You certainly have to figure that a lot of people are going to find out that they didn't have the kind of coverage that they thought they would have,” Mr. Pegno said, addressing whether there will be coverage for firms shut down by government actions or for extended periods of time.

“Companies are always looking to cut costs and insurance is a cost. People may be unpleasantly surprised in terms of what their coverage is,” he said.

Mr. Pegno believes that property coverage will be another major area of coverage litigation. “These are going to be incredibly complex property damage claims, complicated by the loss of records,” he said.

“They always tell you when you get insurance on your house to videotape everything–to walk through the house and make a list. Here, you're going to be in a situation where a lot of data has been lost. And there will be questions of what exactly has been lost because documentation that might establish that has also been destroyed,” he said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, October 15, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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