Third-Party Indemnity Clause Precludes Coverage For WTC Claim

In the most recent insurance ruling concerning the 9/11 World Trade Center (“WTC”) attacks, the Southern District of New York ruled that an exclusion contained within an insurance policy for property indemnified by a third-party bars the Port Authority of New York and New Jersey’s coverage for certain WTC property damage.  Certain Underwriters at Lloyd’s, et al. v. The Port Authority of New York and New Jersey, No. 1:05 CV 05239, S.D. N.Y., February 22, 2008.  Under the ruling, the Port Authority of New York and New Jersey (“Port Authority”) can only file claims for one of the six buildings and the commuter train terminal which were destroyed by the 9/11 attacks.

The Port Authority owns hundreds of properties in New York and New Jersey.  Many of these properties are controlled or managed by third-parties pursuant to lease agreements.  A group led by Larry Silverstein (“the Silverstein group”) entered into 99-year leases with the Port Authority for certain buildings at the WTC complex.

The insurers in this action provided $1.5 billion per occurrence in coverage for certain Port Authority properties.  The Port Authority did not insure property that was otherwise subject to indemnification or to insurance purchased by the Port Authority’s lessees or other third-parties.  The lessees placed approximately $3.546 billion in direct first-party property insurance on the leased property.

The Port Authority received payments of $950 million under its insurance, but contended that there was a “shortfall” between the amount available under the Silverstein group’s insurance and the funds required to rebuild the property.  The Port Authority claimed that the Port Authority insurance provided two full limits with respect to the damage to the property leased to the Silverstein group’s interests in 2001, seeking to recover up to $3 billion, or approximately double the limit for any one occurrence under the Port Authority insurance.  Specifically, the Port Authority sought coverage for the entire complex, not just the building and train terminal that were leased out.

The insurers filed a declaratory judgment action in the Southern District of New York, seeking a declaration that the Port Authority insurance does not insure the losses to the Silverstein group’s property.  The insurers’ position was based on a policy exclusion (“exclusion f”) relating to other insurance and leaseholder indemnification agreements that their policy covered only the single building and the train terminal.

Conversely, the Port Authority alleged that an exception clause in the exclusion obligated the insurers to supplement the leaseholders’ insurance if it did not provide full coverage for the loss.  However, the insurers contended that the exception applied only to other insurance that covers the property and not to the indemnification agreements.

The Court  ruled that exclusion removed the Silverstein property from coverage under the Port Authority insurance, as the Port Authority was indemnified with respect to the Silverstein property at the time of the loss by the Silverstein group’s lease agreements.  The Court held that to hold otherwise would render the indemnification portion of the exclusion meaningless.  Pursuant to the indemnification agreements, the Port Authority was fully indemnified for the loss at the complex, regardless of whether the leaseholders fulfilled their obligations.

The Court in Certain Underwriters at Lloyd’s, et al. v. The Port Authority of New York and New Jersey adhered to traditional rules of contract interpretation and enforced the policy language as written, ruling that it cannot ignore clear and unambiguous policy terms and conditions.  To ignore clear policy terms would render such terms meaningless.