Authority of New York and New Jersey. Silverstein, who enjoys a reputation as a skilled, tough landlord, planned to do such a good job maximizing individual rental payments from the Trade Center’s tenants, while keeping expenses down, that they’d end up with much more than the annual cost of paying off the debt and a $120 million-a-year payment due to the Port Authority.
But when the attacks came barely six weeks after the deal had closed, Silverstein’s investment suddenly turned on one thing: insurance. How well was he covered? By the evening of September 11, Silverstein had begun talking to lawyers and orchestrating what has become an audacious legal and public-relations campaign aimed at getting him and his investors as much as possible of an extra $3.55 billion in insurance–a fight that will help determine who rebuilds Ground Zero and how.
Silverstein had taken out insurance from multiple companies (no one insurer insures anything this large) that limited the total payout to $3.55 billion “per occurrence” in the event that the Trade Center complex was destroyed. But when the two towers of the Trade Center were each struck, 16 minutes apart, as part of the same terror plot, was that one “occurrence,” or was it two occurrences worth $7.1 billion? If you say it’s one, what if the planes had hit two hours apart? A day apart? If you say it’s two occurrences, what about the fact that the crash into the first tower obviously also damaged the second tower? Or that it was all part of the same attack, albeit with two weapons, from the same people and that the buildings had one common plumbing and air system and one common insurance policy?
It’s an interesting brainteaser, if you like law-school hypotheticals. But how’s this for ruining the game:
“The word ‘occurrence’ shall mean any one loss, disaster or casualty or series of losses, disasters or casualties arising out of one event. When the word applies to loss or losses from the perils of… civil commotion and vandalism and malicious mischief one event shall be construed to be all losses arising during a continuous period of 72 hours.”
That clause–which clearly makes the attacks one occurrence–can be found in the policy form that Silverstein’s own broker had insisted on during negotiations with the insurers.
So how could his lawyers and PR people now argue otherwise? Part of the reason is that because the attacks happened so soon after Silverstein closed his deal, the formal insurance policies had not yet been signed. Instead, documents known as binders had been drafted by his brokers and agreed to by the insurance companies. These binders, which summarize a deal until the formal contract is written, referred clearly to the broker’s policy that contained this clause. But one company–Travelers Insurance, which had come in for a small portion of the deal at the last minute–was at the time of the attacks negotiating to use its policy form, which did not define occurrence at all.
Silverstein’s lawyers quickly seized on the existence of that Travelers policy document to claim that every insurer was bound by that vague definition of occurrence. And Silverstein’s PR firm was soon selling the case as a fascinating tossup, in which occurrence was not defined and which both sides ought to settle somewhere in the middle between $3.55 billion and $7.1 billion. More than that, the PR people and the lawyers made sure that every legal brief was laced with language urging that the dispute be resolved quickly so that, as one brief put it, this “sixteen acre scar in the middle of the financial capital of the world… is rebuilt promptly… to show the world that America will not succumb to terrorism.”
Silverstein’s position stunned the lead insurer in the group–London-based Swiss Re International, which had provided $780 million in coverage that would have to be doubled if the two-occurrence theory prevailed. So in October Swiss Re sued, and the other insurers soon joined the case.
The lawyers are now almost finished scouring the other side’s files and questioning their witnesses in preparation for a purported November trial. The materials reveal a treasure trove of evidence against Silverstein, including:
The strongest “evidence” the other side seems to have–and I begged them to show me their best stuff–is an e-mail an assistant in the broker’s office sent to Swiss Re in late July with a copy of the Travelers policy form attached. The e-mail did not mention the attachment, the attachment wasn’t labeled as a Travelers policy and no one from Swiss Re acknowledged reading it, much less agreeing to it. Nor did any of the other insurers or lenders involved in the deal say they had ever even heard of the Travelers policy, let alone agreed to use it. Nonetheless, the Silverstein lawyers argue that this proves that Swiss Re had agreed to the Travelers form.
All of this may explain why the Silverstein lawyers are now openly talking about a settlement. The insurers’ lawyers have become so cocky that they’re saying they want a trial. But I bet they’d pay from $3.8 billion to $4.4 billion to make this go away rather than risk a New York jury reaching, as Silverstein has, for a higher payout purportedly to enable the Trade Center to be rebuilt.
Whether the money really will be used by Silverstein to rebuild is a whole other question, one that the insurers’ side has raised repeatedly. In the Silverstein lease there is a clause that, in the event the Trade Center is destroyed, requires the Port Authority either to let him rebuild it exactly as it was or, if that isn’t feasible, for the two sides to agree on a new plan. Port Authority officials had been saying that while they’re not going to let Silverstein rebuild two 110-story towers, they would let him build the same number of square feet of office space spread over more buildings in a way that he’d find agreeable. Yet with the widespread negative reaction to the release last week of six different Ground Zero plans providing for all that square footage, it now seems clear that they will be forced to scale back on what they let Silverstein rebuild. That means some accommodation involving the insurance proceeds and the rebuilding plans will be necessary–an accommodation that could be hard fought because the various contracts seem to give Silverstein a claim on as much as $1 billion of the insurance proceeds if he refuses to compromise and walks away without rebuilding.
Port Authority general counsel Jeffrey Green says any such disagreement with Silverstein is unlikely. And Silverstein–showing the same indignation he summons when he talks about the insurers’ not paying what they owe to rebuild New York–dismisses any scenario in which he might cash out after fighting with the Port Authority as “purely hypothetical.” (His senior majority partner, Lloyd Goldman–who, despite remaining behind the scenes, has a veto on any decision Silverstein makes–says he, too, is committed to New York and to investing whatever proceeds they get to rebuilding as much as they can.)
Wherever that insurance money goes, what’s certain is that anything beyond the $3.55 billion, one-occurrence limit that Silverstein gets to settle his loser case will be worth the millions he’s paid for scorched-earth legal and PR warriors. After all, just 5 percent means $177 million. Litigating has clearly been Silverstein’s best Ground Zero investment.
