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Spring Journal

Volume 32, Issue 1

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Contingency planners are trained to prepare for business interruptions of any type. But no contingency planner could have imagined the devastating events that occurred on September 11, 2001. The destruction and loss of life caused by the terrorist attack was astounding.

By now, the facts of the events have been well publicized. Terrorists hijacked U.S. commercial airlines and slammed them into the twin towers of the World Trade Center and the Pentagon. A fourth hijacked plane crashed into a rural area of Pennsylvania. The World Trade Center Towers, which housed nearly 1,200 businesses, crumpled to the ground, sending clouds of debris and dust crashing down on rescuers and spectators. Billions of dollars in damage occurred and more than 6,000 people were killed.

In total, some 40,000 people worked in the World Trade Center. The loss of human life and the massive destruction was devastating to the nation and to the world.

As we go to press, many questions surrounding this tragic event remain unanswered. It is not yet known who is responsible for the attack, though strong suspicion has been cast upon a subject. It is also not known what response the United States will take against the terrorists and/or countries that were behind the attack. These questions will undoubtedly be answered as time goes by.
Other questions may take even longer to answer. Of the businesses that were affected, how many will be able to survive? What will be the long-term effects on the economy? How will employees who escaped the World Trade Center deal with the trauma?

Companies Try to Return To Business As Usual

Many businesses that were located in and around the World Trade Center were able to continue ‘business as usual’ almost from the moment of the terrorist attacks. These companies relied on thorough, well-tested contingency plans and were able to switch their business operations to an alternate site almost immediately. For those companies that have been denied access to their offices, or for those whose offices were destroyed, an alternate location has been the only viable option.

Some companies have offered temporary office space to employees from other businesses displaced by the attacks, Dan Michaelis, a spokesman for the Securities Industry Association said in a previously published report.

In all, more than 15 million square feet of office space was damaged or destroyed, reports Fortune Magazine. That space is equivalent to the entire downtowns of Atlanta or Miami.

Employees are Top Concern

As companies try to return to business, their main concern has been their employees. Many firms were lucky; they lost no employees in the terrorist attack. Others, though, were not as fortunate.

Cantor Fitzgerald, the nation’s largest broker for U.S. Treasury bonds, occupied floors 101 and 103 to 105 of the North Tower of the World Trade Center. The hijacked plane hit that tower between floors 96 and 103. At last count, Cantor Fitzgerald had lost 680 of its 1,000 employees.
Fred Alger Management, which occupied floor 93 of the North Tower, lost 36 of its 55 employees. Carr Futures, located on floor 92 of the North Tower, has 70 employees missing from its staff of 141.

The south tower of the WTC was hit between Floors 87 and 93.

Sandler O’Neill & Partners occupied floor 104. Sixty seven of their 100 employees are missing. Keefe Bruyette & Woods, which had offices on floors 85, 88 and 89, is missing 67 of their 171 employees. AON Corp occupied Floors 92, and 98 to 105. Two hundred of their 1100 employees are lost.

It has been reported that some firms hit by the attacks will be able to rebuild, but others that lost many employees may never get back on their feet.
Many of the people who worked at the trade center complex were brokers, traders and money managers. Of the more than 6000 who are missing, some 2000 worked for financial firms. But that was not the only sector affected. The legal industry also suffered great losses.

During the first weeks after the terrorist attacks, nearly one-fifth of New York City’s lawyers were unable to return to their offices. In total, some 14,000 lawyers were lost or blocked from their offices, said Frank Ciervo in an Associated Press report. He is spokesman for the New York State Bar Association. That is about 18 percent of the city’s 76,000 lawyers. The lawyers offices were either located in the trade center or in surrounding office buildings. Those that were displaced include the U.S. Attorney’s office, the Legal Aid Society, the state Attorney General’s office, the Securities and Exchange Commission’s enforcement office and many private firms.

Economy Slumps Following Attacks

The economic losses from the terrorist attacks are also staggering. The airline industry has been especially hard hit. Business has plummeted as consumers avoid flying. As a result, the airlines are laying off nearly 100,000 people. When the airlines were grounded, the nine largest airlines lost between $100 million and $250 million daily.

Smaller businesses across the nation are also feeling the effects of the economic slowdown. Restaurants, theaters and shopping centers of all types and sizes have reported sharp drops in business. The nation’s tourism industry has also suffered.

The stock market declined by double-digit percentages during the week following the terrorist attacks. It dropped 1,369 points, the biggest point loss and the fifth worst week ever for Dow Jones industrials. At press time, the stock market had rallied somewhat, making a climb of more than 300 points. However, experts predict that the markets will be unstable for quite some time.

Some say the economic woes could be short-lived if consumer confidence returns and there is a quick resolution to the United States’ proposed military action. Other analysts say it could be months before a turnaround occurs.

The Federal Government is making every effort to revive the economy. Short-term interest rates were cut on Monday, September 17 just as the stock market was preparing to open for the first time since the attacks. The government has also pledged money for rebuilding the Manhattan area. In addition, an airline aid package worth $15 billion was passed to help revive the ailing airline industry.

Overall the events of September 11 had a great affect on businesses close to and far from the site of the attacks. Businesses located within and around the World Trade Center, of course, had the greatest losses from the attack. But businesses across the nation have also felt the impact. The rebuilding process has begun. Now, we’ll wait to hear the stories of who survived and how. Those in the contingency planning world are eagerly awaiting the lessons learned from this terrifying event.

Determining Insurance Coverage Could Be A Tough Task For Businesses

Businesses damaged from the terrorist attacks of September 11 are faced with the daunting task of reconstructing their buildings, their equipment and possibly even their staffs. In the midst of this, they’ll also need to deal with their insurance companies to determine what damage is covered and when they can collect. Estimated costs from the attacks at the World Trade Center and the Pentagon have skyrocketed to above $30 billion, making it the most expensive man-made disaster. How insurance companies cope with this disaster remains to be seen.

Coverage could be excluded if insurers invoke the acts-of-war clause written into most property and liability policies. This clause protects insurers from receiving an overwhelming amount of claims in the event of a war.

Coverage could also be affected if a claimholder’s policy contains an act-of-terrorism exclusion.

This clause, though not often used, is included in some insurance forms.

Some major insurance firms, such as Chubb Corp. and Swiss Re, have already stated publicly that the destruction of the World Trade Center was not an act of war, and therefore covered under most insurance policies. But it is still not known if all insurance firms will take this stance.

According to Michael Mostow, a partner with the law firm of Quarles & Brady in Chicago, most likely the losses will be covered. However, it will depend on how a company’s particular policy is written.

“Generally in order to invoke the acts-of-war exclusion you need activity by a sovereign or quasi-sovereign group, not a faction, as was the case in the September 11 attack,” explained Mostow.

Still, Mostow cautioned that he expects some insurance firms will deny coverage, especially if an act-of-terrorism clause was contained in the policy.

“It depends on the policy. Policyholders need to look very closely at their policies to see exactly what kind of coverage they have and the terms under which they can collect,” he said.
Currently, the act-of-terrorism exclusion is not seen often on insurance forms, said Mostow. The clause was more common on forms in the 1980s. The hostile acts exclusion, which includes acts of war, warlike actions, riots and the like, is found in most property policies.
In the insurance industry, Chubb Corp. enjoys a reputation of being less likely than other carriers to deny coverage, said Mostow, so it is not surprising that they have publicly stated coverage would not be denied under the hostile acts exclusion. Chubb has said that it expects to pay approximately $100 to $200 million in claims.

“With respect to the amount of claims and damage that was caused by this event, that’s an affordable amount for that company,” said Mostow. “Chubb will be able to absorb that amount of loss and still protect their reputation by stating that they aren’t going to use the acts of war exclusion.”

However, smaller insurance firms who are less likely to be able to absorb great amounts of loss may take an alternate view on what coverage is excluded.

“Different companies will review their bases for denial,” explained Mostow, “but luckily for the policyholders the case law out there regarding these kinds of incidents is good.”
In particular, Mostow cited a 1974 decision involving the hijacking of a Pan Am airplane. The plane was flown to Beirut, the passengers and crew were released, then the plane was blown up. When the airline filed a claim for the loss of the aircraft, the claim was denied based on the hostile acts exclusion. However, after litigation, the courts ruled that coverage was not excluded since, among other things, there was not a sovereign group responsible for the act.

“When you’re dealing with big losses like a lot of companies will be doing in this disaster, it may pay to hire a lawyer and pursue your options, including litigation,” said Mostow.
Mostow expects claims for business interruption to be very high following the terrorist attacks.

“A critical issue with business interruption claims is that a policyholder still needs an appropriate ‘trigger’ to collect. Business interruption coverage is usually offered as part of an insured’s property policy. As a result, an insured needs to show that the business interruption flowed from a covered property loss,” he explained.

Lack of access to a building is not always enough to warrant insurance firms to pay a business interruption claim if an insured has not also suffered a loss to covered property, he said. Even if you do manage to get your business interruption claim approved, there are often separate liability and time limitations.

Businesses located near the World Trade Center that did not sustain damage, but were denied access to their buildings may have a tough time collecting on business interruption claims, said Mostow.

When claims are denied, policyholders still have some recourse through negotiation and litigation.

“Even if you have the acts of terrorism exclusion in your policy, there are still ways that you may be able to collect,” explained Mostow. “You may be able to prove the loss arose not from the terrorist act, but from a different, covered loss.”

For example, if a building burns down an insured may be able to collect the losses stemming from the fire (a covered cause of loss), even though the fire was initially started by a terrorist act (an excluded cause of loss).

Companies also have the option of filing litigation in a number of different jurisdictions, including the one where the damage occurred, the one where parties to the dispute are located, or in the jurisdiction where the insurance policy was executed. Mostow advises clients to file in the jurisdiction that has laws and/or rulings in favor of their position.

“There are a lot of options out there when pursuing insurance claims,” said Mostow. “It pays to be diligent and consider every angle.”

Janette Ballman is an Editor for DRJ.