Sr Intern. Bus. Ins. v. World Trade Center Prop., 01 Civ. 9291(MBM).

Citation445 F.Supp.2d 320
Decision Date25 July 2006
Docket NumberNo. 01 Civ. 9291(MBM).,01 Civ. 9291(MBM).
PartiesSR INTERNATIONAL BUSINESS INSURANCE CO. LTD., Plaintiff-Counterclaim Defendant, v. WORLD TRADE CENTER PROPERTIES, LLC, et al., Defendants-Counterclaimants. World Trade Center Properties, LLC, et al., Counterclaimants, v. Allianz Insurance Company, et al., Additional Counterclaim-Defendants.
CourtU.S. District Court — Southern District of New York

Marc Wolinsky, Esq., Jonathan M. Moses, Esq., Ben M. Germana, Esq., Joshua A. Munn, Esq., Ian Boczko, Esq., Martin J.E. Arms, Esq., Edward J.W. Blatnik, Esq., Wachtell, Lipton, Rosen & Katz, John H. Gross, Esq., Lois D. Thompson, Esq., Proskauer Rose LLP, New York, NY, for defendants-counterclaimants World Trade Center Properties LLC, Silverstein Properties Inc., Silverstein WTC Mgmt. Co. LLC, 1 World Trade Center LLC, 2 World Trade Center LLC, 4 World Trade Center LLC, and 5 World Trade Center LLC.

Milton H. Pachter, Esq., Megan Lee, Esq., Timothy G. Stickelman, Esq., Timothy G. Reynolds, Esq., Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY, for defendant-counterclaimant the Port Authority of New York and New Jersey.

Peter K. Rosen, Esq., Latham & Watkins LLP, Los Angeles, CA, Kristine L. Wilkes, Esq., Latham & Watkins LLP, San Diego, CA, for defendants-counterclaimants WTC Retail LLC (f/k/a Westfield WTC LLC), Westfield Corporation, Inc., and Westfield America, Inc.

Catherine M. Colinvaux, Esq., Zelle, Hofmann, Voelbel, Mason & Gette LLP, Waltham, MA, John B. Massopust, Esq., Thomas Caswell, Esq., Mark Feinberg, Esq., Roger Branigan, Esq., Zelle, Hofmann, Voelbel, Mason & Gette LLP, Minneapolis, MN, Dale C. Christensen, Jr., Esq., John J. Galban, Esq., Seward & Kissel LLP, New York, NY, for counterclaim defendant Allianz Global Risks U.S. Insurance Company (f/k/a/ Allianz Insurance Company).

Alan R. Miller, Esq., Robins Kaplan Miller & Ciresi LLP, Boston, MA, for counterclaim defendants Gulf Insurance Company, Travelers Indemnity Company, and Industrial Risk Insurers.

Harvey Kurzweil, Esq., Dewey Ballantine LLP, New York, NY, Robert J. Morrow, Esq., Hunton & Williams LLP, New York, NY, for counterclaim defendants Gulf Insurance Company and Travelers Indemnity Company.

Michael H. Barr, Esq., Jane G. Stevens, Esq., Edward J. Reich, Esq., Justin N. Kattan, Esq., Sonnenschein Nath & Rosenthal LLP, New York, NY, for counterclaim defendant Royal Insurance Company.

Dale Hausman, Esq., Wiley Rein & Fielding LLP, Washington, DC, Paul R. Koepff, Esq., O'Melveny & Myers, New York, NY, for counterclaim defendant Zurich American Insurance Company.

Carolyn H. Williams, Esq., Philip A. Sechler, Esq., Williams & Connolly, Washington DC, for counterclaim defendant Industrial Risk Insurers.

OPINION AND ORDER

MUKASEY, District Judge.

Before the court are two sets of motions and cross-motions for partial summary judgment arising out of an ongoing appraisal proceeding in the litigation to determine the amount of insurance recoverable for the destruction of the World Trade Center complex ("WTC") on September 11, 2001 ("9/11"). The parties to the proceeding are, on the insurers' side, several of the companies that provided insurance coverage for the WTC on 9/11 ("the Appraising Insurers"1), and, on the insureds' side, the Port Authority of New York and New Jersey ("Port Authority"), WTC Retail LLC (f/k/a Westfield WTC LLC), and the Silverstein Parties2 (collectively, "the Insureds").

In the first set of motions, the Silverstein Parties move for a declaration that the full appraised value of tenant improvements affixed to the WTC and owned by the Insureds be included in the calculation of replacement cost, one of three quantities being determined by the appraisal panel. The Appraising Insurers cross-move in three different motions—based on their similar but not identical policies—for orders that would bar the Silverstein Parties from recovering the full replacement cost of the improvements; limit the Insureds' recovery to their "financial interest" in the improvements; declare that this financial interest is "the unamortized portion of the [Port Authority's] original contribution to the improvements"; and hold that replacement cost coverage is inapplicable to tenant improvements and should not be calculated as to the improvements.

In the second set of motions, some of the Appraising Insurers move for a declaration that the definition of actual cash value ("ACV") in one of the policies—the Travelers form—requires application of the "broad evidence rule," which allows the Appraisal Panel to consider any relevant evidence, including market value, tending toward an estimate of the loss caused by the destruction of the WTC. The Silverstein Parties cross-move for a declaration that ACV must be determined according to the plain language of the definition, starting with an estimate of "replacement cost new," deducting for the physical impairments of value specified in the policy, and avoiding any calculation that is based on or incorporates market value.

For the reasons set forth below, the Silverstein Parties' motion to include tenant improvements in replacement cost is granted and the Appraising Insurers' related cross-motions are denied. On the second set of motions, the moving Appraising Insurers' motion to use the "broad evidence rule" to define ACV is denied, and the Silverstein Parties' cross-motion relating to the exclusion of market value calculations is granted.

I.

The following facts are drawn from the parties' submissions, as well as prior opinions in this litigation, familiarity with which is assumed.

In July 2001, the Silverstein Parties entered into 99-year leases with the Port Authority for the commercial space in the WTC, which comprised the North and South Towers, buildings 4 and 5, the retail mall, and related sub-grade spaces. Westfield WTC LLC, now known as WTC Retail LLC ("WTC Retain,3 entered into virtually identical leases for the complex's retail mall. In connection with these leases, the Silverstein Parties, on behalf of themselves, the Port Authority, and WTC Retail, purchased over $3.5 billion of "per occurrence" property insurance from a group of insurers. This group included, among others, Allianz Global Risks U.S. Insurance Company (f/k/a Allianz Insurance Company), Gulf Insurance Company, Royal Indemnity Company, Travelers Indemnity Company, Zurich American Insurance Company, and Industrial Risk Insurers ("IRI"). After the destruction of the WTC, these six insurers, along with the Insureds, agreed to participate in an appraisal to determine various values under their policies (the "Appraisal"). The parties have stipulated (see Ex. 12 to TI Blatnik Decl.4) that the purpose of the Appraisal is to determine three specific values: (1) the replacement cost of the WTC; (2) the actual cash value of the WTC; and (3) the rental value loss that resulted from destruction of the WTC. (See id. at 2-3) Questions regarding actual claims made on a replacement cost basis as reconstruction progresses are beyond the Panel's mandate; the provision of the stipulation that describes the replacement cost that the Panel must determine—Section I.A.1—recognizes that "[t]he Insureds will be making claims on a replacement cost basis as moneys are expended to rebuild" but notes that "[t]hose claims are not part of the I.A.1 topic." (Id. at 3, n. 5)

A. The Insurance Policies

The coverage provided by each of the Appraising Insurers is governed by one of three policies: Travelers, Insurance Services Office ("ISO"), or IRIS.5 Each is a "binder" policy, an interim form that covers the insured while the parties work out a final insurance agreement. All three policies provide for "replacement cost" coverage as a supplement to traditional "actual cash value" coverage through a form or collection of provisions called a Replacement Cost Endorsement ("RCE").6 Although the three RCEs are not identical, their provisions and methods for determining the amount of replacement coverage are substantially similar.

Specifically, the Travelers form provides that, in the event of a covered loss, "the Company will determine the value of Cov-ered Property at replacement cost as of the time and place of loss, without deduction for physical deterioration, depreciation, obsolescence and depletion, except as otherwise provided in this endorsement ...." (Ex. 1 to TI Munn Decl. at Willis 98580) This valuation is subject to several conditions, including that "[t]he Company will not pay for any loss or damage on a replacement cost basis until the property is repaired, rebuilt or replaced." (Id.) If the property is not replaced, the RCE provides that "the value of the property will be determined at `Actual Cash Value,'" a term defined elsewhere in the RCE as "the cost to repair, rebuild or replace the lost or damaged property, at the time and place of the loss, with other property of comparable size, material and quality, less allowance for physical deterioration, depreciation, obsolescence and depletion." (Id. at Willis 98580, 98582). This definition is the subject of the parties' ACV motions discussed later in this opinion.

The ISO policy, as modified by applicable "Optional Coverages," provides replacement cost coverage (see Ex. A to TI Kattan Decl. at ROY 05550) whereby the insurer must "determine the value of Covered Property in the event of loss . . . at [Replacement Cost (without deduction for depreciation)] as of the time of loss or damage." (Id. at ROY 05548) However, as under the Travelers policy, the insurer "will not pay on a replacement cost basis for any loss or damage: (1) Until the lost or damaged property is actually repaired or replaced; and (2) Unless the repairs or replacement are made as soon as reasonably possible after the loss or damage." (Id. at ROY 05550-51)

Finally, the IRI RCE, like the Travelers and ISO policies, conditions replacement...

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