The bitter legal battle over insurance for the World Trade Center shows that the business of covering large risks has changed little since its parchment-and-quill-pen beginnings 300 years ago.
The industry's archaic practices — including handwritten notes for temporary cover and long contract delays — have been partly blamed for the dispute with World Trade Center leaseholder Larry Silverstein, which could cost as much as $200 million in legal fees.
A U.S. jury ruled last Thursday and on Monday to limit the liability of insurers led by Swiss Re in the disaster. But experts argue the trial need not have happened if insurers had simply issued the full policy before the September 11, 2001, attacks occurred — over two months after the cover was bought.
Worse, the process of agreeing and issuing policies has not improved and leaves the industry vulnerable to other expensive court battles over coverage because it is slow and laborious, critics say. "One would think the Silverstein case put the fear of God into everyone with a brain", said Paul Feldsher, Managing Director of Rossfield Advisors LLC, an insurance consultancy.
But a recent survey showed the insurance industry has not learned the lessons of the World Trade Center dispute.
Allianz Global Risks, a unit of Allianz AG, revealed that 90 percent of brokers and large commercial insurance buyers surveyed said the accuracy and timeliness of insurance policies remained a problem and have not improved in the past three years.
Scribbled notes, delayed contracts
The Silverstein trial turned up handwritten notes scribbled by underwriters in the margins of papers that were used as cover agreements until the full contracts were hammered out.
Thierry Van Santen, President of Ferma, an organization for risk managers of European-based corporate giants who buy billions of euros of insurance cover each year, said he has not seen any improvement in the insurance market's performance since the legal havoc wrought by the September 11, 2001 attacks.
This year, Van Santen said some of his own policies took four months to be issued after the cover began, despite his demands to receive them within weeks — partly in response to the Silverstein dispute.
If that's not enough, he's still waiting to see the policy contract for one cover he bought over a year ago in 2003.
When they finally arrive policies can be littered with mistakes and may bear little resemblance to what the client thought he had bought, experts say. But market players assume old friendships can smooth over differences that may arise, in much the same manner as when Lloyd's started in a London coffeehouse in 1688.
"It's an old cliche that insurance is a people business," said Feldsher. "Too often, deals are done with the assumption that personal relationships are the antidote to all problems. That just doesn't work anymore as many companies are publicly traded and coverage disputes involve huge sums of money."
The jury in the multibillion-dollar Silverstein trial decided in separate verdicts that most of the dozen or so insurers agreed to an insurance form that defined the destruction of the twin towers on Sept. 11, 2001 as one event.
Lawyers for Silverstein argued that the insurers used a different form and that since the towers were brought down by two different plane crashes, he should be able to collect double on his roughly $3.5 billion policy.
Antiquated processes
The industry has been notoriously slow to embrace technology. Brokers carrying huge bundles of papers containing information on risks are still a common sight on the streets of London's insurance district, where many of the world's biggest and most difficult risks are insured.
Each day, vans stuffed with documents relating to new deals are driven from broker offices to data centers where each piece of paper is keyed into computers by dozens of data entry clerks.
A large risk, such as the World Trade Center, may require 20 or 30 insurers to provide the required coverage. Each may want to add their own conditions or use their own policy form, slowing the process further.
But some experts say the industry is slowly waking up to the need to change, partly to cut the high costs of traditional working practices. Pressure also is coming from accounting changes and tough corporate governance rules in Europe, which mean the lack of key documents, such as policy contracts, will be regarded as unacceptable, said Van Santen.
"I think there are signs that the industry appreciates the need to tighten up the processing of contractual documentation, and in particular to ensure that the full terms of the contract are agreed before cover incepts," said David Kendall, senior partner at leading London insurance law firm Kendall Freeman. For the first time in over 300 years insurers in the London market this year will have a mandatory, standardized form for all deals and it is to become a requirement that the terms of insurance contracts will be clear and agreed before they come into force.
