The hardest case of their careers

As insurance claims for the World Trade Centre attacks remain under review, Penny Lewis looks at how lawyers will tackle the issue

Nearly four months after the attacks on the World Trade Centre, the question of fair compensation remains unsettled. What is clear is that the financial security of those caught up in the events of 11 September will be decided by the most expensive legal question ever asked.

Insurers are braced for claims for destroyed buildings, contents, motor vehicles and aircraft, business interruption, personal accident, death in service and medical costs. The al-Qa'ida network's handiwork will overtake Hurricane Andrew's $19.6bn bill as the largest single insurance incident. Figures of $30–58bn have been mentioned.

Malcolm Tarling, of the Association of British Insurers, says that because of the "unprecedented catastrophic nature of the event, it will take some time before the extent of the claims can be assimilated." Lloyd's, in the firing line, will take a large but not fatal hit. Its estimate of WTC losses is £1.9bn net of reinsurance, gross, £5.7bn.

Lloyd's acknowledges that the largest short-term threat to the solvency of the global insurance market is "exposure to severe catastrophic events". Rick Hudson, group director of underwriting and claims at Royal & SunAlliance, observes: "WTC was insured by the great and the good of the world insurance market, who reinsure with the great and the good. They do not tend to become insolvent over one event like this." Such insurers budget for worst-case-scenario calamities. The maximum sum insurers are obliged to pay is capped to pre-agreed levels, usually stated within the insurance policy or schedule. The insurance contract tends to specify the limit payable "per occurrence or event".

With telephone-number-sized exposures, it is unsurprising that attention is focused on whether the Manhattan attacks constituted one or more events. Two airlines and four aircraft departing from different airports were drawn into a concerted plan. The WTC impacts and collapse occurred within less than an hour. The towers were adjacent to each other. But was it a single event or occurrence for insurance purposes? If the answer were no, the leaseholder of the buildings, Silverstein Properties, could recover the policy limit for one occurrence or event per tower. Similar issues apply to the airlines' claims.

Lawyers on both sides of the Atlantic will need to examine the issue, since decisions made in each jurisdiction do not bind the other. Swiss Re is seeking court clarification in New York. The outcome will affect victims of this and future disasters. François-Xavier Boisseau, AXA Insurance's underwriting and claims director, says that AXA in the UK is not actively investigating that question. But he confirms that they are "following the debate around this, as it may set a precedent in terms of reinsurance in future."

It would be unthinkable to suggest that reputable insurers will shirk their responsibilities. But they cannot be expected to provide a financial safety net beyond their legal obligations. Small print in policies should dictate pay-outs.

Recent cases suggest that determining the number of occurrences is almost impossible. Last year, the Court of Appeal explored the subject in Mann vs Lexington, a case concerning damage sustained in two days of rioting in Java, before President Suharto's resignation. Twenty-two supermarkets owned by PT Ramayana were damaged, igniting a reinsurance dispute about the number of claims. The reinsurers classed the disturbances as one event, on the grounds that the rioting was government-orchestrated – an approach rejected on appeal. Lord Justice Waller said they had not demonstrated "unity in time nor any unity as to place".

The Court of Appeal referred to "Dawson's Field", an arbitration decision of Michael Kerr QC (as he then was). This terrorist act, perpetrated by the PFLP – the Popular Front for the Liberation of Palestine – involved hijacking three aircraft on 6 September 1970 and another three days later. An attempt to hijack an El Al flight in London was foiled. One plane was taken to Cairo and blown up; three to an airstrip in Jordan, Dawson's Field, where they were destroyed on 12 September.

To clarify what happened, Mr Kerr devised a subjective test, putting himself "in the position of an informed observer". Stressing that "each case does depend on its own terms and circumstances", he decided that the fate of the aircraft in Jordan was not sealed at the outset. They were initially held for ransom and were destroyed only when demands were refused. He regarded the "blowing-up of three aircraft in close proximity more or less simultaneously, within the time-span of a few minutes, and as a result of a single decision to do so, without anyone being able to approach the aircraft between the first explosion and their destruction" as one event generating several losses. Losses were distinguished from the hijacks – executed "in widely separated localities". These constituted more than one occurrence. Other examples given of single events generating multiple losses were mass execution by firing squad or air raids.

Kuwait Airways Corporation vs Kuwait Insurance Co SAK (1996) is regarded as definitive. Fourteen planes were taken from a Kuwaiti airbase over several days following Iraq's invasion of Kuwait, and a 15th shortly afterward. Each was insured for $80m, subject to a ground limit for "any one occurrence/any one location" of $300m. Mr Justice Rix concluded that the $300m limit applied mainly because control was lost upon invasion. He adopted the "informed observer" test from "Dawson's Field", taking into account factors such as "cause, locality and time and the intentions of the human agents". These helped him to decide that there was "such a degree of unity as to justify their being described as, or as arising out of, one occurrence."

Belinda Bucknall QC, a commercial lawyer, says: "Assuming the policy terms do not call for a different approach, the test which would be applied to the WTC losses is whether or not an informed observer in the position of the insured would regard the relevant events as a single occurrence. English courts will consider whether there is unity of factors such as cause, place, time and human intention in the circumstances giving rise to the multiple losses."

Graham Eklund, an insurance specialist and barrister, expects that if a court construes policies covering both towers and limiting insurers' obligations by reference to "any one occurrence" or similar wording, "it will search for the indices of unity in the attack or strikes". He says that "unity of intent appears to be clear, namely to destroy the WTC, which happened to consist of two towers and therefore would need two strikes. There is probably unity of control, since specified members of al-Qa'ida were carrying out al-Qa'ida's intent. There is probably unity of location since the targeted attack was on the WTC itself, albeit by two strikes. Once it is accepted that there would be separate strikes to destroy each tower, the fact that the strikes were separated by minutes should not preclude a finding of relevant unity, leading to the conclusion that there was one occurrence."

Bucknall agrees that "the question whether there has been more than one occurrence is not answered by considering whether there has been more than one loss; a single act of terrorism, like a single act of negligence, may give rise to multiple losses. With WTC, the factors which might be relied upon to support a case of more than one occurrence (two towers; four planes; some separation in time) are heavily outweighed by the unifying factors (one overall plan to destroy the main components of a single complex; common methodology; very short separation by time)."

It is hard to regard the incidents as separate in fact or at law. Indeed, the US government's response was to bracket all events of 11 September as one act of war. No doubt legions of lawyers will be arguing the significance of the minutes between the strikes for some time. This could be the biggest challenge of their careers.