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Wiley Rein, Insurer Sanctioned $1.25 Million
N.Y. federal judge hands down penalty over undisclosed World Trade Center insurance document
New York Law Journal
June 20, 2007
Failure to disclose a key document on insurance coverage for the Port Authority at the World Trade Center in the aftermath of the Sept. 11 terror attacks and other discovery abuses is going to cost Wiley Rein and Coughlin Duffy.
The two law firms and the company they represented, Zurich American Insurance Companies, have been whacked with $1.25 million in sanctions by Southern District of New York Judge Alvin Hellerstein, who said document destruction by Zurich employees and misleading statements by their attorneys added years and millions of dollars to the cost of prosecuting suits on behalf of people who died or were injured or suffered property loss in the 2001 attacks.
The judge did not dictate how much each of the three sanctioned parties should pay of the $1.25 million, leaving the door open for any of those sanctioned to "discuss the subject of allocation."
But it was Wiley Rein partner Thomas Brunner, the lead counsel for all the primary and excess insurers in the case, who was singled out for criticism for telling Judge Hellerstein on Dec. 23, 2003, "We have plenty of evidence that, believe me, we can invoke on this issue of whether [the Port Authority] is an additional insured at all."
The judge said those representations were contradicted by the 62-page document and other evidence showing that Zurich employees knew the liability insurance coverage sought by Larry Silverstein's World Trade Center Properties was meant to include the Port Authority.
It was "clearly important," and "not the type of document that becomes lost without a trace," Hellerstein wrote in In re September 11th Liability Insurance Coverage Cases, 03 Civ. 332. The discovery abuses also concealed that Westfield Corporation, a major retailer at the site, was one of the "additional insureds" that Zurich was obligated to cover under its policies with Silverstein.
"Zurich's 'culpable state of mind' is established by evidence that it intended to delete, and deleted, the electronic version of the 9/11 document, and by evidence that Zurich, or its attorneys, or both, had possession of the printed version of the 9/11 document, but failed to produce it," the judge said.
While the electronic version of the document was destroyed on Sept. 11, a paper version remained in a file cabinet in Illinois.
"Wiley Rein attorneys obtained and copied the 9/11 document in March of 2003, but they left it buried in a box for nearly two years and failed timely to produce it," he said. "Counsel's failure to recognize the importance of this document, and to produce it timely, especially when alerted to its possible existence by opposing counsel, also constitutes a violation of discovery obligations."
It was not until early 2005 that the document was produced and attorneys for the Port Authority and retailer Westfield Properties, which leased the street-level space at the World Trade Center site and also claimed it was covered by the Silverstein policies, pushed for sanctions.
In 2005, Zurich claimed the 62-page document, along with other documents, as being "mistakenly not previously produced."
Meanwhile, on April 13, 2005, Zurich agreed that the Port Authority was an additional insured. Westfield was not acknowledged as entitled to coverage until 2006.
'NEGLIGENCE OR WORSE'
Judge Hellerstein was not impressed when, at a sanctions hearing in April, counsel for Zurich chalked up the failure to produce the document to "inadvertence."
"The explanation is not apt," he said. "A finding of negligence or worse would appear to be a more appropriate characterization, and I so find."
The judge granted sanctions under Rule 11 with regards to the Port Authority and under Rule 37 for both the Port Authority and Westfield.
Under Rule 11, which governs the conduct of attorneys and the representations they make to the court, he said, "Clearly, Zurich's decision to assert and maintain its denials and defenses regarding the Port Authority's status as additional insured multiplied proceedings, caused substantial expense to the parties, caused substantial waste of court time, and insulted public and judicial expectations of the standard of conduct expected of attorneys and insurance carriers."
He sanctioned Zurich and its attorneys $750,000 -- half of which was to reimburse the Port Authority for extra attorney fees they incurred.
Of that amount, $375,000 will go to reimburse the Port Authority for extra attorney expenses. The decision did not specify where the rest would go.
Under Rule 37, which covers sanctions for the conduct of attorneys and their obligations to disclose material to each other under Rule 26, the judge said, "I find that Zurich and its counsel's failure to disclose the 9/11 document and relevant underwriting guidelines and forms caused unnecessary litigation, and compounded their Rule 11 violations."
He imposed $500,000 in sanctions, with $250,000 payable to the Port Authority and $250,000 to Westfield.
Judge Hellerstein said that on Sept. 11, Mary Merkel, Zurich's chief underwriter in the United States, "asked her assistant to print a copy of the then-existing primary policy" and kept a copy in her files in Schaumberg, Illinois.
Zurich's attorneys got a hold of the document in March 2003.
"An associate at Wiley Rein LLP, Zurich's lawyers then responsible for Zurich's representation before me, reviewed the Merkel documents, but did not report the existence of the 9/11 document to a supervising partner, or so Wiley Rein partner Leslie Platt represents," he said. "Platt also stated that Zurich's lawyers, presumably including Platt, did not consider Mary Merkel's files part of the 'underwriting files' relevant to discovery, even though Ms. Merkel was chief underwriter for the United States."
The document was not produced until Feb. 18, 2005, he said, only after depositions had been completed and opposing counsel had made "pointed inquiries," he said.
The document was withheld despite Brunner's instruction to primary liability and excess liability underwriters on Jan. 7, 2002, that "all communications relating to [the] situation should be preserved, including communications that would be discarded in the ordinary course of business."
Just four days after Brunner's instruction was issued, Zurich underwriter Lynn Maier sent an e-mail to two assistants and her supervisor saying, "As per our conversation, please confirm ASAP, that the old version of the policy has been deleted from the Document Library and replaced with the final corrected policy. This information needs to be relayed to the ... home office."
And within two weeks, Zurich claims representative William Salvatore e-mailed two other representatives to ask "Do you have a copy of the Silverstein/WTC GL policy from the document library, not the copy we provided but a copy you may have printed way back when?"
The judge later said that Brunner "represented to me that there would be substantial evidence to support Zurich's denials and defenses with respect ..."
"Zurich's contentions -- that no evidence existed showing the communicated intent of the parties, and that there had been no communication to it before Sept. 11, 2001, of the relationships and agreements among the Port Authority, the Named Insured, and the net Lessees -- were either dishonest, or objectively unreasonable, or the product of a failure to make reasonable inquiries," the judge said.
In their brief opposing sanctions, lawyers for the two firms and Zurich said that the parties acted reasonably in defining the scope of its document search and that, after being alerted to the document, Zurich promptly produced it.
Wiley Rein issued a statement in which it noted that the insurance coverage cases "were complex and hotly contested."
The firm stated, "Decisions made in that context are inevitably subject to varying interpretations. We have great respect for the judge and are carefully studying his opinion and the available options."
It declined further comment.
Thomas Kirby of Wiley Rein represented his firm at the sanctions hearing.
The judge's ruling did not specifically mention Kevin Coughlin of Coughlin Duffy, who also represented Zurich and whose firm was included in the sanctions. Coughlin could not be reached for comment and his firm did not respond to inquiries.
Peter Rosen and Blair Connelly of Latham & Watkins represented the Westfield companies. Joan Lewis and Randy Paar of Dickstein Shapiro represented the Port Authority.
Zurich spokesperson Keith Owens said the company was declining comment until it reviewed the decision.
