Author: Lawrence Cunningham

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Dale Oesterle on Buffett & Munger 20 Years Later

35Editor’s Note: Dale Oesterle (Ohio State U.) contributes an extended version of his current reflections on The Buffett Essays Symposium: A 20th Anniversary Annotated Transcript, recently published by The Cunningham Group and Harriman House. Prof. Oesterle (right) participated in the 1996 symposium’s panel on takeovers and engaged in extensive colloquy with Berkshire Hathaway Vice Chairman, Charlie Munger, sitting in the front row (left).   67

Much has changed since my exchange with Mr. Munger in 1996.  Relevant to my comment, leveraged acquisition practice, and our view of the social utility of leveraged acquisitions has changed significantly.

First, true hostile tender offers, tender offers that close hostile, are dead.  By hostile, I refer to tender offers that are made and executed (closed) without the consent of the target board of directors.  An offer closes hostile when the hostile bidder, buys enough stock to replace vote out a resisting target board.  Financial buyers were “raiders” funded by “LBO Funds” [Leveraged Buy-Out Funds].

We have a very infrequent current substitute in which hostile tender offers are made contingent on the success of a hostile proxy contest. But the word hostile now attaches to tender offers that are, in essence, harsh opening bargaining positions to pressure sitting boards of the target to negotiate to a friendly conclusion. These bids too are rare, however.

What now survives of the old 80s hostile acquisition is a rather timid substitute.  Hedge funds buy small stock stakes so as to not trigger takeover defenses and, as “activist shareholders,” attempt to persuade a sitting board to engage in major transactions or financial reorganizations.

In most cases, the incumbent board and the new active block shareholder negotiate to some sort of compromise.  Incumbent boards that refuse any and all changes face a challenge for one or two board seats and “shark attacks”, a growing group of shareholders, other hedge funds and even institutional investors, that is increasing disturbed by the board’s position.  The common public attack, fueled by the same group of lawyers, politicians, and pundits that attacked raiders, now focuses on hedge funds and “activist shareholders.”

True leveraged acquisition became friendly, run by “PE [Private Equity] Funds,” and often focused on distressed companies negotiating purchases short of inevitable or impeding bankruptcy.  PE Funds also attracted the scorn of the public for their often radical re-organization efforts;  workers were fired, factories closed or sold, and headquarters moved. Read More

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Scalia and The Sherlock Holmes Canon: Canine Silence

Justice Scalia Speaking at GW

Justice Scalia Speaking at GW

While Justice Antonin Scalia‘s life is celebrated in a Catholic Mass of Christian Burial tomorrow in Washington by family and close friends, his legacy is being elaborated by the wider circle of former clerks, lawyers, and judges who knew him, including by many of my GW colleagues who clerked for him or other Justices.  Agree or disagree with the famously feisty jurist and scholar, his life and legacy are monumental.

Coincidentally, a new article, “The Sherlock Holmes Canon,” brought to my attention on the very eve of Justice Scalia’s untimely passing, is very timely. In this article, being published in the GW Law Review, Professor Anita S. Krishnakumar of St. John’s University explores one of the late Justice’s interpretive theories, which he called “The Canon of Canine Silence.” Scalia used it to capture what he explained was a “phenomenon under which courts may refuse to believe Congress’s own words unless they can see the lips of others moving in unison.”

To steal a line from the redoubtable Larry Solum, download this while it is hot.  Following are some highlights of the piece the Editors of GW Law Review offered in their press release:

In the famous Sherlock Holmes story Silver Blaze, Mr. Holmes and Dr. Watson solve the case of a missing racehorse, based in part on the “curious incident of the dog in the night-time.” That is, Mr. Holmes infers that the thief must have been someone with whom the stables watchdog was familiar, because the dog did not bark as the horse was stolen. Mr. Holmes reasons: when an unfamiliar person enters the stables, the watchdog barks; the watchdog did not bark; thus, no unfamiliar person entered the stables.

Courts have applied Mr. Holmes’s “dog that did not bark” logic when construing the meaning of statutes. The interpretive presumption holds: if a new law or statutory amendment would significantly change the existing legal landscape (i.e., introduce something unfamiliar), Congress can be expected to comment on that change in the legislative record; thus, a lack of congressional comment regarding a significant change can be taken as evidence that Congress did not intend a change in the law.

… Professor Krishnakumar critically examines the “dog that did not bark” canon, evaluating its normative and theoretical implications. She finds:

  • In recent years, the Supreme Court has applied the canon with increasing frequency.
  • Yet there is little study of the Court’s practice of inferring meaning from Congress’s failure to comment.
  • In most cases, it is dubious to infer that Congress could not have intended to make a substantial change without notation in the legislative record.
  • The canon is actually a “clear statement” rule in disguise. It assumes a baseline state of the law, and requires that changes from that baseline be accompanied by explicit legislative acknowledgment.
  • Professor Krishnakumar concludes that although Justices view attentiveness to congressional silence as part of
    their duty as faithful agents , they often end up using the canon to guard against changes they find normatively problematic.
  • In the wake of, and leading up to, highly divisive Supreme Court decisions, The Sherlock Holmes Canon is fascinating to anyone with an interest in law, politics, or the intersection of the two. The next application of the canon could have a significant impact on all of us.To repeat: .

This piece is likely to stay hot, so download anytime.

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Warren Buffett’s Timeless Ten Investing Rules

cunningham buffett 4e coverAbout 10 years ago, editors of Investing Rules asked me the top ten rules from Warren Buffett on investing.  Last week, the editors asked me to update the list for a new edition.  After studying the list for the first time in a decade, guess how much change was needed?

None. Given the timeless quality of Buffett’s method, I did not elect to change a word.  Herewith the list, as good today as ten, twenty or more years ago. And for elaboration of these and other insights, see The Essays of Warren Buffett, recently updated to a fourth edition.

  1. Don’t be the patsy.

If you cannot invest intelligently, the best way to own common stocks is through an index fund that charges minimal fees. Those doing so will beat the net results (after fees and expenses) enjoyed by the great majority of investment professionals. As they say in poker, ‘If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy’.

  1. Operate as a business analyst.

Do not pay attention to market action, macroeconomic action, or even securities action. Concentrate on evaluating businesses.

  1. Look for a big moat.

Look for businesses with favorable long term prospects, whose earnings are virtually certain to be materially higher 5, 10, 20 years from now.

  1. Exploit Mr. Market.

Market prices gyrate around business value, much as a moody manic depressive swings from euphoria to gloom when things are neither that good nor that bad. The market gives you a price, which is what you pay, while the business gives you value and that is what you own. Take advantage of these market mis-pricings, but don’t let them take advantage of you.

  1. Insist on a margin of safety.

The difference between the price you pay and the value you get is the margin of safety. The thicker, the better. Berkshire’s purchases of the Washington Post Company in 1973-74 offered a very thick margin of safety (price about 1/5 of value).

  1. Buy at a reasonable price.

Bargain hunting can lead to purchases that don’t give long-lasting value; buying at frenzied prices will lead to purchases that give very little value at all. It is better to buy a great business at fair price than a fair business at great price.

  1. Know your limits.

Avoid investment targets that are outside your circle of competence. You don’t have to be an expert on every company or even many – only those within your circle of competence. The size of the circle is not very important; knowing its boundaries, however, is vital.

  1. Invest with ‘sons-in-law’.

Invest only with people you like, trust and admire – people you’d be happy to have your daughter marry.

  1. Only a few will meet these standards.

When you see one, buy a meaningful amount of its stock. Don’t worry so much about whether you end up diversified or not. If you get the one big thing, that is better than a dozen mediocre things.

  1. Avoid gin rummy behavior.

This is the opposite of possibly the most foolish of all Wall Street maxims: ‘You can’t go broke taking a profit’. Imagine as a stockholder that you own the business and hold it the way you would if you owned and ran the whole thing. If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.

 

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Delaware’s Latest Show of Corporate Savvy

corp_logo_180x175Delaware continues to be the savviest seller in the world of corporate charters and related services, thanks to a combination of judicial vision and legislative elegance supported by all the state’s leadership and citizens alike.  The most recent example appears in the intersection of two technical corners–strike suit merger litigation and forum selection bylaws.

As detailed in this Wall Street Journal article of Wednesday, Delaware’s Chancery Court, led by Vice Chancellor Travis Laster, has been cracking down on frivolous shareholder suits challenging mergers.  The cases tend to be settled quickly based on corporate governance promises. Most of the cash that changes hands goes to plaintiffs’ lawyers while defense lawyers and boards seem to accept paying this “merger tax” as an investment in the certainty that that there will be no future litigation.

The WSJ piece suggests that the Chancellors’ crackdown may simply lead plaintiffs’ lawyers to file such suits in other forums.  But this overlooks one of the most important developments in recent Delaware corporate law, with which the savvy Delaware judges are keenly attuned.  If plaintiffs’ lawyers start filing increasing numbers of suits outside the Chancery Court,  more and more boards would unilaterally adopt bylaws barring such cases from any forum but Delaware.

The Delaware legislature recently authorized boards to do just that and courts elsewhere are bound to respect such arrangements and transfer any filed cases over to Delaware (as the Oregon Supreme Court did at year end in Roberts v. Triquint Semiconductor, Inc.).

True, in the past, Delaware boards and defense lawyers settle the frivolous cases and may find value in the finality. To that extent, the Chancellors’ crackdown on settlements may lead them to prefer litigating in courts more willing to give a rubber stamp, perhaps states eager to compete with Delaware in the corporate chartering and services business.

Except the Delaware judges are signaling a new world where boards need not fear these suits and crave their settlement as much as in the past.  If so, that makes Delaware more attractive and favors its selection for forum.  That increases board incentives to adopt Delaware forum bylaws.

A clearly virtuous effect of this combination of legislative, judicial, and directorial innovation is to make the merits matter more.  For Delaware, it is yet another way to cement the state’s deserved reputation as an attractive place to be incorporated.  And it does so primarily in the name of quality corporate law administration, rather than being either pro-management or pro-shareholder.

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Hot Topics 2015 to 2016: A New Year Note

What an eventful 2015! Thanks to you, my friends and colleagues in media, business, investing, and academia, for engaging conversations, publications, and gatherings on a range of topics. These include Berkshire Hathaway, shareholder activism, the AIG case, celebrity contract disputes, and many more.  During 2016, I’ll continue to offer insights, interviews, and commentary and lecture widely on the vital business stories of the day. As we move into the New Year, herewith a forecast of hot topics in 2016 I’ve been following, gratefully along with many of you, in 2015:

  1. Shareholder Activistm 2.0 . A subject of ascending importance, I’m especially interested in the activist personalities and target cultures, and in 2015 commented for a profile of Carl Icahn in the  San Jose Mercury News (by Michelle Quinn) and of Nelson Peltz in the Wilmington News Journal (Maureen Milford & Jeff Wordock) as well as the case of DuPont Company on WDEL Radio (Frank Geravce). Expect to see more of the younger generation of activists—even younger than Bill Ackman and with fewer resources—as this approach to governance cements as mainstream. I am directly involved in a few of these efforts, including as a director nominee.
  1. Google and Gloms. As a cross-current against activism, I foresee continued restoration of the conglomerate business model. In 2015, I endorsed Google’s move in that direction, as noted in stories in The Omaha World-Herald (Steve Jordan), Quartz (Max Nisen), and MarketWatch (Tim Mullaney). I expect to see more conglomerates, even as many shareholder activists oppose them, and predict that the clash will be resolved by switching from a general aversion to gloms to the specific question of the model’s suitability for particular personalities, ownership structures, and corporate cultures.
  1. Berkshire Culture. I continue to believe that Berkshire corporate culture is special and full of lessons. In 2015, I was grateful to many editorial page editors for printing my op-eds on this theme. These addressed corporate culture and leadership in The Wall Street Journal (thanks Mark Lasswell & Paul Gigot); what’s so instructive about Berkshire in The Omaha World-Herald (thanks Deb Shanahan & Steve Jordan); and numerous aspects of Berkshire and Buffett in the Dealbook of The New York Times (thanks Jeff Cane & Peter Henning, Wayne State U.). More to come in 2016 as the company continues to both evolve and stay the same, as thoughtfully put in various stories in which I’m quoted, including in Fortune (Roger Lowenstein) and Reuters (Luciana Lopez).

Read More

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Rather v. CBS Contracts Story Omitted from Redford’s “Truth”

Robert Redford’s latest film, Truth, dramatizes the last stand of newsman Dan Rather, longtime face of CBS News until fired for a controversial 2004 broadcast about President George W. Bush. The film, which debuted this week at the Hamptons Film Festival in Long Island, New York and opens October 16, is based on the book by Rather’s producer, Mary Mapes, and is therefore biased.  It is nevertheless a rich story, with Redford playing Rather and Cate Blanchett portraying Mapes (all pictured nearby).  The true story culminated, moreover, in a fight between Rather and CBS about contract interpretation, although neither the book nor the film delves into this important topic.

Amid a heated 2004 presidential election, on a CBS 60 Minutes broadcast of September 8, 2004, Rather questioned President Bush’s service in the Texas Air National Guard during the Vietnam era. Rather implied that Bush exerted political influence to avoid that era’s military draft by entering the Guard, and then receiving special treatment to skip military duties. A media melee followed Rather’s show. Bush supporters challenged its accuracy, the authenticity of documents used, and Rather’s journalistic integrity, which many believed was compromised by bias against President Bush.

After investigation, CBS disavowed the broadcast and, two weeks later, an emotional Rather apologized for it on national television. But CBS and Rather disagreed on the overall journalistic quality of the broadcast and what to do about it. Rather identified important accurate facts in the broadcast, obscured by the firestorm, and urged a defense of those whose reputations, including his and Mapes, the broadcast imperiled.

For its part, CBS emphasized the journalistic lapses and wanted to let it go at that. Believing CBS was most interested in the politics of good relations with the White House, as Bush was running for reelection in a heated contest against Senator John Kerry, Rather retracted his apology and claimed CBS fraudulently induced it. The day after President Bush won reelection, CBS told Rather it planned to remove him from his coveted spot as anchor of the CBS Evening News—a stinging rebuke. Rather’s last broadcast as anchor was March 9, 2005.

During the next 15 months, through May 2006, CBS kept Rather on its payroll, paying his salary of about $125,000 per week ($6 million annually). CBS gave him irregular appearances on CBS programs covering less significant stories, and his former television profile diminished. He rarely appeared on the network’s big-time shows such as 60 Minutes. Worse, CBS prevented him from pursuing jobs with competing networks or other media. Rather claimed that CBS marginalized him by giving him limited staff and editorial support; rejected most of his story proposals and aired those it accepted at off-peak times; denied him the chance to appear as a guest on other programs; and generally prevented him from refurbishing his reputation. Read More

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Better Bankers, Better Banks

bbbbAnyone seeking a fresh and compelling assessment of global financial stability should consider the forthcoming book Better Bankers, Better Banks, due out later this month.  The simple central thesis is that banks fail because bankers fail and the logically inexorable prescription is covenant banking, meaning getting banker’s to assume personal liability for bank failures.  U. Minnesota business law professors Claire Hill and Richard Painter offer a work of elegant simplicity, as reflected in the book’s Table of Contents:

Part I: The Problem

1 Irresponsible Banking  

2 How Banking Became What It Is Today
3 Explaining Banker Behavior  

Part II: Solutions
4 Law and Its Limits
5 Covenant Banking
6 Responsible Banking

The sub-title suggests an intriguing twist on the normative thrust: “Promoting Good Business Through Contractual Commitment.”  I discussed the book and its themes with the authors on several occasions and read some draft chapters. I am now eager to devour the final.  My guess is the read will benefit not only policymakers and scholars but bankers as well.  Kudos to Claire and Richard.

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Howard Stern’s Audience: One Group or Two?

11111Howard Stern is a wealthy man, but he sought to be some $300 million richer after his radio employer, Sirius, doubled his audience by acquiring rival XM. Stern thought his contract said as much but a court disagreed.  Businesspeople and lawyers alike can take a lesson from the deal, presented here in one of my three-part series this week on the unruliness of words–and numbers.  Following on my accounts of whether the attack 14 years ago today on the WTC was one occurrence or two and whether The Hobbit film trilogy released by New Line Cinema was one film or three, here’s the Stern story. 

The Howard Stern Show is a popular off-color program long aired on traditional radio. But in 2004, one of the leading satellite radio companies, Sirius Satellite Radio Inc., persuaded Stern to move his program to its service. Performance compensation under the resulting licensing agreement called for Sirius to pay Stern’s production company up to five separate awards of common stock in Sirius—each worth $75 million—if a series of ever-rising subscriber thresholds was met.

To implement this deal, the parties included in their formal written contract an exhibit setting out the company’s estimated number of subscribers as of year-end for each of the ensuing five years. The agreement then provided that the company would pay a stock bonus if at any year-end the actual number of subscribers exceeded the target by a specified amount: a first bonus for exceeding the target by two million; a second for exceeding it by four million; a third for exceeding by six million; a fourth for exceeding by eight million; and a fifth by ten million.

There was no dispute about what happened the first two years: at 2006, actual subscribers exceeded estimated subscribers by more than two million and Sirius promptly delivered $75 million worth of its stock to Stern; at 2007, actual subscribers did not exceed the target by more than four million, and therefore no bonus was due. A complication arose in 2008, however, because in that year Sirius acquired a rival, XM Radio, which had nearly ten million subscribers. So the parties disputed whether those subscribers counted as Sirius subscribers under the bonus provisions of the licensing agreement.

Resolution depended on determining the intended meaning of their contract in light of the specific terms of Sirius’s acquisition of XM. Before the acquisition, Sirius and XM were separate rivals of about equal size (Sirius had more than nine million subscribers)—and both had been wooing Stern to join them. After the acquisition, Sirius changed its name to Sirius XM, but the two continued to operate separately with their own subscribers, although subscribers could buy a premium package to add the other company’s offerings. About one million XM subscribers signed up for the Sirius package.

Counting only original Sirius subscribers, at year-end 2008, actual subscribers did not exceed target subscribers by more than four million contemplated for a second bonus award. Even adding the one million XM subscribers who bought access to Sirius, the target was not so surpassed. But if also counting the nearly ten million XM subscribers that Sirius acquired in the acquisition, then the target was exceeded by more than ten million, triggering all the bonuses and meaning Sirius owed Stern another $300 million worth of stock. Read More

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Greatest Error: Was The Hobbit One Film or Three?

11111One of the greatest errors in contract history arose when Miramax sold the movie rights for “The Hobbit” to New Line Cinema.  Here’s the story which, in honor  of the trilogy fashioned from Tolkien’s fantasy work, is in an installment of three posts on lessons from such debacles (others consider whether the 9/11 attacks on the World Trade Center were one occurrence or two for applicable insurance contracts (see here for the answer) and  whether, when Sirius radio acquired another satellite radio service, it was obliged to pay Howard Stern $300 million because the deal doubled its subscriber base).   Each story has inherent interest, a bit of drama, and useful lessons for contract drafting.  These three stories will be in the upcoming second edition of my book, Contracts in the Real World: Stories of Popular Contracts and Why They Matter.

The Hobbit: One Film or Three?

In 1998, the film company Miramax sold New Line Cinema the film rights to J.R.R. Tolkien’s four books: The Hobbit: Or There and Back Again (“The Hobbit”) and The Lord of the Rings Trilogy: The Fellowship of the Ring, The Two Towers, and The Return of the King. Miramax had spent $10 million developing screen adaptations of Tolkien’s classic fantasy works, which required considerable technological dexterity to produce. In exchange for the film rights, New Line paid $11.7 million and promised to pay royalties equal to five percent of the gross receipts of the “first motion picture” based on each book, excluding any “remakes.”

More technically, under a “Quitclaim Agreement,” New Line agreed to pay Miramax “Contingent Consideration,” defined as five percent of gross receipts, for “Original Pictures.” The Quitclaim Agreement defined “Original Pictures” to mean “the first motion picture . . .  based in whole or in part” upon The Hobbit Book and each of the three books in The Lord of the Rings Trilogy and “excluding remakes.” The Quitclaim Agreement further provided that a motion picture constituted a film based on The Hobbit book if “the main story line of the book is substantially the same as the main story line of the movie, certain of the book’s events and characters are featured in the movie, or the title or subtitle of the movie contains the words ‘The Hobbit’ or ‘Hobbit’.”

Between 2001 and 2003, New Line released three Original Pictures based in whole or in part on each of the three books in The Lord of the Rings Trilogy. Pursuant to the Quitclaim Agreement, New Line paid Miramax total Contingent Consideration exceeding $90 million in connection with those three movies.  In 2012, New Line released a new film based on The Hobbit book, called The Hobbit: An Unexpected Journey, as the first of another trilogy. It acknowledged an obligation to pay Miramax royalties on that film—and had paid $25 million—but not on the second or third in the planned series. Miramax objected, saying it was entitled to royalties on all three Hobbit-based movies. Read More

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Contracting with Unruly Words—and Numbers

11111Lawyers learn drafting lessons from previous cases involving disputes over the meaning of language. The result is often contracts with denser detail, attempting greater specificity to delineate intention using language. Yet words can be unruly and open to interpretation—well illustrated by a series of contemporary examples that also happened to involve numbers:

  • were the 9/11 attacks on the World Trade Center one occurrence or two for purposes of applicable insurance contracts? (Spoiler alert: both!)
  • was the blockbuster film trilogy The Hobbit three separate films or merely one film in three installments?
  • when Sirius radio acquired another satellite radio service, was it obliged to pay Howard Stern $300 million because it doubled its subscriber base–or not?

Each story has inherent interest, a bit of drama, and useful lessons for contract drafting.  These three stories will be in the upcoming second edition of my book, Contracts in the Real World: Stories of Popular Contracts and Why They Matter.  So, what about that attack or attacks?

WTC and 9/11: One Occurrence or Two?

On September 11, 2001, terrorists hijacked commercial aircraft and flew two of them into the World Trade Center in New York—another hit the Pentagon in Washington and a fourth was overtaken by passengers, forcing it to nosedive into a Pennsylvania field. Beyond the loss of 3,000 lives and many personal injuries, the assaults in New York destroyed or damaged twenty buildings, including the total collapse of five of the buildings that comprised the World Trade Center (WTC).

The insurance industry incurred an unprecedented $40 billion in claims, all pursuant to thousands of contracts, including aviation, life insurance, workers’ compensation, and liability policies. While many claims were filed and paid without incident, some generated significant litigation. One issue was particularly vexing: how many occurrences were there on 9/11 at the WTC: one, encompassing the destruction of the entire unitary complex, or two, given that two planes struck separate towers?

Commercial property insurance policies typically address claims on a per occurrence basis, including in terms of overall policy limits (the maximum payable) and the applicable deductible (in effect, the minimum loss before any coverage applies). When losses are within limits, the question of occurrences relates only to the deductibles and insurers tend to classify events into multiple occurrences to generate multiple deductibles; but when losses exceed policy limits, the number of occurrences defines that cap and insurers generally prefer to classify events as involving a single occurrence to cap liability. In the case of the destruction of the WTC on 9/11, losses vastly exceeded policy limits, turning what may seem like a semantic question into a $3.5 billion disagreement.

The WTC was owned by the Port Authority of New York and New Jersey, which had recently leased it to Silverstein Properties, Inc. The lease agreement required Silverstein to insure the WTC, and on September 11 it was in the process of putting insurance in place. Given the WTC’s size and scope, the insurance was large and complex, involving more than thirty insurers, each offering varying layers of coverage that aggregated $3.5 billion—“per occurrence.” Silverstein claimed there had been two occurrences, meaning $7 billion in total coverage; the insurers said there had been but one occurrence, meaning $3.5 billion in total coverage.

Despite posing the same question—what is an occurrence?—the answer differed for different insurers because the insurers were bound by different contract policies using different contract language. One group had bound itself to a policy (called the Willis form) which defined “occurrence” to mean “all losses or damages that are attributable directly or indirectly to one cause or to one series of similar causes.” Other policies either did not define the term occurrence or defined it differently. Court proceedings followed accordingly.

Interpreting policies using the Willis form’s definition of occurrence was relatively easy for the judges, with both the trial and appellate courts finding that the 9/11 attacks amounted to one occurrence. The reasoning was closely tied to the specific definition:  “no finder of fact could reasonably fail to find that the intentional crashes into the WTC of two hijacked airplanes sixteen minutes apart as a result of a single, coordinated plan of attack, was, at the least, a ‘series of similar causes.’” The liability of such insurers was therefore limited to the respective policy cap. The conclusion was reached on summary judgment—meaning as a matter of law without need for any trial.

Such an easy interpretation was impossible under the other policies, however. For those that lacked a definition of occurrence, both courts concluded that the concept is sufficiently ambiguous to require considering extrinsic evidence to determine contractual intention. This requires studying context: meaning is to be interpreted given the specific policy and facts of the case, not broad generalities or legal principles. The issue was therefore a matter for a jury. After listening to competing evidence and views, the jury decided that the 9/11 assault on the WTC amounted to two occurrences for purposes of coverage under the policies.

The jury was apparently persuaded by evidence offered at trial by Silverstein’s expert witness on the insurance business. Concerning policies that did not define occurrence, he explained that insurers generally take occurrence to have a narrow meaning—giving rise to multiple occurrences from given scenarios—principally because that increases the number of deductibles that apply. Insurers only prefer a broad conception of occurrence—one-occurrence interpretations—in total loss situations such as this, which are rarer. For policies that defined occurrence differently than in the Willis form—such as any loss or series of losses arising out of one “event”—the expert explained that the word event should likewise be construed narrowly.

The policy language is the starting point for making a deal and interpreting it. Want a specific definition, then supply it, and courts will enforce it accordingly; absent a specific definition, courts must dig into context, get all the facts, and let the fact finder decide. The latter setting obviously entails greater uncertainty, subjectivity, and contingency. Indeed, while some courts urge juries to contemplate the dictionary definition of occurrence, others adopt a logical perspective, which can vary according to emphasizing the causes of a loss (where all damage from a single, proximate cause is a single occurrence) or the effects (each separate incident of loss is a separate occurrence).

Lawrence Cunningham is a professor at George Washington University whose forthcoming books include the second edition of Contracts in the Real World: Stories of Popular Contracts and Why They Matter, which includes this story and fifty more. 

Sources: Scott G. Johnson, Ten Years After 9/11, 46 Tort Trial & Insurance Practice Law Journal 685 (Spring-Summer 2011); World Trade Center Properties, L.L.C. v. Hartford Fire Insurance Co., 345 F.3d 154, 180 (2d Cir. 2003).