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Rebuild vs. Repair

Burned high-rise creates classic standoff

Philadelphia --- Shawn Walsh operates a hoist, a cage that serves as an elevator, mounted to the outside of One Meridian Plaza, a burned out, boarded up high-rise building in the heart of downtown Philadelphia.

It’s a towering version of a blighted, plywood-covered, shack that you might find in a forgotten neighborhood. 

It’s not what you expect to across the street from historic City Hall, where the City Council, tourists and other visitors arrive daily and where nearby office space commands pricey rent.

Despite its appearance, this is no neglected, abandoned site, according to Walsh and a crew of about 36 workers.

They work around the clock, doting on the dilapidated mass of broken concrete and twisted steel, guarding against intruders and showing  visitors a 45-minute videotape about the environmental and other dangers of entering.

They babysit the 750,000-square-foot hobbled giant, waiting for the owners and insurer to settle a dispute about whether to rebuild or repair.

The three dozen shift workers are a far cry from the 2,500 employees ranging from top-ranked executives to security guards who used to work for 27 tenants at the 38-story building. 

All that changed 8:23 p.m. Feb. 23, 1991, the Saturday night a pile of discarded oily rags spontaneously combusted on the 22nd floor, setting off the worst high-rise office fire in U.S. history.

The 12-alarm fire burned for 18 hours, claimed the lives of three firefighters and ravaged the nine-story midsection of the building.  Seeing firefighters struggle against a blaze that would not yield, and fearing the building would implode, fire officials decided to allow the building to free-burn.  They hoped once the fire reached the 30th floor, the first with automatic sprinklers, it would die.

It did.

But embers in the shape of huge of a huge legal battle smolder, waiting for the court date to determine the fate of the building.

The owners, E/R Associates, want to tear down the building to the 19th floor and rebuild at a cost of about $450 million.

Aetna, the insurer on the $1 billion manuscript policy, wants to repair at a cost of $150 million.

Rebuild vs. repair:  it’s a classic standoff between policyholder and carrier.  This one has gone on for nearly five years.

Looking for cover

When Paul D. Lettau arrived at One Meridian Plaza just before 8 a.m. Feb 25, 1991, one look told him not to stick around too long.  A seven-ton piece of granite had fallen off the badly burned office tower, landing on a lower roof.  Another hung precariously.  There was not telling when the rest--the façade was covered with granite slabs--would fall.

“Everyone’s major and first concern was safety,” said Lettau, an executive general adjuster for Aetna based in Youngstown, Ohio, with more than 23 years of experience.

Initially, it looked like i may take about six months to close the case.  More than four years and 250 attorneys later, the file remains open.

“It’s almost taken on a life of its own,” said Dennis Langford, president of Philadelphia-based Langford Management Associates and the project manager who has worked with Aetna to help develop the claim.

The claim is believed to be the largest single commercial claim against one carrier in the history of the insurance industry, according to Langford.

“I’ve just been amazed at the volume of paper, “said William J. Leonard, a lawyer with the Philadelphia firm Obermayer, Rebmann, Maxwell & Hippel, which represents E/R Associates, the policyholder and owner of the building.

Aside from the obvious battle over insurance, there are coincidental carrier connections at One Meridian Plaza.  One of the building’s owners is New York-based Equitable Life Assurance Society, which can weigh in with its own intimate knowledge of a carrier’s method of handling big claims.  Equitable had a similar claim in 1988 when its First Interstate Bank of California high-rise burned.  In addition One Meridian’s fire started in the office of Balis & Co., a reinsurance intermediary unit of Marsh & McLennan Cos.

E/R Associates also included Pan American Office Investments (an affiliate of Richard I. Rubin & CO., a Philadelphia real estate development and management company) and USA One Associates, a Dutch pension fund.

Many of those interviewed for this story declined to talk about some aspects of the claim because of pending litigation.  But most agreed that the case, in addition to challenging them with unusual obstacles that called for ingenuity, also fascinated them.

Odd problems, novel answers

In the beginning, both sides worked together to fortify the crippled hulk. Lettau could see that it would be a “mega-loss,” and as far as he can tell, it is the biggest building loss on record, he said.  Before repairs could begin, Aetna and the owners agreed that they had to stabilize One Meridian Plaza.  A look at preliminary efforts to preserve the building presents a case study filled with novel procedures. 

First, contractors wanted to secure the granite until it could be removed.  They decided to belt it.  Initially, they used temporary metal bands.  Then, they slowly lowered three-inch wide, 60-foot long orange fabric straps from the roof so that workers inside could belt them around the granite to the building.  The materials resembled army belts or the kind of straps used to lash camping gear and was tied to steel posts in the building.  As a precaution, traffic was rerouted away from the building for several months. 

“If one of those pieces dropped, it could easily hurt or kill people, “Lettau said.  “By God’s fortune, nothing dropped off the building after the fire was over.”

A helicopter lifted rolls of what became a giant nylon shroud, designed to catch any debris, and placed them on the roof where workers, wearing safety harnesses, unrolled them over the building.  Workers created the shroud by tying together the netting that was 20 to 30 foot wide and 38 stories long.  They secured it to the roof using a system of outriggers and one-inch steel cable attached vertically to hold the blanket in place and prevent winds from turning the 38-story cover into a powerful, billowing sail.

To remove the granite, workers created a special box-like bin.  Workers needed a crane to move the special bin up and down the side of the building to collect the granite, but placing the crane posed problems.  The street could not support the weight of the crane and the heavy granite because of a subway concourse beneath it.  Instead, workers used a helicopter to transport a derrick, piece by piece, to the roof, where it was reassembled and attached to the roof.  They used the derrick to lift a larger crane to the roof which was used to remove the granite.

A nationwide call went out to locate 2,000 pole shores to be placed between what was left of ceilings and floors to hold up the building.  They also braced the building with steel I-beams located two feet off of the fire-damaged floors.

In addition, contractors were brought in to control humidity to offset widespread water damage.  After the fire, the building became an uncontrolled environment, open to ambient temperatures.  Conditions in the building at times reached dewpoint. 

“It was raining inside the building,” said Joseph D. Dougher, a lawyer with the Obermayer firm, which also represents Equitable in other matters. 

There was as much as 15 feet of water in the elevator pits and five feet of water in the sub-basement.

“It took us six months to stabilize the building structurally and to remove the debris,” Dougher said.  “The dehumidification process still runs during summer months.”

The building has sprouted “tremendous amounts of mold, mildew and fungus,” said Dougher.  “I’d be surprised if you don’t leave without a headache,” he told a visitor. 

E/R spends about $1.5 million a month in connection with maintenance and consultant expenses for the building, according to the lawsuit. 

In the beginning there were no competitive bids “because nobody knew what they were going to encounter in the building,” Langford said.  “They were working with however many people they thought they needed at any given time and with any materials they needed.”

Langford established a special system to oversee expenses.  In part, it included asking for a daily list of workers, where they would be and what they were working on and comparing it with inspections “so that when the bill came in, Aetna wouldn’t be paying for something that they didn’t get.”

Lawsuits have been endless.

Tenants, their clients and companies that service the building or businesses sought recovery from the owners for uninsured property damage and economic losses, as id tenants in surrounding buildings damaged by smoke and water. 

E/R has settled most claims against it by agreeing last February to set up a $15 million fund to pay back workers and small businesses that suffered losses caused by the blaze.

Cozen and O’Connor handled subrogation claims against 21 contactors and service providers in a civil action seeking $400 million.  The owners blamed the fire and its spread on firms who made, supplied or installed firefighting and alarm systems in the building as well as a wood refinishing contractor whose oily, discarded rags spontaneously combusted, triggering the fire. 

Fifteen of the 16 defendants that remained in the negligence suit agreed in March 1994 to a settlement believed to be about $100 million.  Honeywell of Minneapolis, which installed part of the alarm system, is the lone remaining defendant. 

The biggest stumbling block to the restoration of One Meridian Plaza is the dispute between Aetna and the policyholder. 

In an unusual turn for an insurer, Aetna sued E/R Associates in U.S. District Court in New York, saying the owners had “stymied, blocked, obstructed and frustrated Aetna’s good faith attempt to repair One Meridian Plaza.”

E/R has countersued Aetna, saying it expects its losses to be more than $400 million, including $257million in property loss and rental income of $1.5 million a month or more than $50 million in lost future rental income.  They deny any foot-dragging, and accuse Aetna of hindering settlement. 

“It’s a typical insurance company war of attrition of attrition approach to resolving claims,” says Dougher.  “Do whatever is necessary to postpone the day of reckoning because you may frustrate somebody to the Nth degree and finally make them yell ‘uncle, we’ll take something to go away’.”

Structural arguments

E/R Associates claim the duration and high temperature of the fire severely dmaged the building’s vertical supporting steel columns, creating locked-in stresses and requiring replacement. 

“We said that was a bunch of techno-babble,” said Henry Daar, of Kostow & Daar, the Chicago law firm representing Aetna.  “When you make steel, you heat it and it cools.  Steel is a product of fire.  Steel is a very forgiving material.”

Not all the steel is reusable, Daar said.  Aetna has agreed to replace about 65 percent of the smaller and horizontal beams that were visibly damaged. 

“They look like spaghetti,” Daar said.  “They can be replaced.”

E/R Associates based their case on an expert opinion bolstered by a computer analysis of the steel.

Aetna has countered with an expert of its own, who dismissed the owner’s argument.

To figure out which expert to believe, U.S. District Court Judge Michael Mukasey sought the independent opinion of yet a third specialist, Matthys P. Levy, of Weildinger Associates, New York consulting engineers.

To the delight of Aetna’s lawyers, Levy rejected the owner’s conclusion.

“Finally, a fire, because of its unpredictable and unrecorded range of heat and cooling may result in locked-in forces in a structure.  But, a fire may also serve to relieve earlier locked-in forces because the process of heating steel and subsequently cooling it is analogous to how stress relieving is performed,” Levy said in a July 13, 1994 letter to the judge.  “To the question whether locked-in forces exist, the answer is yes, they exist in every structure to a certain extent, but can not be reliably differentiated as to cause (manufacture, construction, fire).

“…in conclusion, based on my own experience and generally accepted engineering principles, locked in forces can neither be reliably attributed as to cause nor do they result in degradation of structural capacity.”

Levy also rejected the computer analysis that the building’s owners used to bolster their case of the building’s weakened condition.  “I believe the computer analyses to be speculative at best and to fail to meet the criteria of scientific validity.”

At the same time, the judge indicated he will reject a motion by Aetna to bar testimony by E/R’s expert, pleasing the owners.

Exercising an option

When Aetna said it would exercise its option to repair the building, the policyholders asked for right of approval of the plans for repair. Aetna refused, saying its obligation is only to provide the insured with a building “of like kind and quality to that in existence just prior to the date of the loss.  The contract has no provision that the insured have approval of the plans and specifications for repair,” according to lawsuit documents.

Jeffrey Rottwitt, a business attorney at Obermayer, said the insurer has adopted a stance of “Just keep saying ‘no’. They’ve been trying to stonewall and procrastinate. You fight until there’s only one of you left standing. That’s accepting a settlement that’s based upon the exhaustion of a marathon runner as opposed to a legitimate debate about the economic merits of a claim.”

“It’s not a nice way to do business,” said attorney Leonard. “They went about the business of fighting a customer.”

Aetna has offered to insure its construction against any problems.

“Aetna would be on the hook if anything went wrong,” said Peter Kanaris, a partner at Kostow & Daar. “Aetna is an insurance company. They are not going to take on the risk of any potential collapse.”

But E/R Associates say the insurance falls short of an iron-clad indemnity, the kind it usually demands of its contractors, and is unlikely to help quell doubts about the building’s safety.

“If you accepted Aetna’s argument that their repair scenario was safe, you’d have such a cloud, a specter over this building that you might have difficulty in re-renting it,” said Rottwitt.

Problems would include assuring potential tenants that the building is structurally sound and environmentally clean, Rottwitt said. The fire unleashed pollutants, including PCBs and dioxin, that the owners say have infiltrated and contaminated the heating, ventilation and air condition duct system.

“Smoke can penetrate every nook and cranny of the building,” Rottwitt said. “How certain could one be that you’d get every nook and cranny and would you have the specter of environmental liability as an owner of the building affecting the marketability of the building if you sell it to someone else or to lease it?”

Everything went wrong

“It seemed like Murphy’s Law was in full swing when this fire started,” Dougher said. “Everything that could have gone wrong went wrong.”

For example:

  • Firefighting was hampered because the building lacked an automatic sprinkler system on the lower floors. City codes require sprinklers on all buildings built since 1984. One Meridian Plaza was built in the 70s. The owners say they were adding sprinklers as tenants moved out. Comcast CableVision, a tenant on the 30th floor, at its own expense had installed the sprinklers that ultimately extinguished the blaze.      
  • An emergency backup electrical system failed, rendering useless an air conditioning system that should have automatically reversed to extract smoke.
  • A supplemental water pump failed.
  • Neither of the security guards on duty reported the fire. A passerby called it in.
  • An automatic dialer that was supposed to contact emergency officials failed.
  • Fire raced through the electrical fire tower because of breaches in what was supposed to be a sealed tower to protect the electrical system.
  • Internal water pressure was so low that firefighters could not get ample water. The system provided 40 to 60 pounds of pressure per square inch but firefighters needed 65 to 100 pounds per square inch. Water pressure regulating valves were found to be inadequate.
  • Nozzles used by the fire department did not fit the fire hose connectors in the building’s wet standpipe system, rendering the fire department’s equipment to be not much more than “water pistols,” said Dougher.
  • Plate glass melted, allowing the fire to exit and re-enter through windows.
  • Concrete that was two-and-a-half inches thick buckled to create a “V”, or a “skateboarder’s delight,” said Dougher.
  • The New York judge assigned to the case has been preoccupied with another high-rise – the conspiracy trials in connection with the first bombing of the New York World Trade Center.

On top of all these problems, the owners are dealing with lost rental income.

“The policy we have has a rental clause in it that is unique – there is no period of indemnity,” Dougher said. “They have to pay us our rental loss for as long as this fire affects this building. The typical rental loss provision is one or two years or three years, maybe.”

Aetna paid E/R $1 million a month for eight months in lost rental income but then stopped, saying the building could have been inhabited during reconstruction and that it should have been inhabited within a year after the fire and fully inhabited within three years, Dougher said.

Locals have their own views of the charred high-rise. The Philadelphia Inquirer awarded the building its “Biggest Eyesore” of the year award, calling it a monument to indecision. Describing the quagmire involving the most costly towering inferno in US history, the Philadelphia Daily News called it the “Infernal Tower.”

“I think it’s a disgrace,” said Terry Tracy, 38, an account manager at an insurance brokerage whose office is across the street from One Meridian Plaza. “They ought to make them do something on the exterior while they’re fighting it out in court if those two can’t agree.”

Adjusters, contractors, property owners and others can learn from One Meridian Plaza. For example, Lettau just recently advised an adjuster how to tackle repairs on a high-rise roof damaged by a hailstorm in Dallas. Taking the equipment and supplies through the building would take forever, displace elevator riders and soil the interior.

“Use a helicopter,” Lettau said, based on his experience at One Meridian. “It’s not that expensive.”

Langford, whose business includes property loss project management services to the insurance industry, said he uses the lessons learned from working with the claim to illustrate seminars he gives for adjusters. But lessons have not helped close the file.

Lettau oversees the claim, updating repair bids from subcontractors every six months in case the stalemate ends.

“I truthfully hoped to close this case very quickly but unfortunately, the events, size and other things prevented us from getting it closed,” said Lettau. “We’d like it closed. If someone called tomorrow and told me it was closed, I’d be a happy adjuster.”

Written by Lorraine Iannello for Claims Covering the Business of Loss - November 1995

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