Fourth Circuit Holds that Contingent Business Interruption Endorsement Does Not Extend to Indirect Suppliers

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On February 20, 2014, the United States Court of Appeals for the Fourth Circuit held that a contingent business interruption endorsement did not extend coverage to claims arising out of a business interruption caused by an indirect supplier.  Millennium Inorganic Chemicals Ltd. v. National Union Fire Insurance Co. of Pittsburgh, PA, 13-1194, 2014 WL 642993 (4th Cir. Feb. 20, 2014).

Millennium Inorganic Chemicals Ltd. and Cristal Inorganic Chemicals Ltd. (collectively, “Millennium”) was in the business of processing titanium dioxide, a compound often used for its white pigmentation, at its processing facility in Western Australia.  Millennium’s titanium dioxide processing operation was fueled by natural gas through the Dampier-to-Bunbury Natural Gas Pipeline (the “DB Pipeline”), Western Australia’s principal gas transmission pipeline.  Millennium purchased the gas under a contract with Alinta Sales Pty Ltd (“Alinta”), a retail gas supplier, which had purchased the gas from a number of natural gas producers, including Apache Corporation (“Apache”).  Millennium’s contract for the purchase of natural gas was solely with Alinta.

On June 3, 2008, an explosion occurred at Apache’s Varanus Island facility, causing its natural gas production to cease.  As a result of the explosion, Millennium’s gas supply was disrupted, and it was forced to shut down its titanium dioxide manufacturing operations for a number of months.

On June 5, 2008, Millennium tendered its claim to National Union Fire Insurance Company of Pittsburgh, PA and ACE American Insurance Co. (the “Insurers”), seeking contingent business interruption (“CBI”) coverage for losses incurred when the titanium dioxide manufacturing operation was shut down.  The policies included a CBI Endorsement that insured Millennium against certain losses resulting from the disruption of the supply of materials to Millennium caused by damage to certain “contributing properties.”  The term “contributing properties” was defined as “the insured’s prime suppliers of materials, parts and services.  If the insured depends upon one or, at most, a few manufacturers or suppliers for the bulk of materials and supplies necessary to conduct its business operations, then these suppliers are said to be “contributing properties.”  The Endorsement further defined “contributing property” by reference to the policy schedules, which indicated that covered locations “must be direct suppliers of materials to [Millennium’s] locations.”

The Insurers denied Millennium’s claim on the ground that Apache was not a direct supplier to Millennium as required under the policies.  Millennium subsequently sued the Insurers in the U.S. District Court for the District of Maryland, contending that the Insurers wrongfully denied Millennium’s claim for coverage under the CBI Endorsement.

The district court concluded that coverage under the policies extended only to “direct contributing properties”; however, the district court also held that none of the evidence “speaks to the specific meaning the parties intended by the use of the word ‘direct.’”  The district court ruled that the term “direct” was ambiguous in the context of an entity that provides a direct physical supply of material to the insured, but has no direct contractual relationship with the insured.  Accordingly, the district court, construing the term in favor of the insured, held that Apache qualified as a “direct” supplier to Millennium, and Apache’s natural gas production facility was a “direct contributing property” within the meaning of the policies “because Apache’s facility physically provided a direct supply of natural gas to Millennium’s premises, despite the fact that Apache and Millennium had no direct contractual relationship.”

On appeal, the Fourth Circuit reversed the judgment of the district court and remanded the case for entry of summary judgment in favor of the Insurers on the ground that neither Apache nor Apache’s facilities on Varanus Island could be considered a “direct contributing property” of Millennium.  The Fourth Circuit held that the term “direct” meant “proceeding from one point to another in time or space without deviation or interruption,” “transmitted back and forth without an intermediary,” or “operating or guided without digression or obstruction.”  It was undisputed that Millennium received its gas from Alinta, and Alinta, not Apache, had the sole ability to control the amount of gas directed to Millennium.  It also was undisputed that Millennium received its gas by way of the DB Pipeline, and that the DB Pipeline was neither owned nor operated by Apache and Apache relinquished both legal title and physical control over the gas when it entered the DB Pipeline.  Therefore, the court concluded that the relationship between Apache and Millennium, if any, was clearly interrupted by “an intermediary,” Alinta, who took full physical control of Apache’s gas before delivering indistinguishable commingled gas to Millennium.

 

Topics:  Business Interruption, Natural Gas, Suppliers

Published In: Energy & Utilities Updates, Insurance Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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