The U.S. Court of Appeals for the Fourth Circuit, reversing a district court decision, has ruled that a titanium dioxide processor was not entitled to contingent business interruption (CBI) coverage for losses it had suffered when it had to close down its processing facility, where the losses did not stem from a “direct” supplier.

The case

Millennium Inorganic Chemicals Ltd. and Cristal Inorganic Chemicals Ltd. (together, “Millennium”), were in the business of processing titanium dioxide at a processing facility in Western Australia. The energy source for Millennium's titanium dioxide processing operation was natural gas received 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. Alinta purchased the gas it offered for sale from a number of natural gas producers, one of which was Apache Corporation (Apache).

As a natural gas producer, Apache extracted and processed natural gas from wells on Varanus Island, an island located off the coast of Western Australia. Once Apache processed the natural gas, it would inject the gas into the DB Pipeline, at which point custody, title, and risk passed from Apache to Alinta. The natural gas received from Apache's facility then comingled with that obtained from other producers, resulting in an amorphous mix of gas in a single pipeline.

Apache had no ownership interest in the DB Pipeline and did not own any downstream gas transmission or distribution facilities. Alinta retained sole ownership of the gas once it entered the DB Pipeline. Under Alinta's end-user contract with Millennium, title to the gas passed to Millennium only at the time of delivery, i.e., when the gas left the DB Pipeline and was delivered to Millennium's facility by way of a separate delivery line. Millennium's contract for the purchase of natural gas was solely with Alinta. Millennium had no contract or business relationship with Apache, and the contract with Alinta made no reference to Apache.

An explosion at Apache's Varanus Island facility caused its natural gas production to cease. Apache notified Alinta that the explosion caused it to shut down its operations and that there would be no gas supply from Varanus Island until further notice. Alinta, in turn, sent a notice of force majeure to Millennium and other customers. The Australian government intervened and imposed controls, prioritizing delivery of natural gas to domestic customers and essential services. As a result, Millennium's gas supply was curtailed, and it was forced to shut down its titanium dioxide manufacturing operations for a number of months.

Two days after the explosion, Millennium sent notice of claim letters to National Union Fire Insurance Company of Pittsburgh, PA, and ACE American Insurance Co., which had issued Millennium commercial liability insurance policies, seeking CBI coverage for its losses incurred when the titanium dioxide facility had closed.

The insurers concluded that Apache was not a direct supplier to Millennium and, as a consequence, there was no coverage under the policies for Millennium's claim.

Millennium responded by asserting, inter alia, that Apache was a direct supplier to it because Alinta provided only a service, the delivery of natural gas, whereas Apache provided the actual material at issue.

National Union reaffirmed its denial of Millennium's claim, contending that Alinta, and not Apache, was the only direct supplier of natural gas to Millennium.

Millennium sued the insurers in the U.S. District Court for the District of Maryland, invoking the court's diversity jurisdiction. Millennium requested a declaratory judgment regarding the rights and liabilities of the parties with respect to the policies. Further, Millennium asserted claims of breach of contract and failure to act in good faith.

The district court granted partial summary judgment in favor of Millennium and the parties stipulated and agreed to the entry of judgment in favor of Millennium in the amount of $10,850,000, inclusive of pre-judgment interest, with the insurers expressly preserving their right to appeal the judgment. The district court entered final judgment against the insurers in the stipulated amount, and the insurers appealed.

The policies

Each policy included an endorsement entitled:

CONTINGENT BUSINESS INTERRUPTION CONTRIBUTING PROPERTY(IES) ENDORSEMENT.

The endorsements defined events of coverage as insurance:

Only against loss directly resulting from necessary interruption of business conducted on premises occupied by [Millennium], caused by damage to or destruction of any of the real or personal property described above and referred to as CONTRIBUTING PROPERTY(IES) and which is not operated by [Millennium], by the peril(s) insured against during the term of this Policy, which wholly or partially prevents the delivery of materials to [Millennium] or to others for the account of [Millennium] and results directly in a necessary interruption of [Millennium's] business.

The circuit court's decision

The Fourth Circuit reversed.

In its decision, it explained that the endorsements provided coverage only with respect to “direct contributing properties.” It then found the term “direct” to be “clear” as used in the policies and without ambiguity. According to the circuit court, for Apache to be considered adirect contributing property to Millennium, it must have supplied Millennium with materials necessary to the operation of its business “without deviation or interruption” from “an intermediary.”

It then ruled that neither Apache nor Apache's facilities on Varanus Island could be considered a “direct contributing property” of Millennium because neither Apache nor Apache's facilities had a direct physical relationship with Millennium.

Indeed, the circuit court continued, whatever the relationship between Apache and Millennium, it was “clearly interrupted” by “an intermediary,” Alinta, which took full physical control of Apache's gas before delivering indistinguishable commingled gas to Millennium. That relationship, the circuit court pointed out, also was interrupted by an intervening step – the physical insertion of the gas into the DB Pipeline – at which point Apache relinquished all physical control over that gas. Under “any view of the relevant facts,” the circuit court concluded, Apache could be only an indirect contributing property to Millennium, coverage of which was not included in the terms of the policies.

The case is Millennium Inorganic Chemicals Ltd. v. National Union Fire Ins. Co. of Pittsburgh, PA, No. 13–1194 (4th Cir. Feb. 20, 2014).

Attorneys involved include: ARGUED:Charles Glaston Cole, Steptoe & Johnson, LLP, Washington, D.C., for Appellants. Joseph Lanham Beavers, Miles & Stockbridge P.C., Baltimore, Maryland, for Appellees. ON BRIEF:Jonathan D. Hacker, Omelveny & Myers LLP, Washington, D.C., for Appellant ACE American Insurance Company. Roger E. Warin, Steptoe & Johnson LLP, Washington, D.C., for Appellant National Union Fire Insurance Company of Pittsburgh, PA. John C. Mezzacappa, Hilary M. Henkind, Mound Cotton Wollan & Greengrass, New York, New York, for Appellants. Gary C. Duvall, Jeffrey P. Reilly, John C. Celeste, Miles & Stockbridge P.C., Baltimore, Maryland, for Appellees.

Special Reports /

Contingent BI Claim Fails Where Loss Did Not Stem from 'Direct' Supplier

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