Contingent Business Interruption Coverage and the Meaning of “Direct Supplier”

02.25.2014

On February 20, 2014, the United States Court of Appeals for the Fourth Circuit issued an opinion in Millennium Inorganic Chemicals, Ltd. v. National Union Fire Insurance Company of Pittsburgh, 2014 WL 642993 (4th Cir. Feb. 20, 2014) discussing the extent of an insured’s contingent business interruption (“CBI”) coverage under its commercial liability insurance policies.  Reversing the district court’s entry of summary judgment and remanding the case for entry of summary judgment in favor of the insurers, the Court of Appeals found the policies to be unambiguous and held that coverage was triggered only by damage to or destruction of “direct contributing properties.”  CBI losses suffered by the insured as a result of damage to “indirect contributing parties” were not covered according to the plain language of the policies.

Millennium Inorganic Chemicals Ltd. and Cristal Inorganic Chemicals Ltd. (collectively, “Millennium”) were in the business of processing titanium dioxide at a facility located in Western Australia.  Millennium purchased two commercial coverage policies: one from National Union Fire Insurance Company of Pittsburgh and one from Ace American Insurance Company.  Both policies included CBI endorsements, but neither policy provided any coverage for “indirect” suppliers.  Rather, the policies provided coverage only for “direct contribution or recipient property(ies).”  The CBI endorsements insured Millennium against certain losses resulting from the disruption of the supply of materials to Millennium caused by damage to certain “contributing properties,” which were defined as direct suppliers of materials to Millennium’s locations.

The energy source for Millennium’s titanium dioxide processing operation was natural gas received through the Dampier-to-Bunbury Natural Gas Pipeline (“DB Pipeline”)—Western Australia’s principal gas transmission pipeline.  Millennium contracted with and purchased the natural gas from a retail gas supplier, Alinta Sales Pty Ltd., who in turn purchased the gas it offered for sale from various natural gas producers, one of which was Apache Corporation.

Apache extracted and processed natural gas from wells on an island off the coast of Western Australia and then injected the gas into the DB Pipeline.  Apache has no ownership interest in the DB Pipeline and Alinta retains sole ownership of the gas once it enters the DB Pipeline.  Millennium had no contract or business relationship with Apache and Millennium’s contract with Alinta made no reference to Apache.

On June 3, 2008 an explosion occurred at Apache’s island facility, causing its natural gas production to cease.  The shutdown of gas production resulted in Millennium’s gas supply being curtailed and it also was forced to shut down its manufacturing operations for a number of months.  Two days after the explosion, Millennium sent notice of claims letters to National Union and ACE seeking CBI coverage for its losses incurred when its titanium dioxide facility closed.  After investigating the claim, the insurers denied coverage under the policies on the basis that Apache was not a direct supplier to Millennium.  Millennium responded that Apache was, in fact, a direct supplier because it provided the material at issue, whereas Alinta was nothing more than a delivery service. 

After National Union reaffirmed its denial of Millennium’s claim, Millennium filed a declaratory judgment action against the insurers in the United States District Court for the District of Maryland seeking clarification of the rights and liabilities of the parties with respect to the policies.  Millennium also asserted claims of breach of contract and failure to act in good faith.  Both Millennium and the insurers moved for summary judgment.

The district court granted Millennium’s motion for partial summary judgment and denied the insurers’ motion for summary judgment with respect to Millennium’s declaratory judgment claim.  Specifically, the district court concluded that coverage under the policies extended only to “direct contributing parties” and that Apache qualified as a direct supplier.  The district court determined that the meaning of “direct” was ambiguous, as that term could describe an entity that provides a direct physical supply of material to the insured or an entity that has a direct contractual relationship with the insured.  Thus, the district court applied the doctrine of contra proferentem and resolved the ambiguity in favor of coverage for Millennium.

On appeal, the Fourth Circuit found the plain language of the policies to be clear.  Citing to the dictionary definition of “direct,” the Court of Appeals found that for Apache to be considered a direct 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.”  Because Millennium received its natural gas from Alinta and because Alinta had the sole ability to control the amount of gas directed to Millennium and the rate at which Millennium would be charged, the Court of Appeals determined that Apache could not be considered a “direct contributing party” of Millennium.  Significantly, the DP Pipeline is neither owned nor operated by Apache and Apache relinquished legal title and physical control of the gas once it entered the pipeline and comingled with gas from other sources.  In other words, there was no direct physical relationship between Apache and Millennium.  At best, Apache was an indirect contributing party to Millennium.  For these reasons, the Court found that the policies did not provide coverage for Millennium’s CBI losses.

The Millennium case illustrates the importance of ensuring that the policy matches the insured’s expectations.  Millennium had solicited bids from multiple insurers for CBI insurance, but specified that it only required coverage for “direct suppliers/customers.”  When given the opportunity to list “contributing properties” that created potential risk of business interruption on the provided schedules attached to the policies, Millennium failed to do so.  The denial of coverage in this case can be attributed, at least in part, to Millennium’s failure to fully understand its insurance needs combined with its failure to appreciate the nature of its relationships with suppliers.  When seeking CBI coverage, insureds would be wise to consider these questions in detail, because a court interpreting the policy will not necessarily give the benefit of the doubt to the insured.

Jaime Wisegarver is an associate in the Litigation Section, where she handles a variety of civil and commercial matters, including insurance recovery litigation and counseling. For more information, please contact Jaime at (804) 771-5634 or jwisegarver@hf-law.com.