The Fourth Circuit Clarifies Who Is A Direct Supplier Under Contingent Business Interruption Coverage

In Millennium Inorganic Chemicals, Ltd. v. National Union Fire Ins. Co. et al., — F.3d. — , 2014 WL 642993 (4th Cir., Feb. 20, 2014), the United States Court of Appeals for the Fourth Circuit recently clarified who constitutes a direct supplier of goods and services under contingent business interruption (CBI) insurance, and it specifically rejected arguments that the undefined term “direct” in the coverage grants of the CBI endorsements at issue was ambiguous in nature.

shutterstock_173639594The policyholder, Millennium Inorganic Chemicals, Ltd., processed titanium dioxide at its facility in Western Australia, using natural gas that it received via a pipeline.  It purchased the gas from Alinta Sales Pty Ltd., a retail gas supplier.  Alinta, in turn, purchased the gas it supplied to Millennium from others, including Apache Corporation.

Apache extracted and processed natural gas and then injected it into the pipeline, where it comingled with gas from other producers.  As soon as the substance was injected, custody, title, and risk for it passed to Alinta, and Apache had neither any ownership interest in the pipeline nor any contractual relationship with Millennium.

In 2008, an explosion shut down Apache’s facility, and the Australian government subsequently imposed controls, giving priority for delivery of the substance to essential services.  The result was that Millennium was forced to shut down for a number of months.

Millennium had CBI coverage with National Union Fire Insurance Company and ACE American Insurance Company.  The CBI endorsements in the two contracts of insurance provided Millennium with $10 million in coverage for “any unnamed direct contributing properties,” and they recited that only a “direct supplier of materials to the Insured’s locations” could be a “contributing property.”

Millennium made claim for its loss, but both insurers denied liability after concluding that Apache was not a direct supplier.  The policyholder then filed suit in the United States District Court for the District of Maryland, arguing that Apache was a direct supplier because Alinta provided only a service, the delivery of natural gas, whereas Apache provided the actual material at issue.  The District Court agreed, and it granted Millennium’s motion for partial summary judgment, holding:

  • that “the physical relationship between the properties is as or more important than the legal relationship between the properties’ owners;” and
  • that the undefined term “direct” was ambiguous because it could refer to either relationship, mandating a construction in favor of the insured.

On appeal, a two-one panel of the Fourth Circuit disagreed, and the Court of Appeals reversed and remanded, directing the entry of judgment for the insurers.  Judge G. Steven Agee’s opinion looked to the dictionary definition of direct, and it concluded that this meant that Apache could only be a direct supplier if it supplied Millennium with materials “without deviation or interruption [from] an intermediary.”  The producer didn’t qualify as such because:

  • Apache relinquished both legal title and physical control over the gas once it entered the pipeline; and
  • Alinta—and not Apache—had the sole ability to control the amount of gas supplied and the rate that Millennium was charged.

As a result, Judge Agee held that “[w]hatever the relationship between Apache and Millennium, it was clearly interrupted by an intermediary, Alinta,” rendering Apache “at most an indirect supplier to Millennium.”

Judge James A. Wynn, Jr. dissented, and he would have affirmed.  In Judge Wynn’s view, both the insurers’ construction of the CBI endorsement and that of the policyholder were reasonable, and “no writing is unambiguous if susceptible of two reasonable interpretations.”

The majority opinion stands for the proposition that the undefined term “direct” in a CBI provision is not ambiguous in nature.  In addition, it recognizes that the contractual relationship between the insured and one of its suppliers is at least as important as the physical one and is a key consideration in determining whether the latter is a “direct supplier” of goods and services.

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About The Property Insurance Law Observer
For more than four decades, Cozen O’Connor has represented all types of property insurers in jurisdictions throughout the United States, and it is dedicated to keeping its clients abreast of developments that impact the insurance industry. The Property Insurance Law Observer will survey court decisions, enacted or proposed legislation, and regulatory activities from all 50 states. We will also include commentary on current issues and developing trends of interest to first-party insurers.
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