Court: District Court, W.D. Arkansas; September 10, 2015; Federal District Court
A motion for summary judgment has been filed by the Defendants in a case involving Lion Oil Company, which operates an oil refinery in El Dorado, Arkansas. Lion Oil alleges a breach of contract against its insurers and underwriters, seeking a declaration for coverage of losses incurred at the refinery. The refinery processes 80,000 barrels of crude oil daily and receives oil via the North Line pipeline, owned by EMPCo, a subsidiary of ExxonMobil.
In 2007, EMPCo's inspection of the North Line identified anomalies, including a seam weld defect misidentified as low-risk, which later caused a rupture near Torbert, Louisiana, on April 28, 2012. Following the rupture, EMPCo notified the Department of Transportation's Pipeline and Hazardous Materials Safety Administration (PHMSA) and received a Corrective Action Order (CAO) on May 8, 2012. The CAO mandated EMPCo to develop a restart plan, conduct a failure analysis, and submit an integrity verification plan that included metallurgical analysis, field testing, and long-term testing provisions.
The damaged pipeline section was replaced by mid-May 2012, but the integrity verification plan was not submitted until October 2012, which included a hydrostatic pressure test. This test was to confirm the pipeline's integrity over 200 miles, including undamaged sections. During hydrostatic testing from July to September 2012, seven leaks were found and repaired. The PHMSA approved the integrity plan, allowing EMPCo to restart the pipeline in October 2012, after which Lion Oil resumed receiving crude oil in March 2013.
Defendants provided 'all-risk' insurance policies to Lion Oil, which covered direct physical loss or damage to specified property, with certain exclusions, including losses from faulty workmanship or latent defects. The policies included contingent time element coverage for losses due to property damage that hindered suppliers from delivering goods, and featured a deductible period of 30 or 45 days for the El Dorado refinery. Lion Oil filed claims for approximately $44 million in contingent business interruption losses and $36 million in extra expenses due to a disruption in crude oil supply from the EMPCo pipeline, which were denied by Defendants in September 2013. Consequently, Lion Oil initiated legal action for breach of contract, asserting entitlement to coverage for its losses, while Defendants contended that such claims were not covered by the policies and sought summary judgment in their favor.
Summary judgment is deemed appropriate when there are no genuine disputes of material fact, allowing the moving party to be entitled to judgment as a matter of law. The court evaluates evidence favorably towards the non-moving party, and such judgments are favored in cases where legal issues predominate over factual ones. The interpretation of the insurance policies, governed by Arkansas law, mandates that terms be understood in their ordinary meaning and that contracts are to be interpreted reasonably and fairly, reflecting the intent of the parties involved.
A court must evaluate an entire insurance policy to interpret any specific clause, as established in Cont’l Cas. Co. v. Davidson. The interpretation of any clause must be contextual, considering other clauses that may limit or extend the insurer's liability. In Arkansas, if the policy language is clear and unambiguous, courts will enforce it as written, adhering to its plain meaning. Conversely, ambiguous language, defined as having uncertainty or being open to multiple interpretations, will be construed liberally in favor of the insured. Typically, courts determine ambiguity as a matter of law, but if parol evidence is presented, it becomes a factual question for the jury. In disputes over contract terms, trial courts first assess whether the disagreement can be resolved by the contract alone or if it necessitates extrinsic evidence.
The excerpt also addresses coverage specifically related to all risk policies. These policies protect against losses that are hard to explain and cover 'all risk of direct loss' unless explicitly excluded. The policies in question included Time Element Coverage and extensions, specifically covering losses caused by damage to property that hinders a direct supplier from providing their goods or services. For the Contingent Time Element provision to apply, it must be shown that a direct supplier suffered property damage that impeded their ability to serve Lion Oil. The defendants contend that the interruption in oil delivery to Lion Oil’s refinery was not due to property damage but rather a decision by EMPCo to inspect its pipeline for potential defects.
Defendants contend that the April 28, 2012 pipeline rupture resulted in damage limited to one section, which was fully repaired by May 17, 2012, allowing for the continued transportation of oil. They argue that since the repair occurred within the 30-day deductible for coverage, no property damage existed that impeded EMPCo's ability to deliver oil to Lion Oil’s refinery after this date. Defendants reference the Tenth Circuit case, MarkWest Hydrocarbon, Inc. v. Liberty Mutual Insurance Co., which denied coverage for costs incurred due to regulatory requirements following a pipeline rupture. The court reasoned that covering these costs would effectively turn the insurance policy into a maintenance contract. However, Defendants note that Lion Oil's situation differs because it does not own or operate the pipeline and thus could not control maintenance or testing, making the concerns in MarkWest inapplicable.
Lion Oil counters that the insurance policies do not support Defendants’ claim that coverage ceased after repairs were made. They argue that the Contingent Time Element Coverage requires only that property damage occurred, and losses resulting from that damage are covered. Lion Oil asserts that a simple "but for" analysis shows that its losses stemmed from the rupture. Additionally, they highlight that a Corrective Action Order (CAO) issued following the rupture required EMPCo to submit a restart plan, which included hydrostatic testing approved by PHMSA. Lion Oil maintains that EMPCo's decision to conduct testing post-rupture is not a separate cause of loss but rather connected to the original damage. Consequently, Lion Oil argues that its claims for contingent financial losses are indeed covered by the insurance policies. The court finds that a genuine issue of fact regarding causation prevents the entry of summary judgment on this issue.
Coverage for Lion Oil's losses hinges on property damage that hinders a supplier's ability to deliver goods. The policy's language indicates that claims are not limited to the duration of repairs. Physical damage to the supplier's property is acknowledged, specifically a pipeline rupture on April 28, 2012. A key dispute arises over whether the rupture or EMPCo's subsequent hydrostatic testing was the primary cause of Lion Oil's losses, a factual issue that precludes summary judgment.
Defendants argue that even if property damage occurred, exclusions for "cost of making good faulty workmanship" and "latent defect" negate coverage. The determination of coverage must follow an analysis of these exclusions once coverage is established. Exclusionary terms must be clear and unambiguous; if the policy language is straightforward, it will be upheld as written. Conversely, if ambiguity exists, it will be construed in favor of the insured, allowing recovery if the policy can be reasonably interpreted to support it.
The 'Perils Excluded' section of the insurance policy clarifies that it does not cover the costs associated with rectifying defective design, specifications, materials, or workmanship. However, losses resulting from such defects are covered. Defendants contend that all losses incurred by Lion Oil are classified as costs to rectify faulty workmanship, thus excluded from coverage. They argue that Lion Oil's business interruption losses are contingent on the defective welds, implying that these losses fall under the exclusion. In contrast, Lion Oil asserts that the exclusion does not apply to its claimed financial loss, as it is not seeking to recover repair costs for the faulty workmanship. Lion Oil's property was not damaged by the defective work, and its claim pertains solely to business interruption losses from a pipeline rupture, which it argues are distinct from the 'cost of making good' faulty workmanship. The language of the exclusion is interpreted to narrow the definition of 'cost of making good' to refer specifically to expenses incurred in repairing damaged property rather than consequential losses. Consequently, Lion Oil's business interruption claim does not fall within the exclusion, and the Court finds that the Defendants have not demonstrated its applicability, granting Lion Oil summary judgment on this issue.
Regarding latent defects, the policy states it does not cover latent defects unless they lead to non-excluded losses or damages. The term 'latent defect' is not defined in the policy, but Arkansas case law suggests it refers to defects that are not discoverable through careful inspection, as articulated in Hall v. Patterson.
A defect is considered latent if it cannot be discovered through ordinary care by a person with competent skill, as stated by the Eighth Circuit. In this case, Defendants claim that the seam weld imperfection responsible for a pipeline rupture qualifies as a latent defect. Conversely, Plaintiff contends that the imperfection was discoverable during careful inspection, evidenced by its detection in a 2007 pipeline inspection. This inspection, conducted by EMPCo using an in-line inspection device, identified 411 seam weld anomalies, including the one at the site of the 2012 rupture. The anomalies were categorized into three types: 14 classified as Seam Weld Feature A (crack-like), 37 as Feature B (partially crack-like), and 360 as general weld abnormalities not likely to cause future failures. The defect causing the 2012 rupture fell into the latter category. Both parties agree that the inspection was reasonable and utilized advanced tools, and they acknowledge the detection of an anomaly at the rupture site, although it was misidentified. The parties’ extrinsic evidence, including expert testimonies, does not conflict, leading the court to determine the ambiguity of the policy language rather than a jury. Defendants assert that since the inspection did not indicate the anomaly was likely to cause failure, it was not discoverable through reasonable inspection.
Defendants presented deposition testimony from Koetting to argue that a misidentification of a defect was not a one-time error, referencing the vendor's analysis post-2012 rupture. However, they failed to provide legal authority to support the claim that a defect could be considered 'latent' solely due to misclassification by the inspection vendor. The Court clarified that the term 'latent defect' is clearly defined and not ambiguous, asserting that the existence of the defect was discoverable during the 2007 inspection, despite the vendor's misinterpretation of its severity. Consequently, the Court concluded that the defect was discoverable upon careful inspection, and Defendants did not meet their burden to invoke the 'latent defect' exclusion. As a result, Lion Oil is entitled to summary judgment on this issue, leading to the denial of Defendants’ Motion for Summary Judgment and granting summary judgment in favor of Plaintiff. The Court will issue a judgment consistent with this opinion. The document also mentions that a jury will decide coverage determinations and notes that the Court assumes, for analysis, that the defect was due to faulty workmanship. However, since the faulty workmanship exclusion and the latent defect exclusion do not apply, the Court will not explore the potential coverage under the ensuing loss exceptions related to these exclusions.
