Millennium Inorganic Chemicals Ltd. v. Nat'l Union Fire Ins. Co. of Pittsburgh

• Decision Date: 28 September 2012
• Docket Number: Civil Action No. ELH–09–1893.
• Parties: MILLENNIUM INORGANIC CHEMICALS LTD., et al., Plaintiffs, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, et al., Defendants.
• Court: U.S. District Court — District of Maryland

893 F.Supp.2d 715

MILLENNIUM INORGANIC CHEMICALS LTD., et al., Plaintiffs,

v.NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, et al., Defendants.

Civil Action No. ELH–09–1893.

United States District Court, D. Maryland.

Sept. 28, 2012.

Gary Carlson Duvall, Jeffrey Philip Reilly, Miles and Stockbridge PC, Towson, MD, John Celeste, Joseph Lanham Beavers, Miles and Stockbridge PC, Baltimore, MD, for Plaintiffs.

Robert E. Scott, Jr., Semmes Bowen and Semmes, Baltimore, MD, Eric J. Voigt, Hilary Michele Henkind, John C. Mezzacappa, Mound Cotton Wollan and Greengrass, New York, NY, for Defendants.

MEMORANDUM OPINION

ELLEN LIPTON HOLLANDER, District Judge.

Millennium Inorganic Chemicals Ltd. (“Millennium Inorganic”) and Cristal Inorganic Chemicals Ltd. (“Cristal Inorganic”) (collectively, “Millennium”), plaintiffs, sued two of their “All–Risks” insurers, National Union Fire Insurance Company of Pittsburgh, PA (“National Union”) and ACE American Insurance Company (“ACE”) (collectively, the “Insurers”), after the Insurers denied coverage for business interruption losses that plaintiffs sustained due to the loss of natural gas supply to their titanium dioxide production facilities in Western Australia. Plaintiffs allege that they incurred a loss of over $10 million due to the business interruption.¹

The loss of natural gas supply was caused by a massive explosion that occurred on June 3, 2008, at a natural gas production facility on Varanus Island, off the coast of Western Australia, operated by a joint venture led by Apache Corporation (“Apache”). The explosion completely shut down Apache's gas production on Varanus Island, which accounted for approximately 30% of the natural gas supply to all of Western Australia. Immediately after the explosion, the supply of natural gas to plaintiffs' facilities was terminated and, without natural gas, plaintiffs were forced to suspend production of titanium dioxide. Shortly after the explosion, Millennium submitted a claim to the Insurers for coverage under the applicable policies. The claim was denied in February 2009.

Plaintiffs' suit, filed in July 2009, contains three counts against the Insurers.² Count I seeks a declaratory judgment that Millennium is entitled to coverage under the policies for business interruption losses arising out of the Varanus Island explosion. Count II asserts a claim for breach of contract under the insurance policies. Finally, Count III alleges a cause of action under Md.Code (2006 Repl. Vol., 2012 Supp.), § 3–1701 of the Courts & Judicial Proceedings Article (“C.J.”), for failure to act in good faith in denial of insurance coverage.

The principal question on which insurance coverage turns is whether Apache's Varanus Island natural gas production facility was a “direct contributing property” to plaintiffs' titanium dioxide production facilities, despite the fact that plaintiffs purchased the natural gas from an intermediary, Alinta Sales Pty Ltd. (“Alinta”), which, in turn, purchased natural gas from Apache and other natural gas producers for resale to end users such as Millennium. If Apache's facility was a direct contributing property to plaintiffs, or to “others for the account of” plaintiffs, the loss comes within the contingent business interruption (“CBI”) coverage provided by the insurance policies. Otherwise, the loss is not covered.

Discovery has concluded, and plaintiffs and the Insurers have filed cross-motions for summary judgment on the issues of whether coverage exists and whether the Insurers are liable for bad faith denial of coverage under C.J. § 3–1701.³ The motions have been fully briefed,⁴ and a hearingis not necessary to resolve them. See Local Rule 105.6. For the reasons that follow, I will grant Millennium's motion and grant in part and deny in part the Insurers' motion.

Background⁵

A. Millennium

Cristal Inorganic is the parent company of Millennium Inorganic. See Millennium Motion at 3; Insurers' Motion at 1. Both companies are subsidiaries of The National Titanium Dioxide Co., Ltd. See ECF 2. Millennium, together with other affiliates, is a leading global producer of titanium dioxide, a white pigment used in manufacturing a range of products such as paint, plastics, and paper. See Millennium Motion at 3; Insurers' Motion at 1. Millennium operates two interdependent plants near Bunbury, Western Australia (the “Bunbury Operations”) for the production and finishing of titanium dioxide. See id.; Millennium Motion at 3.

B. The Policies

Millennium was insured under a “Master Controlled Insurance” (“MCI”) program, which is a method of global business insurance coverage. Millennium Motion at 6. Such a program provides coverage on a global basis through the issuance of “master policies,” issued by insurers in the United States, and “local policies,” issued in the countries where the insured operates, in order to comply with regulatory requirements in those countries. See id. For the 2008–2009 policy year, Millennium's MCI program was procured through its broker, Marsh. See id.; Insurers' Motion at 8.⁶ The 2008–2009 MCI program included two “All–Risks” master policies, one issued by National Union and the other issued by ACE, as well as an Australian local policy issued by American Home Assurance Company.⁷See National Union Policy, Ex. 13 to Millennium Motion (ECF 146–15); ACE Policy, Ex. 14 to MillenniumMotion (ECF 146–16) (collectively, the “Master Policies”).⁸ The two Master Policies were written on substantially the same policy forms, and each policy covered Millennium for 50% of any covered losses, up to an aggregate limit of $450 million per occurrence between the policies. See Millennium Motion at 7; see also National Union Policy at 13; ACE Policy at 6.⁹

The provisions of the Master Policies at issue are the provisions for contingent business interruption, or “CBI” coverage. “CBI coverage is a relatively recent development and its scope has not yet been fully delineated by the courts.” Zurich Am. Ins. Co. v. ABM Indus., Inc., 397 F.3d 158, 168 (2d Cir.2005); see also Pentair, Inc. v. Am. Guar. & Liab. Ins. Co., 400 F.3d 613, 615 (8th Cir.2005) (“few reported cases have construed this type of extended business interruption coverage”). Broadly speaking, contingent business interruption insurance “gives the insured coverage for loss of sales or revenue sustained when its business is interrupted as a result of damage to property that disrupts the flow of goods and services with a supplier or customer.” Arthur Andersen LLP v. Fed. Ins. Co., 416 N.J.Super. 334, 3 A.3d 1279, 1282 (N.J.Super.Ct.App.Div.2010). “The word ‘contingent’ is something of a misnomer; it simply means that the insured's business interruption loss resulted from damage to a third party's property.” Pentair, 400 F.3d at 615 n. 3.

Whereas ordinary “[b]usiness interruption insurance protects against the loss of prospective earnings because of the interruption of the insured's business caused by an insured peril to the insured's own property,” contingent business interruption insurance “protects against the loss of prospective earnings because of the interruption of the insured's business caused by an insured peril to property that the insured does not own, operate, or control.” CII Carbon, L.L.C. v. Nat'l Union Fire Ins. Co. of La., Inc., 918 So.2d 1060, 1061 n. 1 (La.Ct.App.2005) (emphasis added); accord Penton Media, Inc. v. Affiliated FM Ins. Co., 245 Fed.Appx. 495, 499 (6th Cir.2007) (quoting CII Carbon ). In other words, “[r]egular business-interruption insurance replaces profits lost as a result of physical damages to the insured's plant or other equipment; contingent business interruption coverage goes further, protecting the insured against the consequences of suppliers' [or customers'] problems.” Archer Daniels Midland Co. v. Hartford Fire Ins. Co., 243 F.3d 369, 371 (7th Cir.2001); accord Zurich, 397 F.3d at 168;see also Duane Reade, Inc. v. St. Paul Fire & Marine Ins. Co., 411 F.3d 384, 394 (2d Cir.2005) (stating that CBI coverage “reimburses [the insured] for BI losses that are caused by damages to property that is not owned by [the insured] but upon which its business depends”).

The “Declarations” of both Master Policies designate the sublimits for the policies'CBI coverage, which is described as “contingent time element—direct contributing or recipient properties” coverage.¹⁰ National Union Policy at 14 (capitalization altered); see also ACE Policy at 14. The policy limits are $25 million “named per occurrence” and $10 million “unnamed per occurrence.” National Union Policy at 14 (capitalization altered); see also ACE Policy at 14. The relevant CBI coverage is established in Endorsement 8 of both Master Policies. Endorsement 8 is entitled “CONTINGENT BUSINESS INTERRUPTION [—] CONTRIBUTING PROPERTY(IES) ENDORSEMENT [—] (Not Operated By The Insured).” It is set forth using the same endorsement form in both Master Policies, although there is one notable difference between the policies in the manner in which the form was completed. The operative language of Endorsement 8 states, National Union Policy at 47 (boldface and underlining in original; italics added):

A. AMOUNT OF INSURANCE:

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

B. SCHEDULE OF LOCATION(S):

The following locations must be direct suppliers of materials to the Insured's locations or coverage is deemed to be void:

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