NATIONAL UN. FIRE INS. CO. v. Anderson-Prichard Oil Corp.

• Decision Date: 03 March 1944
• Docket Number: No. 2699.,2699.
• Citation: 141 F.2d 443
• Parties: NATIONAL UNION FIRE INS. CO. OF PITTSBURGH v. ANDERSON-PRICHARD OIL CORPORATION et al.
• Court: U.S. Court of Appeals — Tenth Circuit

141 F.2d 443 (1944)

NATIONAL UNION FIRE INS. CO. OF PITTSBURGH v. ANDERSON-PRICHARD OIL CORPORATION et al.

No. 2699.

Circuit Court of Appeals, Tenth Circuit.

March 3, 1944.

F. A. Rittenhouse, of Oklahoma City, Okl. (John F. Webster, O. R. Rittenhouse, and Arthur Leach, all of Oklahoma City, Okl., on the brief), for appellant.

W. H. Brown, of Oklahoma City, Okl. (J. H. Jarman and Virgil R. Ball, both of Oklahoma City, Okl., on the brief), for appellees.

Before PHILLIPS, BRATTON, and MURRAH, Circuit Judges.

MURRAH, Circuit Judge.

Effective January 1, 1941, the National Union Fire Insurance Company of Pittsburgh, Pennsylvania, issued and delivered its use and occupancy insurance policy to the Anderson-Prichard Oil Corporation, Anderson-Prichard Refining Corporation, and Anderson-Prichard Pipe Line Corporation "as their interest may appear". By the terms of the policy, the insurer undertook to insure a complete oil refinery against actual loss of net profits, plus fixed and continuing overhead expenses, which the insured refinery is prevented from earning by reason of total or partial suspension caused by fire, together with the expenses necessarily incurred in reducing the loss. In no event, however, could the actual recoverable loss exceed 1/365th of the total coverage of $850,000, or $2,328 for each day of interruption, "due consideration being given to the experience of the business before the fire and the probable experience thereafter"; provided further that the period of interruption or suspension could not exceed the length of time required, with the exercise of due diligence and dispatch, to rebuild, repair or replace the refinery.¹ The policy also contained a "partial suspension" or "honesty" clause, which limited the per diem liability of the company for a partial suspension of the business to the same proportion of the per diem liability which would be incurred by a total suspension of the business for the same period.² For appropriate illustration see Kahler Business Interruption Insurance, p. 162; and Foster Consequential Coverages, p. 55. See also Hartford Fire Ins. Co. v. Wilson & Toomer Fertilizer Co., 5 Cir., 4 F.2d 835; Firemen's Ins. Co. v. Lasker, 8 Cir., 18 F.2d 375, 379; Studley Box & Lumber Co. v. National Fire Insurance Co., 85 N. H. 96, 154 A. 337, 75 A.L.R. 248; Nusbaum v. Hartford Fire Ins. Co., 276 Pa. 526, 120 A. 481.

The insured sued and recovered a judgment in the sum of $22,546.68 for actual loss of net profits by reason of a partial suspension of the refinery operations, caused by a fire on February 24, 1941. The question presented by this appeal is whether the insured is entitled to recover under the insurance contract, if so the extent, and the factors to be considered in the computation of the loss.

The Anderson-Prichard Refining Corporation and the Anderson-Prichard Pipe Line Corporation are wholly owned subsidiaries of the Anderson-Prichard Oil Corporation. The refining company owns and operates an oil refinery located near Cyril, Oklahoma, which manufactures and sells refined petroleum products; the pipe line company owns and operates a pipeline for the transportation of crude oil which it purchases as a carrier, and which it sells and delivers to the refinery. In the early part of January 1941, the refinery completed a program of expansion and modernization. A new and improved cracking unit, flash tower, and additional storage facilities were installed to be operated in connection with the old equipment which had been in operation for a number of years. These improvements increased the capacity of the refinery from approximately 5,000 barrels to approximately 8,000 barrels daily throughput, and the additional storage facilities enabled the refinery to maintain constant operations by providing storage for the finished products during seasonal depressions of the gasoline market. As a result of these improvements, the refinery planned a program of 7,500 barrels daily throughput for the year 1941, and from January 23 to February 24, 1941, the refinery had an average daily throughput of 8,200 barrels per day.

On February 24, 1941, at about seven o'clock a. m., the newly installed cracking unit was damaged by fire, which necessitated the discontinuance of its operation, and also rendered the flash tower inoperative. The old unit was immediately disconnected or "blinded" off from the damaged cracking unit, and partial operations were resumed after a total suspension of two days. The refinery as improved was one homogeneous unit; the cracking unit and flash tower produced high octane gasoline, and with the discontinuance of the new cracking equipment and flash tower, the production of the plant was curtailed to approximately 5,000 barrels per day. In this impaired condition, the plant was unable to refine all of the charged stock, consequently a part of it was held in reserve storage until full operations could be resumed. For a period of fifteen days, that is, from February 24 to March 11, 1941, the refinery continued to operate in its crippled condition until the damaged parts were repaired and placed in full operation. The parties were unable to agree upon the actual loss recoverable under the policy for the agreed period of partial suspension, and this suit followed.

The insured is the oil company, the refining company, and the pipe line company, as their interest appears in the risk. The subject of the insurance is one refinery complete; the peril insured against is loss by fire, and the indemnity is the actual loss of business earnings out of which net profits and continuing overhead expenses are paid. The purpose, scope and legal effect of the insurance contract is to protect the prospective earnings of the insured business only to the extent that they would have been earned if no interruption had occurred, not to exceed the per diem limits of the policy. In other words, the policy is designed to do for the insured in the event of business interruption caused by fire, just what the business itself would have done if no interruption had occurred — no more. Hartford Fire Ins. Co. v. Wilson & Toomer Fertilizer Co., supra; Hutchings v. Caledonian Ins. Co., D.C., 52 F.2d 744; Fidelity-Phenix Fire Ins. Co. v. Benedict Coal Corp., 4 Cir., 64 F.2d 347; Miller v. Hocking Glass Co., 6 Cir., 80 F.2d 436; Goetz v. Hartford Fire Ins. Co., 193 Wis. 638, 215 N.W. 440; National Filtering Oil Co. v. Citizens' Ins. Co., 106 N.Y. 535, 13 N.E. 337, 60 Am.Rep. 473. See also Annotation, 75 A.L.R. 253; Appleman, Insurance Law and Practice, vol. 5, § 3120; Kahler Business Interruption Insurance, p. 49, 50, 137; Foster, Consequential Coverage. The rights and liabilities of the parties are of course measured by the contract of insurance, the terms of which must be judicially interpreted to give practical effect to the manifest intentions of the contracting parties. There is no prescribed formula for the determination of the actual loss of net profits and business expenses covered by the policy, except the test of past experience and probabilities of the future. This test is of course to be applied in a practical way, having regard for the nature of the business and the methods employed in its operation. Hutchings v. Caledonian Ins. Co., supra; Fidelity-Phenix Fire Ins. Co. v. Benedict Coal Corp., supra; Puget Sound Lumber Co. v. Mechanics' & Traders' Ins. Co., 168 Wash. 46, 10 P.2d 568; Kahler Business Interruption Insurance, p. 173.

The operations of the refinery and pipe line companies are largely interrelated and interdependent, and insofar as the pipe line is an integral part of the complete refinery, it should be treated as an integrated whole for the purpose of determining the actual loss sustained under the policy. Studley Box & Lumber Co. v. National Fire Ins. Co., supra; Nusbaum v. Hartford Fire Ins. Co., supra; Puget Sound Lumber Co. v. Mechanics' & Traders' Ins. Co., supra. The proof of loss is based on this principle, and the trial court likewise treated the business as an integrated whole for the purpose of computing the actual loss sustained under the policy. The oil company is interested only as a holding company for the two operating companies, and its interest in the recovery is governed accordingly.

The insured submitted timely proof of loss of its net profits and continuing expenses during the period of partial suspension, based upon the difference between the earnings of the insured property under a normal fifteen day period, and earnings for the actual operations during the fifteen day partial suspension. For this normal fifteen day period of operations, the insured took the average actual daily throughput of the refinery from January 23rd to August 1, 1941 (exclusive of the partial suspension period), ascertained to be 7,443 barrels daily. The refined or manufactured value of this barrelage, based upon the weighted average of the quoted tank car and tank truck price for the last five days of February...