Sinclair Wyo. Ref. Co. v. Infrassure, LTD, No. 19-8018

• Decision Date: 17 August 2020
• Docket Number: No. 19-8018
• Citation: 970 F.3d 1317
• Parties: SINCLAIR WYOMING REFINING COMPANY, Plaintiff-Appellant/ Cross-Appellee, v. INFRASSURE, LTD, Defendant-Appellee/ Cross-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

970 F.3d 1317

SINCLAIR WYOMING REFINING COMPANY, Plaintiff-Appellant/ Cross-Appellee,

v.INFRASSURE, LTD, Defendant-Appellee/ Cross-Appellant.

No. 19-8018

United States Court of Appeals, Tenth Circuit.

FILED August 17, 2020

Marc J. Ayers and Alicia K. Margolis, Bradley Arant Boult Cummings, LLP (Marcy G. Glenn and JoAnna S. DeWald, Holland & Hart LLP, Denver, Colorado and Cheyenne, Wyoming, with them on the briefs), Birmingham, Alabama, and Jackson, Mississippi, for Plaintiff-Appellant/Cross-Appellee.

Guyon H. Knight, Quinn Emanuel Urquhart & Sullivan (Jane M. Byrne and David M. Cooper, Quinn Emanuel Urquhart & Sullivan, New York, New York, and Randall B. Reed, Long Reimer Winegar Beppler, Cheyenne, Wyoming, with him on the briefs), New York, New York, for Defendant-Appellee/Cross-Appellant.

Before TYMKOVICH, Chief Judge, BACHARACH, and CARSON, Circuit Judges.

TYMKOVICH, Chief Judge.

After a 2013 fire in its Wyoming refinery caused the Sinclair Wyoming Refining Company to restrict operations for several months, it filed a claim with its eighteen insurers, including Infrassure, Ltd., which collectively provided Sinclair coverage for business interruption losses under an all-risk insurance policy. In 2015, after twenty months of claim adjustment, Sinclair and the other seventeen insurers settled the claim. But Infrassure did not agree with the settlement value and eventually exercised its right under the policy to have Sinclair's covered loss calculated by a panel of three appraisers. The panel valued the loss at $60,365,508, with Infrassure liable for $4,527,413.

Infrassure, still unsatisfied, sought to invalidate the award in district court, arguing that the appraisers relied improperly on the settlement amount rather than independently valuing the loss. The district court rejected this theory and confirmed the award, holding Infrassure failed to show any actionable misconduct on behalf of the appraisers. We agree the record reveals nothing warranting setting aside the appraisal award and therefore AFFIRM.

I. Background

This appeal arises out of an insurance dispute regarding a September 27, 2013 fire in Sinclair's petroleum refinery.¹ The fire originated near a heater located within a #4HDS Unit—a piece of machinery that removes sulfur and nitrogen from gasoil, one step in the production of gasoline. The fire damaged the #4HDS Unit and other portions of Sinclair's facility. As a result, the plant was forced to operate on a limited basis, resulting in lost business for Sinclair.

A. The Policy

At the time of the fire, Sinclair's refinery was covered under an all-risk insurance policy. Sinclair's parent companies solicited the Policy on the London insurance market, and eighteen insurers (collectively the Market) separately subscribed to varying portions of the $250 million limit. Infrassure, as one of the participating insurers, subscribed to cover 7.5%—meaning that it assumed several liability for 7.5% of any covered loss up to the Policy limit.

The Policy covers property damage as well as business interruption losses. The parties do not dispute the amount of Sinclair's covered property damage. Nor do they dispute that the fire caused Sinclair to lose business from its inability to operate as fully as it had before, generating some covered business interruption loss. The sole point of contention is the amount of that loss.

The Policy defines business interruption loss as "loss resulting from necessary interruption of business ... caused by loss, damage, or destruction covered" by the Policy. Aple. App. at 127.² This constitutes the actual loss sustained by Sinclair, "consisting of the net profit which is ... prevented from being earned and of all charges and expenses only to the extent that these must necessarily continue during the interruption of business." Id.

This coverage is cabined in two ways. First, Sinclair undertook a duty to mitigate its business interruption loss to the extent "reasonable means" were available, including by resuming operations on a "complete or partial" basis. Id. Second, the Policy limits the time period—the "Period of Recovery"—during which business interruption losses were recoverable. It states the "length of time for which [a business interruption loss] may be claimed" runs from 75 days after the event giving rise to the loss and "shall not exceed such length of time as would be required with the exercise of due diligence and dispatch to rebuild, repair, or replace the property that has been destroyed or damaged." Id. at 130.

In the event of a dispute over coverage, the Policy provides any party with the right to have the covered loss determined by a panel of three appraisers. Once a party demands an appraisal, the parties must each name a "competent and disinterested appraiser," and those two in turn "select a competent and disinterested umpire." Id. at 148. Under the Policy, the two party-appointed appraisers will meet and attempt to value the loss, with the umpire deciding any disputes.

B. The Claim-Adjustment Period

Shortly after the fire, Sinclair filed a claim under the Policy, assisted by experts from the firm AON. The Market retained independent loss adjusters to review the claim. The Market's team included Dan McLain, the lead loss adjuster, Ennio Mastracci, a refinery expert, and Mike Clarke, an accounting expert. For approximately the next 20 months—from October 2013 through May 2015—the Market's adjusters worked with Sinclair and its experts in an attempt to value the claim.

During this claim-adjustment period, Sinclair and the Market, along with their respective experts, disagreed over how best to value Sinclair's business interruption loss. Although this analysis depended on numerous factors, two issues became particularly contentious: (1) the amount of time it should have taken Sinclair to repair the #4HDS Unit³ and (2) the appropriate model to use to estimate Sinclair's lost profits.

With respect to the repair timeline, the experts disagreed over what constituted a reasonable hypothetical restart date assuming the exercise of due diligence and dispatch in repairing the #4HDS Unit. On May 11, 2015, in one of the final reports on the issue, Mr. Mastracci stated that the appropriate theoretical restart date may have been as early as March 1, 2014—almost two months before the actual restart date of April 26, 2014. See Aplt. Supp. App. at 364–65. Mr. Mastracci arrived at this conclusion by starting with the actual restart date of April 26, 2014 and then subtracting time for numerous categories of work—including fireproofing, welding, repairing errors resulting from poor workmanship, and ordering new parts—that he reasoned were either not attributable to the fire or were not performed with sufficient alacrity or efficiency. Id. In this report, however, Mr. Mastracci noted certain issues required additional discussion with Sinclair. Id. at 365.

On June 7, 2015—less than a month after his earlier report—Mr. Mastracci issued an updated report listing April 1, 2014 as an appropriate theoretical start date. Id. at 412. In justification for his adjusted timeline, Mr. Mastracci stated, "my comments have been revised to reflect the new information and clarifications provided by Sinclair during the meeting in Salt Lake City on June 2, 2015." Id. According to Mr. Mastracci, in that meeting, "Sinclair explained that work on the #4HDS Unit undertaken and performed during the month of March 2014,"—work that Mr. Mastracci had earlier opined was unrelated to the fire—"was the result of physical damage sustained during the September 27, 2013 incident." Id. As such, he concluded, that work "should be considered in preparing a theoretical restoration timeline."⁴ Id.

The Market adjusters and Sinclair also disagreed over what linear program model (LP Model) to use to calculate Sinclair's lost profits. In this context, an LP Model is a computer program that describes the operations of a refinery, estimating what gasoline, diesel, and other products the facility would have produced in a but-for world where no fire had occurred. Comparing this theoretical output against the actual output of the refinery during the repair period, one can calculate Sinclair's lost business.

In the wake of the fire, a Sinclair employee, Jon Christensen, prepared the November 2014 LP Model. But after testing the model and additional analysis by the Market's expert, Mr. Christensen agreed to make certain modifications, resulting in the March 2015 LP model. As a result of this agreement, both AON, working on behalf of Sinclair, and the Market's experts used the March 2015 LP model during the claim-adjustment period.⁵

C. The Settlement

On June 2, 2015, approximately 20 months after the fire, four members of the Market—comprising 40 percent of the coverage—met with representatives from Sinclair in an attempt to settle Sinclair's claim. During the meeting, both sides "presented their claim analysis and answered questions of the other [regarding] methodology of the claim submission, assumptions regarding performance of the business, hypothetical period of restoration vs. actual period of restoration, etc." Aplt. Supp. App. at 131. At the request of the insurers, forensic accountants completed a revised claim assessment, using a March 31, 2014 theoretical restart date, that resulted in a calculation of $59,995,997. Id. Peter Johnson, Sinclair's president, then met privately with representatives from two insurers and agreed on a settlement figure of $60 million.⁶

In his deposition, Mr. Johnson stated that he did not believe Sinclair had provided any "new information concerning timeline issues" in the settlement meeting. But, in response to questions regarding whether consensus had been reached on the appropriate repair timeline in the meeting, Mr. Johnson stated that although there was not "an explicit agreement reached on the repair time" his observation was that "[Mr. Mastracci] seemed satisfied that [Sinclair] had addressed his...