In Millennium Inorganic Chemicals Ltd v. National Union Fire Ins. Co., 2012 U.S. Dist. LEXIS 140257 (D.Md., Sept. 28, 2012), the federal district court for the district of Maryland addressed an important issue regarding contingent business interruption coverage – what is a “direct” supplier of goods or services. As is explained in the opinion, contingent business interruption coverage (often referred to by the acronym “CBI coverage”) provides coverage for loss of business income caused by an interruption of business operations caused by physical loss or damage to property of an insured’s supplier or customer if that physical damage is caused by a covered cause of loss. An issue that has arisen in determining whether coverage exists under this provision is whether the supplier or customer is a “direct” or “indirect” supplier or customer. Some policies identify the specific suppliers and/or customers whose property damage could trigger CBI coverage, others require that the supplier and/or customer be a “direct” supplier or customer, and yet others simply provide for coverage for losses caused by damage to suppliers or customers without specifying whether the supplier or customer must be “direct.” Before Millennium, there were only three reported cases addressing the issue of whether a “direct” relationship between the insured and the claimed supplier or customer is required in order to establish CBI coverage.
In Archer-Daniels-Midland Co. v. Phoenix Assurance Co., 936 F.Supp. 534 (S.D.Ill. 1996), the global agribusiness of the insured, ADM, sustained losses of income due to flooding of farmland in the Mississippi River valley. ADM purchased its grain from wholesalers who, in turn, purchased the grain from farmers whose land was flooded. Sometimes, multiple wholesalers were involved, but the farmers were the source of the grain. The policies at issue in ADM provided that they covered loss of business income “caused by damage to or destruction of real or personal property…of any supplier of goods or services which results in the inability of such supplier to supply an insured location.” The court noted that although the farmers may be “indirect” suppliers of ADM, they were suppliers nonetheless, and that since the policy provided coverage for losses of “any” supplier of goods or services, CBI coverage was available to ADM. In Pentair Inc. v. Amer. Guar. & Liab. Ins. Co., 400 F.3d 613 (8th Cir. 2005), an earthquake disabled an electrical substation that provided electric power to two factories which manufactured products that were supplied to the insured. The insured needed to “cover” by purchasing substitute supplies from a different supplier for a higher cost. The insured sought to recover for its contingent extra expenses (extra expenses caused by damage to a supplier) under a policy that provided coverage for “losses incurred by Pentair as the result of damage to property of a supplier of goods and/or services to the Insured that is caused by a covered peril.” The Eighth Circuit held that the power substation was not a “supplier of goods and/or services” to Pentair, and that CBI coverage was therefore not available. In Park Electrochemical Corp. v. Continental Cas. Co., 2011 WL 703945 (E.D.N.Y. 2011), a manufacturing facility owned by a subsidiary of the insured supplied component parts needed for the insured’s manufacturing operations. The subsidiary’s facility sustained physical damage that prevented it from supplying its parent. The policy in issue provided CBI coverage for loss of income “caused by direct physical damage or destruction to…any real or personal property of direct suppliers which wholly or partially prevents the delivery of materials to the insured or to others for the account of the insured.” The court found that the term “direct suppliers” was ambiguous, and found that there was no CBI coverage available for the parent/insured’s losses.
In Millennium, the insured produced titanium dioxide, a white pigment used in manufacturing a range of products such as paint, plastics and paper. The insured’s manufacturing facility, located in Western Australia, was fueled by natural gas. The gas was produced by two entities: a joint venture headed up by Apache and an entity named the North West Shelf Joint Venture. The two joint venture suppliers sent their gas product into a single pipeline, where it was comingled, and ultimately delivered to end users. Both joint ventures ceased to hold title to the gas when it entered the pipeline, and title passed to a third party, named Alinta. Neither of the gas producers nor Alinta owned the pipeline, which was owned by a different entity. Alinta entered into contracts with end users, including Millennium, and sold the gas to them. Alinta, however, never technically had possession of the gas. An explosion at the Apache facility interrupted Apache’s supply of gas into the pipeline, and had the effect of interrupting the supply of gas to Millennium. Millennium made claim with its insurer under its CBI coverage. Although the policy language used different terms in different places, the parties appear to have agreed that coverage was provided for loss of income caused by damage to a “direct contributing property.” The insurers argued that “direct contributing property” required that the property be a “direct supplier.” Although the insured disputed this, the court undertook its analysis based on an assumption (“arguendo”) that the direct supplier language in another part of the policy applied in determining whether a property was a “direct contributing property.” The “direct supplier” language provided that “the following locations must be direct suppliers of materials to the Insured’s locations or coverage is deemed to be void.” The court then held that even under this assumption, the policy language was ambiguous, and could reasonably be interpreted to provide coverage. The court noted that the words in the policy referenced properties, and not people or entities. Thus the policy referenced “direct contributing property” and required that “locations must be direct suppliers” instead of “damage to property of a supplier.” The court also noted that the insurers had conceded that contractual privity was not required to prove that a location was a “direct contributing property” or “direct supplier.” The reason for this concession by the insurers is not clear from the opinion. The court noted
“The Insurers argue that, if there is no contractual relationship, some other ‘direct relationship’ between Apache and Millennium would be necessary for Apache to be a direct contributing property to Millennium. But, the Insurers are unable to explain what they mean by the phrase ‘direct relationship,’ aside from a contractual relationship.”
The court found that because Apache put the gas into the pipeline and that uninterrupted physical forces moved the gases into the possession of Millennium, this was sufficient to make the Apache property a “direct contributing property.”
In light of the ADM case, many insurers have changed the language of their CBI coverage language to restrict coverage to losses caused by damage to the property of a “direct supplier and/or customer.” The Millennium case may be cited by insureds to support an argument that the “direct” requirement in these policies can be avoided if the product being supplied is unaltered while it is being transported to the insured. Such an argument, however, would be misplaced, as the language in the Millennium policy and the facts in issue in Millennium ar fairly unique. First, as the court noted, the policy language spoke in terms of properties, not people or entities. The result of Millenniummight be different if the policy language referred to damage to property of suppliers and/or customers. Second, the court relied heavily on the physical process by which the gas was transported to Millennium, and noted that neither the owner of the pipeline nor Alinta did anything to transport the gas, and that the gas was transported by natural physical forces. That is not true in the case of most other commercial transactions. Finally, the Millennium decision relies heavily on the fact that the insurers conceded that privity of contract is not required to make a supplier a “direct supplier.” The court also noted that the policy in issue contained other provisions that did require contractual privity, thus making it clear (in the court’s eyes) that privity was not required to establish CBI coverage. Depending on the policy language in issue, insurers may be able to make a persuasive argument that contractual privity is required.
Finally, even given the unique policy language and factual background presented, it is not at all clear that Millennium was correctly decided. Missing from the opinion is any consideration as to whether there can be more than one “direct” supplier of a particular material. A good argument can be made that there can only be one direct supplier and that, in this case, given the unusual policy wording, the “direct contributing property” was the pipeline. If the pipeline, instead of the Apache property, had been damaged, it is pretty clear that the pipeline would have been considered a “direct contributing property.”