You may recall that we posted a summary of Millennium Inorganic Chemicals Ltd v. National Union Fire Ins. Co., 2012 U.S. Dist. LEXIS 140257 (D. Md. Sept. 28, 2012), where the federal district court of the district of Maryland analyzed whether contingent business interruption coverage was triggered where coverage applied only to “direct” contributing properties. In Millennium, the insured’s manufacturing facility was located in Australia, and was fueled by natural gas. Two entities (Apache and North West Shelf Joint Venture) produced the natural gas, which was then transferred into a pipeline which was owned by another entity. Once the gas entered the pipeline, title to the gas transferred to the other entity, Alinta. Millennium contracted with Alinta for delivery and purchase of the gas. An explosion occurred at the Apache facility, which resulted in an interruption of the supply of the gas to Millennium. The district court determined that the term “direct” was ambiguous, construed the policy in favor of Millennium, and found that Millennium’s claim for loss of business income was covered because it was caused by the damage to Apache’s property, which was, according to the district court, damage to a “direct” supplier of Millennium.
In our posting, we predicted that perhaps Millennium was not correctly decided. The Fourth Circuit recently reversed Millennium, and directed summary judgment to enter for the insurer. Millennium Inorganic Chemicals Ltd., et al. v. National Union Fire Ins. Co, et al, 2014 U.S. App. LEXIS 3096 (4th Cir. Feb. 20, 2014). The Fourth Circuit determined that the term “direct” is unambiguous and defined that term as “proceeding from one point to another in time or space without deviation or interruption,” “transmitted back and forth without an intermediary,” or “operating or guided without digression or obstruction.” Relying on this definition, the Fourth Circuit stated succinctly:
“Whatever the relationship between Apache and Millennium, it was interrupted by an intermediary, Alinta.”
As we noted in our summary of the district court’s decision, there is a dearth of case law on contingent business interruption coverage, and the Fourth Circuit’s decision may be useful to insurers in Superstorm Sandy litigation in addition to other catastrophic losses. It should be remembered, however, that not all contingent business interruption coverages include the word “direct” in describing suppliers and/or customers. The question of whether damage to property of “indirect” customers or suppliers can trigger contingent business interruption coverage when the policy language does not specify whether the customer or supplier must be “direct” remains largely unresolved in the caselaw.