In a 2-1 decision released on February 20, the U.S. Court of Appeals for the Fourth Circuit reversed the district court below and declared that the term “direct contributing properties” was unambiguous in the context of a policy that provided contingent business interruption coverage.  Accordingly, the court found that the insured was not entitled to coverage when its production facility was knocked offline for several months following an explosion at a natural gas producer’s facility.  A copy of the court’s decision inMillennium Inorganic Chemicals Ltd. v. National Union Fire Insurance Company of Pittsburgh, Pa., No. 13-1194 (4th Cir. Feb. 20, 2014), is available here.

The case arose out of the Varanus Island explosion in Western Australia in June 2008.  Apache Corporation operated a natural gas processing facility on the offshore facility.  Once the gas had been processed, Apache injected it into Dampier-to-Bunbury Pipeline, at which point custody, title, and risk passed from Apache to Alinta Sales Pty Ltd.  Millennium (the insured) in turn contracted with Alinta for a constant supply of natural gas at its titanium dioxide production facility.  The Varanus Island explosion caused a severe reduction in the supply of natural gast to Western Australia; the Australian government quickly intervened and imposed controls that prioritized the delivery of natural gas to domestic customers and essential services.  Alinta declared a force majeure event and ceased to deliver natural gas to Millennium.

Two days after the explosion, Millennium tendered a CBI claim to National Union and ACE American Insurance Company.  The carriers concluded that Apache was not a direct supplier to Millennium, with the result that Millennium’s policies’ CBI coverage had not been triggered.  Millennium sued.  The federal district court in Maryland concluded that the policies’ CBI coverage extended only to “direct contributing properties” to Millennium.  Surprisingly, however, the court went on to conclude that the term “direct” was ambiguous (a point suggested by none of the parties) and resorted to the doctrine of contra proferentem.  Because Apache produced natural gas that eventually made its way through the pipeline to Millennium, the court reasoned, Millennium had a plausible argument that Apache could qualify as a direct supplier.  Accordingly, the district court found that Millennium was entitled to coverage.

The Fourth Circuit reversed.  It agreed that the policies provided CBI coverage only for damage to Millennium’s “direct contributing properties.”  It held, however, that the term was simply unambiguous – the word “direct” has only one commonly-understood meaning, and the relationship between Apache and Millennium did not satisfy it.  The court reasoned that there was no legal relationship between Apache and Millennium because Millennium’s natural-gas supply contract was with Alinta.  Similarly, there was no physical relationship between Apache and Millennium because Apache’s gas (which comingled with other gas in the pipeline and therefore could not be segregated) passed through Alinta’s pipeline to reach Millennium’s facility.  No matter how the court considered the question, the court concluded that the gas had to pass through an intermediary to get from Apache’s production facility to Millennium, and that insertion of an intermediary made Apache (at best) only an indirect supplier to Millennium.  The appeals court remanded with instructions for the district court to enter summary judgment in the carriers’ favor.

The Fourth Circuit’s holding is a victory for common sense.  The carriers’ policies clearly defined the scope of CBI coverage that would be provided, and the Fourth Circuit correctly found that coverage to be unambiguous.  There is a relative dearth of cases construing coverage provisions in CBI policies, so we hope that the Fourth Circuit’s well-reasoned holding will guide the construction of such policies elsewhere.