Business Interruption: Coverage For Period Of Delayed Resumption Resulting From Post-Rupture Pipeline Investigation

A peril causes covered property damage and business interruption, and also triggers legal obligations to respond to government orders that increase the cost and length of time that would have been required simply to rebuild the property as it was at the time of the peril. This is common when government regulators order (and common sense dictates) that measures be taken to minimize the likelihood that the incident will recur. Whether coverage exists for the increased costs to repair or replace insured property, and for the increased time element losses, is a frequent dispute arising in claims for property damage and business interruption losses.

A federal trial court recently addressed some of these issues in Lion Oil Co. v. National Union Fire Ins. Co .of Pittsburgh, PA., Civ. No. 13-CV-1071 (W.D Ark., El Dorado Div., Sept. 10, 2015). Policyholder Lion Oil Company ("Lion") owns a refinery in Arkansas which receives oil from a 200-mile long pipeline owned and operated by EMPCo, a subsidiary of ExxonMobil ("EMPCo"). Lion had insurance coverage for "all risk of direct physical loss or damage" to covered property, subject to policy exclusions. The coverage included contingent time element loss "resulting from" damage to property that prevented certain direct suppliers, including EMPCo, from rendering their goods to Lion. The contingent time element deductible was either 30 or 45 days.

On April 28, 2012, the pipeline ruptured. EMPCo shut the pipeline and notified the Department of Transportation Pipeline and Hazardous Material Safety Administration ("PHMSA"), the federal agency responsible for pipeline safety.

On May 8, 2012, PHMSA ordered EMPCo to, among other things, prepare an "integrity verification and remedial work plan," including: (1) a metallurgical analysis, failure analysis, and an integrated compilation of relevant pipeline system data; (2) field testing to assess whether conditions that caused the failure or other integrity-threatening conditions were present elsewhere in the line; and (3) provisions for long-term testing and verification measures.

By mid-May 2012, within 30 days of the rupture, EMPCo had replaced the ruptured section of the pipeline. EMPCo began the integrity testing required by the government in July 2012, and discovered and repaired seven additional leaks. PHMSA granted permission to restart the pipeline in October 2012. EMPCo then began the work necessary to restart shipments of oil, and Lion began receiving...