“All-Risk” is Not “All-Loss”

Copyright 2009.  All rights reserved. 

The 10th Circuit Court of Appeals reaffirmed the principle that all-risk insurance is not a maintenance contract for fa pipeline operator to reallocate the cost of doing business to its insurers. MarkWest Hydrocarbon, Inc. et al, v. Liberty Mutual Insurance Company, Birmingham Fire Ins. Co., ACE American Ins. Co., ARCH Ins. Co.,   2009 U.S. App. LEXIS 5265, March 9, 2009, rehearing and en banc consideration denied, April 17, 2009.

Robins, Kaplan, Miller & Ciresi, L.L.P. recently obtained dismissal of a pipeline operator's claim for insurance coverage under an "all-risk" policy for costs incurred following the rupture of an underground steel pipeline in a subdivision in Ivel, Kentucky.  MarkWest Hydrocarbons, Inc. operated a 65-mile pipeline carrying natural gas liquids ("NGL") through Kentucky and West Virginia.  A small rupture in the pipeline in November, 2004 resulted in the release and ignition of natural gas liquids ("NGL") which destroyed several houses and caused a number of injuries.

MarkWest was insured under an all-risk Policy issued by four insurance companies represented by Robins, Kaplan, Miller & Ciresi, L.L.P.  The Policy excluded the peril of corrosion and excluded coverage for any increase of loss caused by the enforcement of a law or ordinance regulating the use of the pipeline. A   Demolition and Increased Cost of Construction Endorsement provided coverage for specified losses resulting from the enforcement of laws or ordinances regulating the construction or repair of the pipeline.

The Office of Pipeline Safety ("OPS") investigated the incident and issued a Corrective Action Order (‘CAO") which required, inter alia, that MarkWest shut down and test the entire 65-mile pipeline for "integrity threatening" conditions.  The CAO noted the presence of corrosion around the failure site, the pipeline had not been subject to internal inspection since it was installed in 1957, and eleven prior incidents of leaks caused by corrosion had occurred.  The OPS concluded the corrective action was needed to prevent serious harm to life, property or the environment.

MarkWest submitted a claim for the costs incurred in complying with the CAO and the costs of transporting the NGL by alternative means.  The claim was denied for several reasons, including the exclusion for the peril of corrosion in the Policy and the exclusion for loss caused by the enforcement of a law or ordinance regulating the use of the pipeline.  MarkWest brought suit against the Insurers in Colorado alleging breach of contract, and bad faith seeking coverage under the Policy as well as punitive damages.

The United States District Court for the District of Colorado granted the Insurers' Motion for Summary Judgment holding the only reasonable inference from the OPS documents was that the corrective actions were the product of concerns about corrosion, an excluded peril.  The Court agreed the fire and explosion was the cause of the required actions only in the sense that it gave notice to the OPS of the history of leaks in the pipeline resulting from corrosion. The extra-contractual claims were summarily dismissed at the hearing.

On appeal, the 10th Circuit Court of Appeals affirmed the grant of the summary judgment in favor of the Insurers.  The Court held the corrective actions required testing of the pipeline to determine the extent to which integrity threatening conditions were present along the remainder of the affected segment or elsewhere on the pipeline.  The costs of performing hydrostatic testing of the pipeline in particular was a procedure conceded by MarkWest's own expert to be a procedure " determine a safe operating pressure [to which] the pipeline can be operated."  The corrective actions regulated the use of the pipeline, an excluded cause of loss, and not construction or repair.

The Court of Appeals also discussed the claim in the context of the language and structure of an all-risk policy.  Noting that the purpose of all-risk policies is to cover fortuitous losses, the Court emphasized "to read the policy as covering MarkWest's costs of complying with safety regulations would be to convert the parties' policy against unforeseen fortuities into a maintenance contract."  The Court recognized that if the Policy provided coverage, "strange incentives" would be created by allowing a pipeline operator to "run the least-safe, least-modern least well-run pipeline in violation of every regulation in the books" and the insurers would be "on the hook for repairing and modernizing the entire pipeline."  To construe the Policy in favor of coverage would "misallocate the ordinary costs of doing business from the company to the insurer."