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Lion Oil Co. v. National Union Fire Insurance Co.

United States District Court, W.D. Arkansas, El Dorado Division

September 10, 2015


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[Copyrighted Material Omitted]

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          For Lion Oil Company, Plaintiff: Brian H. Ratcliff, LEAD ATTORNEY, PPGMR Law, PLLC, El Dorado, AR; Geoffrey J. Greeves, Vernon C. Thompson, LEAD ATTORNEYS, PRO HAC VICE, Pillsbury Winthrop Shaw Pittman LLP, Washington, DC; Julie DeWoody Greathouse, LEAD ATTORNEY, PPGMR Law, Little Rock, AR; Peter M. Gillon, LEAD ATTORNEY, PRO HAC VICE, Pillsbury LLP, Washington, DC; Vincent E. Morgan, LEAD ATTORNEY, Pillsbury LLP, Houston, TX; Kimberly D. Logue, Perkins Trotter PLLC, Little Rock, AR.

         For National Union Fire Insurance Company of Pittsburgh, PA, Great Lakes Reinsurance (UK) PLC, Ace American Insurance Company, XL Insurance America, Inc., Torus Speciality Insurance Company, Certain Underwriters at Lloyds-Talbot Syndicate 1183, Certain Underwriters at Lloyds-Navigators Syndicate at Lloyds 1221 and Pembroke Syndicate at Lloyds 4000, Certain Underwriters at Lloyds-SJC 2003/Catlin, Certain Underwriters at Lloyds-Brit Insurance, Syndicate 2987, Certain Underwriters at Lloyds-Chaucer Marine Syndicate 1084, Berkshire Hathaway International Insurance Limited, Arch Insurance Company, Landmark American Insurance Company, Lexington Insurance Company, Ironshore Specialty Insurance Company, Defendants: Amy Churan, LEAD ATTORNEY, Robins Kaplan Miller Ciresi LLP, Los Angeles, CA; James M. Simpson, Martin A. Kasten, LEAD ATTORNEYS, Friday, Eldredge & Clark, Little Rock, AR; William A. Webster, LEAD ATTORNEY, Robins Kaplan LLP, Los Angeles, CA.

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         Susan O. Hickey, United States District Judge.

         Before the Court is a Motion for Summary Judgment filed by Defendants.[1] ECF No. 68. Plaintiff has filed a response. ECF No. 73. Defendants have filed a reply. ECF No. 76. Plaintiff has filed a sur-reply, and Defendants have filed a response to the sur-reply. ECF Nos. 81-1 and 84-1. The matter is ripe for the Court's consideration.

         I. BACKGROUND

         Plaintiff Lion Oil Company (" Lion Oil" ) has owned and operated an oil refinery in El Dorado, Arkansas since 1985. Defendants are insurers and underwriters of insurance policies under which Lion Oil unsuccessfully attempted to recover money for losses sustained at Lion Oil's refinery in El Dorado, Arkansas. Lion Oil filed this action alleging a breach of contract claim and seeking a declaration that Defendants are obligated to cover Lion Oil's losses under the policies.

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          A. El Dorado Refinery and Pipeline

         Lion Oil's El Dorado refinery processes approximately 80,000 barrels of crude oil per day and produces refined products such as gasoline, diesel fuel, and asphalt. Lion Oil receives oil from a pipeline known as the North Line, which is owned and operated by EMPCo, a subsidiary of ExxonMobil. The North Line runs from St. James, Louisiana, to Longview, Texas, and it consists of approximately 200 miles of pipe.

         B. Pipeline Inspection (2007) and Rupture (2012)

         In 2007, EMPCo inspected the North Line for defects in the seam weld of the pipeline. This inspection identified anomalies at various locations along the North Line. The inspection vendor misidentified one particular defect as a seam weld anomaly that was unlikely to cause a failure. This particular seam weld anomaly, however, caused the pipeline to rupture at a point near Torbert, Louisiana on April 28, 2012.

         After the rupture occurred, EMPCo shut down the pipeline and notified the Department of Transportation Pipeline and Hazardous Material Safety Administration (" PHMSA" ), the regulatory entity responsible for pipeline safety.

         C. PHMSA Corrective Action Order

         On May 8, 2012, the PHMSA issued a Corrective Action Order (" CAO" ) to EMPCo. The CAO required EMPCo to take several corrective actions, including the following: (1) develop and submit a written re-start plan for PHMSA's approval; (2) undertake a failure analysis of the ruptured section; and (3) submit an " integrity verification and remedial work plan." ECF No. 1-1, pp. 5-6.[2] The integrity verification plan was required to include, among other items, the following: (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 pipeline; and (3) provisions for long-term testing and verification measures. ECF No. 1-1, p. 6. Regarding the field testing plan, the CAO stated that " confirmatory hydrostatic testing must be considered in the plan" [3] ECF No. 1-1, p. 6.

         The damaged section of the pipeline had been excavated, removed, and replaced my mid-May 2012. It was not until October 2012, however, that EMPCo submitted the required integrity verification plan to the PHMSA, which included EMPCo's election to perform a hydrostatic pressure test. The test was intended to verify the pipeline's integrity as required by the CAO and to reestablish the maximum operating pressure. EMPCo planned to perform the hydrostatic pressure test along approximately 200 miles of the North Line pipeline, including sections that had not been damaged by the April 28, 2012 incident. The PHMSA approved the integrity verification plan and incorporated the plan into the CAO.

         The hydrostatic testing began in July 2012 and lasted until September 2012. EMPCo discovered seven leaks during the hydrostatic testing, and it located and repaired each leak. In October 2012, the PHMSA granted EMPCo permission to restart the pipeline. Lion Oil began receiving crude oil from the EMPCo pipeline in March 2013.

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          D. Insurance Policies

         At the time of the rupture, Defendants provided insurance to Lion Oil pursuant to certain " allrisk" insurance policies.[4] The policies were not identical, but the parties agree that the relevant coverage and exclusion terms were the same. The policies provided coverage to Lion Oil for " all risk of direct physical loss of or damage to property described herein, except as hereinafter excluded." ECF No. 1-2, p. 30. Thus, certain perils were excluded from coverage. For example, the policy did not insure against the cost of making good faulty workmanship or latent defects.

         The policies provided coverage for contingent time element loss subject to the policies' terms, conditions, and exclusions. The contingent time element coverage insured against loss resulting from damage to property that wholly or partially prevented a direct supplier from rendering their goods to the insured. The policies included a time element deductible of either 30 or 45 days as to the El Dorado refinery.

         Lion Oil submitted a contingent business interruption claim of approximately $44 million and an extra expense claim of approximately $36 million for the losses it sustained during the time the El Dorado refinery did not receive crude oil from the EMPCo pipeline. In September 2013, Defendants denied Lion Oil's claims.

         In 2013, Lion Oil filed the instant action alleging a breach of contract claim and seeking a declaration that Defendants are obligated to cover Lion Oil's claims for financial losses under the policies. Defendants argue that Lion Oil's claims for financial loss are not covered under the insurance policies. Defendants, therefore, ask the Court to grant summary judgment in their favor.


         Summary judgment is appropriate when there is no genuine issue of material fact and the record entitles the moving party to judgment as a matter of law. Fed.R.Civ.P. 56(a). When making this determination, the Court views the evidence in the light most favorable to the non-moving party. Progressive Northern Ins. Co. v. McDonough., 608 F.3d 388, 390 (8th Cir. 2010), and the Court gives the non-moving party the benefit of all reasonable ...

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