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Welspun Pipes Inc. v. Liberty Mutual Fire Insurance Co.

United States District Court, E.D. Arkansas, Western Division

February 2, 2017

WELSPUN PIPES, INC., and WELSPUN TUBULAR, LLC PLAINTIFFS
v.
LIBERTY MUTUAL FIRE INSURANCE COMPANY DEFENDANT

          OPINION AND ORDER

          J. LEON HOLMES, UNITED STATES DISTRICT JUDGE

         The plaintiffs, Welspun Pipes, Inc., and Welspun Tubular, LLC, suffered an interruption in business due to a fire that damaged a facility in Little Rock, Arkansas, while the facility was covered by a commercial insurance policy issued by Liberty Mutual Fire Insurance Company. The plaintiffs contend that, as a result of the fire, they incurred expenses in mitigating their business loss that are covered under the policy which Liberty Mutual has refused to pay. Liberty Mutual denies that the mitigation expenses at issue are covered; it contends that it has paid all of the covered losses. The parties have submitted cross motions for summary judgment. For the reasons to be explained, Liberty Mutual's motion for summary judgment is granted, while the plaintiffs' motion is denied.

         I. SUMMARY JUDGMENT STANDARD

         A court should grant summary judgment if the evidence demonstrates that there is no genuine dispute as to any material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a). The moving party bears the initial burden of demonstrating the absence of a genuine dispute for trial. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986). If the moving party meets that burden, the nonmoving party must come forward with specific facts that establish a genuine dispute of material fact. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986); Torgerson v. City of Rochester, 643 F.3d 1031, 1042 (8th Cir. 2011) (en banc). A genuine dispute of material fact exists only if the evidence is sufficient to allow a reasonable jury to return a verdict in favor of the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). The Court must view the evidence in the light most favorable to the nonmoving party and must give that party the benefit of all reasonable inferences that can be drawn from the record. Pedersen v. Bio-Med. Applications of Minn., 775 F.3d 1049, 1053 (8th Cir. 2015). If the nonmoving party fails to present evidence sufficient to establish an essential element of a claim on which that party bears the burden of proof, then the moving party is entitled to judgment as a matter of law. Id.

         Local Rule 56.1 provides that a party moving for summary judgment must annex to the motion a separate, short and concise statement of the material facts as to which it contends that there is no genuine issue to be tried. The rule adds that a nonmoving party who opposes the motion must file a separate, short and concise statement of the material facts as to which it contends a genuine issue exists to be tried. Any material facts stated by the moving party are deemed admitted unless controverted by the statement filed by the nonmoving party.

         II. UNDISPUTED FACTS

         A. Relevant History

         The plaintiffs are subsidiaries of Welspun Corp. Ltd., a global pipe manufacturer based in India. Lib. Mut.'s Mot. for S.J., Ex. 1, Chokhani Dep. at 94-95. Welspun Corp. is the parent company of a group of pipe manufacturers. Id. This group includes plaintiff Welspun Pipes, Inc., a pipe manufacturer based in the United States, and Welspun Tradings Ltd., a pipe manufacturer based in India. Id., Ex. 2, Johnson Dep. at 129. Welspun Pipes, in turn, wholly owns Welspun Tubular, LLC, and Welspun Global Trade, LLC. Pl.'s Resp. to Def.'s Undisp. Mat. Facts ¶ 1 ¶¶ 2-3. Welspun Tubular manufactures pipes in Little Rock, Arkansas, while Welspun Global is the marketing arm of Welspun Pipes and is responsible for negotiating and securing purchase orders, which are fulfilled by Welspun facilities such as Welspun Tubular. Id.

         In April 2012, Enterprise Products Partners circulated a “Request for Quote Package for the Seaway Expansion Project.” Lib. Mut.'s Mot. for S.J., Ex. 4 at Seaway 000005. The Seaway project planned to stretch 670 miles of pipeline from Cushing, Oklahoma, to Houston, Texas. Id. at Ex. 5, Ohlsson Dep. at 26-28. Enterprise was the construction manager for the project. Pl.'s Resp. to Def.'s Undisp. Mat. Facts ¶ 3, ¶ 10. Welspun Global bid on the project, and in May 2012, Enterprise awarded six segments of the project-approximately 220 metric tons of Helically Submerged Arc Welded (HSAW) pipe-to Welspun, worth nearly $330 million. Id. at 3, ¶¶ 13-14. After awarding the project to Welspun, Enterprise asked whether Welspun could produce a portion of the pipe as Longitudinal Submerged Arc Welded (LSAW) instead of HSAW. Id. at 6, ¶ 20. Joel Johnson, a Welspun Global executive, informed Enterprise that Welspun Tubular could not produce that type of pipe but that Welspun Tradings could. Id. at 6-7, ¶¶ 21-22. Welspun and Enterprise agreed to revise the order. Id. at 7, ¶ 23. The revision shifted 36, 592 metric tons of pipe from production at Welspun Tubular in Little Rock to production at Welspun Tradings in India. Id. Johnson told Enterprise that the shift would result in no additional cost to Enterprise. Id. at 7, ¶ 24. With this shift in production to India, the Seaway order required the plaintiffs to deliver approximately 180, 000 metric tons of HSAW pipe on a rolling basis with delivery to be completed by August 31, 2013. Pl.'s St. of Mat. Facts ¶ 2, ¶ 10.

         Production for the project was scheduled to begin on July 25, 2012, with final delivery on August 31, 2013. Pl.'s Resp. to Def.'s Undisp. Mat. Facts ¶ 7-8, ¶¶ 25-27. On July 14, 2012, a fire damaged Welspun's Little Rock facility. Id. at 7-8, ¶¶ 25-27. The damage caused Welspun to cease production until repairs could be made. Id. at 8, ¶ 28. At the time of the fire, Welspun Tubular had three outstanding purchase orders: the Seaway order, an order from Access NEX, and an order from AB-BC. Pl.'s Mot. for S.J., Ex. 2, Chokhani Dep. at 36. To fulfill these orders, Welspun Tubular was scheduled to be at full production capacity for the next 12 months, beginning from the time of the fire. Lib. Mut.'s Mot. for S.J., Ex. 7, Bredeson Rep. at 3.

         Welspun Tubular promptly notified Enterprise of the fire. Pl.'s Resp. to Def.'s Undisp. Mat. Facts ¶ 8-9, ¶ 30. Although Welspun Tubular had a purchase order with Enterprise and the parties had prepared a written contract, the written contract had not been executed. Lib. Mut.'s Mot. for S.J., Ex. 12 at Welspun 001179. Nevertheless, Welspun Tubular gave notice that it was invoking the force majeure provision in the unexecuted contract. Id. Despite that notice, Welspun Tubular offered Enterprise two solutions to side-step the force majeure issue. Pl.'s Mot. for S.J., Ex. 7, Johnson Dep. at 51. Johnson testified that Welspun Tubular first sought to revise the delivery deadlines but Enterprise rejected this proposal. Id., Johnson Dep. at 51-52.[1] Welspun Tubular then proposed shifting a portion of the production to Welspun Tradings in India. Id., Johnson Dep. at 53. The shift was proposed to allow Welspun Tubular to meet the purchase order's delivery deadlines. Pl.'s Mot. for S.J., Ex. 13, Johnson Email at Welspun 003009. Whereas the original plan was for the Little Rock facility to produce pipe for the Seaway project intermittently-in July, October and December of 2012 and March through August of 2013-the proposed schedule, with part of the production shifted to India, provided for a “single rolling campaign” in which the Little Rock facility would produce pipe for the Seaway project from mid-February of 2013 through August of 2013. Id. at 3009 and 3012. Welspun Tubular asked Welspun Tradings to agree to the shift in order to prevent Welspun from losing the entire Seaway order, and it assured Welspun Tradings that it would bear all additional costs incurred as a result of the shift. Pl.'s Mot. for S.J., Ex. 9, Chokhani Letter, August 5, 2012. Enterprise and Welspun Tradings agreed to the shift. Pl.'s Mot. for S.J., Ex. 12, Johnson Email at Welspun 045259-60; Pl.'s Resp. to Def.'s Undisp. Mat. Facts ¶ 12, ¶¶ 40-41. The result was a second shift in production of approximately 40, 000 metric tons of pipe to India. Lib. Mut.'s Mot. for S.J., Ex. 15, Ben-Ami Rep. at 6.

         At the time of the fire, the Welspun Pipes facility in Little Rock was covered by a commercial insurance policy issued by Liberty Mutual Fire Insurance Company. Pl.'s Mot. for S.J., Ex. 1. The policy provided coverage for real property and personal property, equipment breakdown, loss of business income, which included necessary expenses incurred that reduced the loss of business income, and extra expenses. Id. at ¶ 000014. The coverage limit for loss of business income was $68, 128, 941; its coverage limit for extra expenses was $1, 000, 000. Id. at LM000017.

         In August of 2016, Welspun Pipes retained PriceWaterhouseCoopers, LLP, a forensic accounting firm, to assist it in calculating and submitting a claim for lost business income. Pl.'s Resp. to Def.'s Undisp. Mat. Facts ¶ 16, ¶ 47. On behalf of Welspun, the forensic accountants submitted two preliminary claims for real and personal property damage, lost business income, mitigation expenses, and extra expenses-one on September 21, 2012, and another on November 15, 2012, Pl.'s Resp. to Def.'s Undisp. Mat. Facts ¶ 17, ¶ 52, and at 20, ¶ 61. The latter submission claimed a business income loss of approximately $28, 000, 000 as well as an estimated $14, 500, 000 in what Welspun Pipes characterized as mitigation expenses. Id. at ¶ 61. These expenses resulted from the incremental costs, such as steel price differential, excess freight, and double-jointing and coating costs, associated with the second shift of production to Welspun Tradings. Lib. Mut.'s Mot. for S.J., Ex. 15, Ben-Ami Rep. at 7. Welspun claimed that it incurred the estimated $14, 500, 000 in order to mitigate its loss of business income-in other words, if it had not spent the $14, 500, 000 to shift the pipe production to Welspun Tradings, it would have been at risk of losing the entire Seaway order. Id. at 6. Marc Ben-Ami, the plaintiffs' forensic accountant, has since reported that the plaintiffs incurred actual mitigation expenses of $13, 413, 882 in direct costs and $495, 193 in indirect, overhead costs. Id. at 2-3. Liberty Mutual paid a portion of the direct costs-$413, 432-as “Extra Expenses, ”[2] so, according to Ben-Ami, the unpaid direct mitigation costs total $13, 000, 450. Id. at 2. The indirect, overhead costs of $495, 193 have not been paid. Id. at 3.

         Liberty Mutual disagreed with Welspun's calculation of its loss of business income and its characterization of the expenses associated with the shift as necessary expenses. Liberty Mutual agreed that the policy provided coverage for the expenses but considered them “Extra Expenses” subject to the $1, 000, 000 policy limit. Pl.'s Mot. for S.J., Ex. 14. Despite this disagreement, the parties reached a partial settlement in which Liberty Mutual paid Welspun's loss of business income claim in the amount of $22, 300, 026 and a total of $1, 000, 000 for what Liberty Mutual characterized as the insured's “Extra Expense” claim. Id. The partial settlement agreement acknowledged that Liberty Mutual and Welspun disagreed over the characterization of the expenses and that a dispute remained as to Welspun's claim for mitigation expenses. Id. The plaintiffs commenced this action to resolve that dispute.

         B. Relevant Policy Provisions

         The relevant portions of the insurance policy[3] provide:

         C. If coverage for loss of business income is provided . . ., we will pay for:

1. The actual loss of business income you incur during a period of restoration directly resulting from damage by a peril insured against to the type of property covered by this policy at a covered location.
2. The necessary expenses you incur in excess of your normal operating expenses that reduces your loss of business income. We will not pay more than we would pay if you had been unable to make up lost production or continue operations or services.
* * *
5. In determining the actual loss of business income, consideration must be given to:
a. The experience of the business before the loss and the probable experience after the loss;
b. The continuation of only those normal charges and expenses that would have been incurred had no interruption of production or suspension of business operations or services happened;
c. The demonstration of an actual loss of sales, income, or rental income; and
d. Any amount recovered, at selling price, for loss or damage to merchandise that will be considered to have been sold.
6. We will not pay unless you are wholly or partially prevented from:
a. producing goods; or b. continuing business operations or services.
7. You are required to mitigate your loss by:
a. Making up lost production within a reasonable period of time not limited to the ...

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