Pipeline Insurance Issue Booted to Arbitration

(CN) - An arbitrator must sort out claims over a million-gallon U.S.-Canada pipeline crude oil spill into the Kalamazoo River that allegedly cost a refinery $77 million, a federal judge ruled.

The dispute stems from the 2010 rupture of Enbridge 6B, a Canadian-owned, 30-inch-wide pipeline used to carry crude oil between the U.S. and Canada.

A million gallons of oil allegedly leaked into a water source that emptied into the Kalamazoo River.

Enbridge Energy allegedly discovered the crack on July 26, 2010, prompting closure of the pipeline for several months and a corrective action order from the Pipeline and Hazardous Materials Safety Administration.

United Refining has claimed that the rupture delayed shipments of crude to its refining facilities, leaving it $32 million in the hole and requiring it to seek $45 million of additional funding from shareholders to right the cash flow.

United Refining had bought its all-risk business insurance policy in 2009 from National Fire Insurance Co. of Pittsburgh, Allianz Global Risks U.S. Insurance Co., Certain Underwriters at Lloyd's of London, XL Insurance (Bermuda) Ltd., and Swiss Re International SE.

After United submitted a claim for contingent business income and continent extra expense losses totaling about $20.6 million, appraisers for the insurers allegedly issued a "preliminary coverage analysis" suggesting that the policy did not cover losses resulting from the pipe rupture.

The appraisers, Chartis Inc. and Crawford & Co., formally denied United's claim months later on the basis that the losses were incurred within the 45-day waiting period and therefore not covered, United said.

United filed suit earlier this year against those insurers and appraisers, highlighting that it had paid $2.15 million in premiums between 2009 and 2010. It also said that it was otherwise in full compliance with its obligations under the policy.

In their motion to dismiss, the defendants said several of the claims are time-barred or subject to arbitration under the policy, and that the court should stay any nonarbitrable claims.

U.S. District Judge C. Darnell Jones II agreed on Dec. 13 that an arbitrator should resolve most of United's claims. Count III, alleging interference with contractual relations, alone will be stayed until arbitration concludes.

Since neither Chartis nor Crawford is alleged to have purchased a share of the insurance policy, "it does not appear that plaintiff ever entered into an arbitration agreement, or for that matter, had any contractual relationship with either of these defendants," Jones wrote. "Under these circumstances, it would be improper to find that Count III [the interference claim against the appraisers] is arbitrable."

The court tossed aside United's claims that the arbitration provision is actually an appraisal clause, and that the word "liability" equates "appraisal value."

"Because Pennsylvania law requires that courts read contracts in a way that avoids superfluous words and phrases, the court finds that the word 'liability' means disputes over coverage, not disputes over the amount of loss or damage claimed by the insured," Jones wrote.

The judge also threw out the claim that the arbitration agreement does not govern tort claims, finding that the claims for interference against the insurers and bad faith are arbitrable.

United Refining reported in August annual net sales of more than $3.68 billion.

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