Millennium Inorganic Chemicals LTD (Millennium) purchased gas under a contract with Alinta Sales Pty Ltd (Alinta), a retail gas supplier. Apache Corporation (Apache) a natural gas producer from which Alinta purchased gas, injected the processed gas into the DB Pipeline. The injection site was the point where title, custody, and risk associated with the gas passed to Alinta. Apache’s gas mixed with that of other producers in the DB Pipeline. On June 3, 2008, Apache’s facility experienced an explosion that ceased its natural gas production. Apache informed Alinta that it would not be supplying gas until further notice. In turn, Millennium had to shut down its operations for a number of months.

Millennium held contingent business interruption coverage for direct contributing or recipient property (ies) from National Union Fire Insurance Company of Pittsburgh, PA (National Union) and Ace American Insurance Company (Ace). Each policy set sub-limits of $25 million for any direct contributing property listed on the schedule and $10 million for any unnamed direct contributing property. Millennium did not schedule any contributing properties.

Millennium notified National Union and Ace of the loss on June 5, 2008. The carriers concluded that Apache was not Millennium’s direct supplier and denied the claim. After Millennium attempted to clarify the supply arrangement, the carriers re-stated their denial.

In July 2009, Millennium filed a complaint against the carriers and requested a declaratory judgment for coverage while also asserting breach of contract and failure to act in good faith. The carriers filed a joint cross-motion for summary judgment, contending that the policies provided coverage for only direct suppliers and that Apache was not one of them. They also argued that Millennium failed to support its bad faith claim.

The trial court granted Millennium’s motion for partial summary judgment and denied the carriers’ “no coverage” motion. But it did grant the carriers’ motion to reject the bad faith claim. The trial court concluded that the term ‘direct’ was ambiguous in the context of an entity that provides a direct physical supply of material to but has no contract with the insured. The amount of loss was established at $10,850,000 but National Union and Ace appealed.

The appellate court re-examined the policies. It determined that Millennium was not entitled to contingent business interruption coverage due to interruption of materials because the policies limited coverage to “direct contributing property(ies)” and Millennium did not have a direct contractual relationship with Apache. Alinta had legal title to the gas while it was in the pipeline between its facility and Millennium’s facility so Alinta, rather than Apache, was the direct contracting party.

The case was remanded back to it to the trial court to enter summary judgment in favor of National Union and Ace.

United States Court of Appeals, Fourth Circuit. Millennium Inorganic Materials LTD., Cristal Inorganic Chemicals Limited, Plaintiffs-Appellees, v. National Union Fire Insurance Company of Pittsburgh, PA; Ace America Insurance Company, Defendants-Appellants. No 13-1194. Argued Dec. 12, 2013. Decided Feb. 20, 2014. 2014 WL 642993 (C.A.4 (Md.)