Contingent Dependent Properties Insurance: Understanding the Basics - Including Direct Versus Indirect Losses



Relied on Natural Gas For Energy


Retail Gas Supplier of Natural Gas


Producer of Natural Gas

Millennium maintained contingent business interruption insurance from both National Union Fire Insurance Company of Pittsburgh, PA and ACE American Insurance Company.

There were other producers of natural gas, but Apache sold 20 percent of its production to Alinta.

...a business purchases only direct coverage is that the insurer could maintain that what was involved was an indirect supplier situation. The same kind of argument may arise when the company purchases only indirect coverage.

The problem is that many insurers do not want to provide coverage for indirect suppliers. One reason is that the number of suppliers can be infinite. Take, for example, a supplier that has five entities supplying to it — and in turn each of those has five suppliers. This can really complicate matters and in fact did so when the tsunamis struck businesses in Japan (2011) and Indonesia (2010). Purchasing coverage for losses involving indirect suppliers is not always an option. This means that the door can be open to argument and anyone’s guess as to whether the supplier is considered direct or indirect.

Court Case Ends Without Coverage

An actual legal case demonstrating the difficulty in distinguishing between a direct and indirect supplier is Millennium Inorganic Chemicals Ltd. et al., v. National Union Fire Insurance Company of Pittsburgh, PA, et al., 2014 WL 642993 (U.S. Ct. App. 4th Cir.).

Millennium, which was in the business of producing titanium dioxide used for a variety of purposes, operated through interdependent factories near Bunbury, Australia —which relied primarily on natural gas for energy. Millennium purchased its natural gas from a supplier or so-called aggregator rather than directly from a producer. One such entity was Alinta Sales Pty Ltd.

Alinta obtained the gas frommultiple producers in Australia, including Apache Corporation, which supplied at least 20 percent of the gas Alinta bought and resold. Pursuant to the agreement between Atlanta and Apache, Atlanta took title to Apache’s gas when the gas entered a major Australian gas transmission line known as the Dampier to Bunmbury Natural Gas Pipeline. The pipeline was a government-regulated common carrier, owned by third parties, who charged pipeline users a fee based on the distance the gas traveled. After the gas left the pipeline, it was transported to end users via a network of distribution lines.

This case was brought about by a massive explosion and fire in 2008 at Apache’s production facilities that interrupted 20 to 30 percent of the natural gas...