Legal Watch: Volume 1

Prepared by William H. Bode
Bode & Grenier, LLP
1150 Connecticut Ave., NW
Washington, D.C. 20036
Telephone: 202-862-4300 | Email: wbode@bode.com

DAMAGES CAUSED BY RUPTURE OF HOME HEATING OIL TANK COVERED BY INSURANCE BECAUSE HEATING OIL IS NOT A "POLLUTANT" UNDER INSURANCE POLICY

Case Summary: A home heating oil tank ruptured, releasing heating oil. The adjacent home-owners sued the home-owner for property damages and personal injury. The home-owner asked its insurer, Atlantic Casualty Insurance Company, to defend the suit. When the insurance company refused, citing the pollution exclusion clause in the policy, the home-owner asked the federal court in Philadelphia for a declaration that heating oil is not a "pollutant" under the property insurance policy. The Court found that a "pollutant" under the policy is defined as a "solid, liquid, gaseous, or thermal irritant or contaminant including smoke, vapor, suit, fumes, acid, alkalis, chemicals, and waste," but does not list "heating oil." Thus, noting further that any ambiguities in policy language must be construed against the insurance company, the Court held that heating oil is not a "pollutant" under the policy.

LESSON: Never accept an insurance company's declaration of non-coverage without questioning its basis. The current trend is for courts to apply the Absolute Pollution Exclusion clause in insurance policies very narrowly and limit coverage to "traditional environmental contamination." Thus, the courts have held that the absolute pollution exclusion does not apply to a wide range of releases including home heating oil, paint fumes, pesticides, and carbon monoxide. (Atlantic Casualty Insurance Company v. Irving Epstein, et al.)

SHELL OIL/MOTIVA ENTERPRISES WINS A $3.2 MILLION JUDGMENT AGAINST WYATT ENERGY FOR BREACH OF TERMINALLING AGREEMENT

Case Summary: Wyatt Energy, the owner of a gasoline and jet fuel terminal in New Haven, entered into a 10-year Terminalling Agreement with Shell Oil, which Shell assigned to Motiva Enterprises. Shell/Motiva agreed to a minimum payment of $37,000 per month for the first three years, and then $65,000 per month beginning January 1998 for the remaining seven years. In May of 2000, Shell/Motiva purchased a terminal facility in New Haven from Cargill for $13 million, and shifted a majority of its business to the new terminal. On June 23, 2000, Wyatt advised Shell/Motiva by letter that it was terminating their agreement, effective immediately. Then, on September 1, 2000, Wyatt sold its terminal facility to Williams for $31.375 million. Despite an arbitration clause in the Terminalling Agreement, Wyatt sued Shell/Motiva in Connecticut State Court, and Shell/Motiva counter-sued, both citing breach of contract. The Court found that Williams had offered Wyatt $15.7 million for the terminal in 1999 with the Shell/Motiva Terminalling Contract, and $31.750 million without the contract. The Court found further that Shell/Motiva intended to continue making the minimum payments under the Agreement, even after it purchased and shifted much of the business to the Cargill terminal. Thus, the Court held that Wyatt, not Shell/Motiva, had breached the Agreement. The Agreement stipulated that Texas law applied, and the Court found that under Texas law, Shell/Motiva was entitled to "expectancy damages" - expected revenues under the contract less costs avoided by the breach. The Court held that the expectancy damages flowing from Wyatt's failure to assign the Agreement to Williams and provide Shell/Motiva with exclusive use of the gasoline loading racks and up to 500,000 barrels of gasoline storage tanks, and 100,000 barrels of jet fuel storage tanks, was $3,200,801. The Court further held that under Texas law, Shell/Motiva was entitled to recover its attorney fees totaling $891,244.

LESSON: When a company's legal position is shaky, an arbitration panel is generally preferable to a court of law where the "winner takes all." Three-arbitrator arbitration panels - the norm in business arbitration cases - often will "split the loaf," and award damages based on compromise. Also, in a business case, an arbitration panel rarely awards attorney fees. Indeed, in the Wyatt Terminalling Agreement, the arbitration clause specifically provided that each party pay its own attorney fees. A decision to ignore an Arbitration clause in a contract and proceed instead to court should be very carefully considered. (Wyatt Energy, Inc. v. Motiva Enterprises, LLC et al.)

STORAGE TANKS AT PETROLEUM TERMINAL QUALIFY FOR 5-YEAR RECOVERY PERIOD FOR TAX DEPRECIATION

Case Summary: CITGO Petroleum Corp. placed new tanks in service in 1996 and 1997. Pitt-Des Moines constructed two 48 foot tall tanks for $1,244,750 at its Linden-Tremley terminal, and Baker Tank Co./Altech constructed a tank at the Vicksburg terminal for $3439,506. CITGO's parent PDV America, Inc. elected a 5-year property term under IRS section 168(e) for depreciation. After an audit, the IRS accessed a tax deficiency of $119,774 for 1996 and $218,170 for 1997, contending that CITGO should have used a 15-year depreciation schedule. The matter was appealed to the U.S. Tax Court for resolution. The tax court found that the tanks were not "inherently permanent structures." Therefore, under established IRS rules, the 5-year depreciation term was correct. The Tax Court based its decision that the tanks were not "permanent" on an analysis of 6 factors: (1) the tanks could be moved over long distances, and the fact that they needed to be dismantled is not relevant (the Court also discussed Hovercraft airlift technology and the Watson Airbag technology); (2) although the tanks were large, size does not determine whether they are "permanent," nor does their long economic life; (3) there were circumstances where the tanks had to be moved, and they were moved; (4) although it took a week to dismantle a tank for moving, they were nevertheless "readily moveable;" (5) although the tanks did face some distortion following a move, the damage was insignificant; (6) the tanks were not attached to the land.

LESSON: CITGO's boldness has given the terminal industry a substantial victory. All members of ILTA should discuss with their accountants the use of a 5-year depreciation term for all qualifying tanks. (PDV America, Inc. v. Commissioner of Internal Revenue)

DAMAGES FROM PETROLEUM PIPE LINE RUPTURE AND EXPLOSION NOT COVERED BY INSURANCE BECAUSE PIPELINE COMPANY NOT LISTED AS AN "INSURED" IN PARENT'S INSURANCE POLICIES

Case Summary: Olympic Pipe Line Company's pipeline near Whatcom Creek in Washington ruptured resulting in an explosion, costly fire damage, and three deaths. Olympic is a joint venture owned by Equilon (36.5%), ARCO (37.4%), and GATX Terminal Corp. (25.1%). Both GATX and its Parent had Marine Terminal Operator Insurance (MTOL) for its terminals and serving pipelines. The premium for the MOTL was $.70 per 1,000 barrels of through-put for the terminal; the premium for the pipelines was $1.91 per 1000 barrels of product transferred. The Washington Court of Appeals held that the trial court was correct in holding that the MTOL policies did not cover the loss, even though the policy language included coverage for operation hazards including all owned pipelines. Specifically, the Court held that because GATX's list of covered pipelines excluded the Olympic Pipe Line, GATX never intended insurance to apply to the Olympic Pipe Line. GATX also maintained "layered" excess insurance: Somerset and Navigators provided coverage for claims from $1 million to 9 million ($.46 per 1,000 barrels for terminal coverage); National-Ben Franklin and Continental provided coverage for claims from $10-$15 million; American International a $25 million first layer excess coverage; Allianz provided an additional $25 million of excess coverage; London Insurers and Gerling-Konzen provided $110 million in coverage for losses exceeding $50 million; and Lloyds and others provided $100 million for losses exceeding $160 million. The Court held that neither of these polices provided coverage. First, the Court held that the Olympic Joint Venture was not a "subsidiary or owned or controlled company." Second, the Court held that the joint venture was not included in the list of "joint venture" companies provided by GATX. In particular, the Court held that Olympic Pipe Line Company should have been listed as an "insured" to be covered.

LESSON: To guarantee coverage under Marine Terminal Operator Insurance and excess insurance policies of the losses from the operations of a subsidiary, partnership, or joint venture of a terminal operator, each such entity should be listed as an "insured" on each policy. (Olympic Pipeline Company et al. v. Somerset Marine, Inc. et al.)

Please address any comments or questions to Mr. Bode at 202-862-4300 or wbode@bode.com

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