Case Studies details
Equipment Condition: Was an Insurance Claim Inflated Because of Poor Mothballing Practices?
Insurance-related Arbitration, North America
May 1, 2019
Process facilities are sometimes shut down for periods of time, during which it is common practice to preserve and maintain (mothball) equipment until it is restarted, repaired, decommissioned, or sold. The specific mothballing procedures may vary according to the shutdown period and the reason for the shutdown. Process equipment that is typically considered for mothballing includes reactors, pressure vessels, mechanical equipment, heat exchangers, storage tanks, piping, towers, and flare systems. Key aspects for developing and implementing a mothballing program include: inspecting the equipment to determine its condition, establishing the steps required to prepare the equipment for preservation, determining the time period required for preservation, and developing an equipment-specific preservation plan.
Synthetic quartz crystals are manufactured at severe process conditions: 350°C / 660°F and 1,000 bar / 14,500 psi. Following the catastrophic explosion of a pressure vessel at a quartz crystal manufacturing facility, the process equipment remained idle for an extended period of time to allow the investigation to be completed. Additionally, until the equipment repair plan had been developed, the Operator also had to consider the potential decommissioning and/or demolition of the process equipment. At the completion of the investigation, the Operator filed an insurance claim to repair or replace equipment damaged by the incident. The Insurer believed that: (1) the claimed costs were excessive; and (2) the Operator had failed to adequately mothball the facility while it was shutdown, thereby, incurring additional costs for which, under the terms of the policy, the Insurer should not be liable.
Baker & O’Brien was retained to: (1) assess how the process equipment was mothballed following the incident and, given the possibility of more than one outcome following the investigation, determine if the procedures conformed to good industry practice; (2) estimate the cost to properly mothball the facility to prepare for repair and restart; and (3) to opine whether the method of mothballing influenced the equipment’s condition and, therefore, affected the amount of the insurance claim. Our findings were submitted in an expert report.