Baker & O'Brien, Inc.

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Resin Producer’s Reliance on a Single Supplier Leads to Business Interruption

Insurance Subrogation, North America

January 2017

Insurance claims for business interruption are commonly the result of lost production due to events such as hurricanes, power outages, or failures of a manufacturer’s own equipment.  However, production disruptions can also arise from the inability to obtain feedstock components critical to the production process.  In an example of this type of “upstream” event, a manufacturer of polyethylene terephthalate (PET) suffered lost production when its sole supplier of purified terephthalic acid (PTA) suffered an equipment failure.  PET is the clear plastic resin used in the manufacture of water and soft drink bottles.  PET is made from ethylene glycol and PTA, which are combined to form pellets of PET for further conversion into plastic containers.  Thus, PTA is a critical component in the PET manufacturing process. 

 

The failure of a key heat exchanger at the PTA supplier’s facilities resulted in almost two months of downtime and  the PET producer—who relied exclusively on the supplier’s PTA—also suffered a significant business interruption event and filed a claim with its insurer. The insurer brought a subrogation claim against the PTA supplier.

Baker & O’Brien was engaged to provide an opinion on the magnitude       of the PET producer’s losses.  The two main areas we focused on were: (1) costs incurred by the PET producer to acquire alternative feedstock; and (2) lost sales and profits associated with lower PET production.  Our consultants reviewed pertinent documents and calculations associated with the claim and prepared an expert report covering our findings.  Our report included a detailed review of the PET manufacturer’s inventories, scheduling and logistics for alternative PTA supply, as well as lost sales directly attributable to the incident.  One of our consultants was deposed regarding our work.  The case was settled prior to trial.