Case Studies details
When “All Risks” May Not Cover “All Losses”
Jury Trial, United States
January 1, 2014
An international crude oil trading company entered into an agreement with a refiner in which the trader agreed to provide crude oil feedstock to the refiner. The refiner agreed to process the crude oil, on a waterborne cargo-by-cargo basis, into petroleum products on the trader’s behalf. The parties negotiated a “deemed” yield of products—based on the crude oil quality—which represented the trader’s product “lifting” entitlement for that cargo. In the refining industry this is referred to as a “toll” processing agreement. In a tolling process the owner of the feedstock simply pays the refinery a fixed fee (the toll) to utilize the refinery’s equipment, in the same way that one pays to use a toll road or pipeline. To protect against loss, the trader in this case took out an “All Risks” insurance policy.
The trader kept a careful accounting of its available lifting entitlement for each product based on the crude oil processed. However, after many cargoes had been processed, when the trader sought delivery of a large volume of one of the products, it was informed that there was insufficient product available. An onsite investigation resulted in a claim that the refiner had been selling product for its own account, had sometimes failed to meet the deemed yields, and had been filling current lifting obligations with product from the next cargo—not unlike a “Ponzi” scheme. The trader filed a lawsuit against the refiner, as well as making a claim of loss against its insurance provider. The insurance company denied coverage based on the fact that the All Risks policy did not cover losses incurred through poor refinery processing.
Baker & O’Brien was engaged to serve as expert in the trial and to verify the extent of the losses incurred, as well as to evaluate whether the bulk of the losses were due to the refiner’s “theft” of product—which was a covered event in the policy— or to inefficient processing. Our report was entered into evidence and we testified at trial.