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Fourth Circuit Reverses Maryland District Court’s Partial Summary Judgment for Plaintiff and Holds that Doctrine of Contra Proferentem Did Not Apply to Ambiguous Policies

Millennium Inorganic Chemicals v. National Union Fire Insurance
Case No. JKB-13-455 (Feb. 21, 2014)
by Jhanelle A. Graham, Associate
Semmes, Bowen & Semmes (www.semmes.com)

In Millennium Inorganic Chemicals v. National Union Fire Insurance, the United States Court of Appeals for the Fourth Circuit, in a 2-to-1 decision, reversed the judgment of the Maryland district court and remanded the case for entry of summary judgment in favor of the insurers. The case before the Fourth Circuit was on appeal from the United States District Court for the District of Maryland, in which the court granted partial summary judgment in favor of Millennium Inorganic Chemicals Ltd. and Cristal Inorganic Chemicals Ltd. (collectively, “Millennium”), and against National Union Fire Insurance Company of Pittsburgh, PA (“National Union”) and ACE American Insurance Co. (“ACE” and together with National Union, the “Insurers”). Millennium sued the Insurers in the Maryland district court, contending that the Insurers had wrongfully denied Millennium’s claim for coverage under contingent business interruption provisions of commercial liability insurance policies issued by the Insurers. The district court granted partial summary judgment in favor of Millennium after concluding that certain terms in the policies were ambiguous and that the doctrine of contra proferentem therefore applied. The Honorable Judge Agee authored the majority opinion, in which the Honorable Judge Niemeyer joined, and the Honorable Judge Wynn authored a dissenting opinion.

Millennium was in the business of processing titanium dioxide, and the energy source for Millennium’s titanium dioxide processing operation was natural gas received through the Dampier-to-Bunbury Natural Gas Pipeline (the “DB Pipeline”), Western Australia’s principal gas transmission pipeline. Millennium purchased the gas under a contract with Alinta Sales Pty Ltd. (“Alinta”), a retail gas supplier. Alinta purchased the gas it offered for sale from a number of natural gas producers, one (1) of which was Apache Corporation (“Apache”). Apache has no ownership interest in the DB Pipeline and does not own any downstream gas transmission or distribution facilities. Alinta retains sole ownership of the gas once it enters the DB Pipeline. Millennium had no contract or business relationship with Apache, and the contract with Alinta made no reference to Apache. On June 3, 2008, an explosion occurred at Apache’s Varanus Island facility, causing its natural gas production to cease. Apache notified Alinta that the explosion caused it to shut down its operations and that there would be no gas supply from Varanus Island until further notice. Alinta, in turn, sent a notice of force majeure to Millennium and other customers. As a result, Millennium’s gas supply was curtailed, and it was forced to shut down its titanium dioxide manufacturing operations for a number of months.

Two (2) days after the explosion, on June 5, 2008, Millennium sent notice of claim letters to National Union and ACE, seeking coverage for its losses incurred when the titanium dioxide facility closed. The Insurers investigated Millennium’s claim and provided a detailed report explaining the Australian gas distribution system and concluding that Apache was not a direct supplier to Millennium. As a consequence, the Insurers determined there was no coverage under the Policies for Millennium’s claim, but invited Millennium to provide evidence of a direct relationship between Millennium and Apache sufficient to establish policy coverage. National Union contended that Alinta, and not Apache, was the only direct supplier of natural gas to Millennium.

In July 2009, Millennium filed a complaint against the Insurers in the United States District Court for the District of Maryland, requesting a declaratory judgment regarding the rights and liabilities of the parties with respect to the Policies. Further, Millennium asserted claims of breach of contract and failure to act in good faith pursuant to section 3-1701 of the Maryland Courts and Judicial Proceedings Code. After the close of discovery, Millennium moved for partial summary judgment on its declaratory judgment claim, arguing that the Policies unambiguously covered Millennium’s loss because the Endorsements did not limit coverage to direct suppliers. The Insurers filed a joint cross-motion for summary judgment on Millennium’s declaratory judgment and bad faith claims, contending that the Policies provided coverage only for direct suppliers and that Apache was not a direct supplier to Millennium. The Insurers also argued that Millennium failed to present any evidence in support of its bad faith claim.

The district court reviewed the Policies and concluded that coverage under the Policies extended only to “direct contributing properties.” The court observed, however, that “the policies did not define the term ‘direct,’” and opined that “the term ‘direct’ was ambiguous in the context of an entity that provides a direct physical supply of material to the insured, but has no direct contractual relationship with the insured.” In order to resolve the ambiguity, the district court applied the doctrine of contra proferentem in favor of Millennium. When a court determines that a provision in an insurance contract is ambiguous and “extrinsic evidence does not yield a conclusive answer as to the parties’ intent,” the rule of contra proferentem provides that “where an insurer drafts a policy, ‘any ambiguity in [the] . . . policy should be resolved in favor of the insured.’” Morgan Stanley Group, Inc. v. New England Ins. Co., 225 F.3d 270, 276 (2d Cir. 2000) (quoting McCostis v. Home Ins. Co., 31 F.3d 110, 113 (2d Cir. 1994)). Accordingly, the district court held that Apache qualified as a “direct” supplier to Millennium and that Apache’s natural gas production facility was a “direct contributing property” within the meaning of the Policies “because Apache’s facility physically provided a direct supply of natural gas to Millennium’s premises, despite the fact that Apache and Millennium had no direct contractual relationship.” Alternatively, the district court opined that the Endorsements also provided coverage for damage to contributing properties “‘which wholly or partially prevents the delivery of materials to [Millennium] or to others for the account of [Millennium].’” Finding that this provision was also ambiguous because it did not explain “who must hold the ‘account of the Insured’—the one who delivers, or the ‘others’ to whom delivery is made,” the district court again applied the doctrine of contra proferentem, construing “the phrase [‘for the account of’] in favor of coverage for the insured,” Millennium. After the district court granted Millennium’s motion for partial summary judgment, the parties stipulated and agreed to the entry of judgment in favor of Millennium in the amount of $10,850,000, inclusive of prejudgment interest, with the Insurers expressly preserving their right to appeal the judgment. The district court then entered final judgment against the Insurers in the stipulated amount, and the Insurers timely appealed.

On appeal, the Fourth Circuit first looked to the “plain language of the provision at issue.” Citing Webster’s Third New International Dictionary, the appellate court stated that the term “direct” is defined as “proceeding from one point to another in time or space without deviation or interruption,” “transmitted back and forth without an intermediary,” or “operating or guided without digression or obstruction.” Thus, for Apache to be considered a direct contributing property to Millennium, it must have supplied Millennium with materials necessary to the operation of its business “without deviation or interruption” from “an intermediary.” Reviewing the undisputed facts of the case, the Fourth Circuit determined that neither Apache nor Apache’s facilities could be considered a “direct contributing property” of Millennium, because Apache had no control over whether Millennium received its gas and, due to commingling, Millennium could not demonstrate how much, if any, of the gas it received originated with Apache. Further, the appellate court observed that whatever the relationship between Apache and Millennium, it was clearly interrupted by “an intermediary,” Alinta, which took full physical control of Apache’s gas before delivering indistinguishable commingled gas to Millennium. Consequently, the Fourth Circuit concluded that Apache could be only an indirect contributing property to Millennium, coverage of which was not included in the terms of the Policies.

Next, the appellate court considered Millennium’s alternative argument that it could also receive coverage under the “for the account of” clause of the Endorsements. The Fourth Circuit determined that this alternative contention failed for the same reason as Millennium’s primary argument. Under the plain language of the Policies, coverage was triggered only by damage to or destruction of direct contributing properties. Because Apache was at most an indirect supplier to Millennium, there could be no coverage under any reading of the “for the account of” clause. Therefore, the Fourth Circuit concluded that Millennium presented no plausible reading of the Policies under which it could receive coverage for its CBI losses. For these reasons, Judges Agee and Niemeyer reversed the judgment of the district court, and remanded the case to the district court for entry of summary judgment in favor of the Insurers.

In dissent, however, Judge Wynn agreed that the majority opinion provided a reasonable interpretation of the disputed portions of the insurance policies, but found that the district court articulated an equally reasonable alternate interpretation. Because “no writing is unambiguous if ‘susceptible of two reasonable interpretations [,]’” Atalla v. Abdul-Baki, 976 F.2d 189, 192 (4th Cir. 1992), Judge Wynn found the policies to be ambiguous. Like the district court, Judge Wynn determined that it would be best to evaluate the extrinsic evidence for an indication of the parties’ intent in drafting the ambiguous policy provisions.

In so doing, like the district court, Judge Agee would find that none of the proffered evidence revealed that intent. On those grounds, and in accordance with the district court, Judge Agee would affirm the district court’s decision to apply the doctrine of contra proferentem to resolve the ambiguity in favor of Millennium and against the Insurers.