Millennium Inorganic Chems. Ltd. v. Nat'l Union Fire Ins. Co. of Pittsburgh

744 F.3d 279

MILLENNIUM INORGANIC CHEMICALS LTD.; Cristal Inorganic Chemicals Limited, Plaintiffs–Appellees,

v.NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA; Ace American Insurance Company, Defendants–Appellants.

No. 13–1194.

United States Court of Appeals, Fourth Circuit.

Argued: Dec. 12, 2013.

Decided: Feb. 20, 2014.

ARGUED:Charles Glaston Cole, Steptoe & Johnson, LLP, Washington, D.C., for Appellants. Joseph Lanham Beavers, Miles & Stockbridge P.C., Baltimore, Maryland, for Appellees. ON BRIEF:Jonathan D. Hacker, O'Melveny & Myers LLP, Washington, D.C., for Appellant ACE American Insurance Company. Roger E. Warin, Steptoe & Johnson LLP, Washington, D.C., for Appellant National Union Fire Insurance Company of Pittsburgh, PA. John C. Mezzacappa, Hilary M. Henkind, Mound Cotton Wollan & Greengrass, New York, New York, for Appellants. Gary C. Duvall, Jeffrey P. Reilly, John C. Celeste, Miles & Stockbridge P.C., Baltimore, Maryland, for Appellees.

Before NIEMEYER, AGEE, and WYNN, Circuit Judges.

Reversed and remanded by published opinion. Judge AGEE wrote the opinion, in which Judge NIEMEYER joined. Judge WYNN wrote a dissenting opinion.

AGEE, Circuit Judge:

National Union Fire Insurance Company of Pittsburgh, PA (“National Union”) and ACE American Insurance Co. (“ACE” and together with National Union, the “Insurers”) appeal from the district court's grant of partial summary judgment in favor of Millennium Inorganic Chemicals Ltd. and Cristal Inorganic Chemicals Ltd. (collectively, “Millennium”). Millennium sued the Insurers in the United States District Court for the District of Maryland, 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. For the reasons set forth below, we reverse the judgment of the district court and remand for entry of summary judgment in favor of the Insurers.

I

A. The Insurance Policy Provisions

In 2008, Millennium enlisted the help of Marsh USA, Inc. (“Marsh”), an insurance brokerage firm, to secure a commercial liability insurance policy including contingent business interruption (“CBI”) insurance coverage. ¹ Marsh solicited bids from a number of insurers, including National Union and ACE, seeking CBI coverage and outlining the coverage specifications Millennium sought, specifically stating only that it required coverage “for direct suppliers/customers.” (J.A. 1193.) In response, National Union's quote provided, “THERE SHALL BE NO COVERAGE FOR INDIRECT SUPPLIERS/RECIPIENTS.” (J.A. 1209.) ACE also offered a quote, providing policy limits only for “direct” suppliers. (J.A. 1217.)

Millennium chose to purchase its commercial coverage, including the CBI endorsement, from National Union and ACE, each of which would bear responsibility for 50% of Millennium's covered losses, up to specified limits. As pertinent to the CBI coverage, National Union issued a Binder of Insurance (a “Binder”), which stated, “THERE SHALL BE NO COVERAGE FOR INDIRECT SUPPLIERS/RECIPIENTS.” (J.A. 1289.) The National Union Binder also provided a sublimit on liability for “DIRECT CONTRIBUTING OR RECIPIENT PROPERTY(IES).” (J.A. 1287.) Likewise, ACE issued a Binder that provided a similar sublimit on “ ‘Direct’ Contingent Time Element[s].” (J.A. 1305.) Neither Binder provided any coverage for “indirect” suppliers.

Shortly after issuing the Binders, National Union and ACE separately issued policies to Millennium (the “Policies”) with essentially identical terms. Each policy included an Endorsement titled “CONTINGENT BUSINESS INTERRUPTION CONTRIBUTING PROPERTY(IES) ENDORSEMENT” (the “Endorsements”). (J.A. 1392, 1496.) The Endorsements insured Millennium against certain losses resulting from the disruption of the supply of materials to Millennium caused by damage to certain “contributing properties.” ² (J.A. 1392, 1496.) Specifically, Section C of the Endorsements defined events of coverage as insurance

only against loss directly resulting from necessary interruption of business conducted on premises occupied by [Millennium], caused by damage to or destruction of any of the real or personal property described above and referred to as CONTRIBUTING PROPERTY(IES) and which is not operated by [Millennium], by the peril(s) insured against during the term of this Policy, which wholly or partially prevents the delivery of materials to [Millennium] or to others for the account of [Millennium] and results directly in a necessary interruption of [Millennium's] business.

(J.A. 1392, 1496.) “Contributing Properties” in Section C of the Endorsements was thus defined by reference (“described above”) to the preceding Section B, which establishes that only a “direct supplier of materials to the Insured's locations” can be a “contributing property.” Section B provided a “SCHEDULE OF LOCATION(S),” (the “Schedules”) in which Millennium could list any “contributing property” that created a risk of business interruption. (J.A. 1392, 1496.)

A general section of each of the Policies set policy sublimits and provided that any direct contributing properties named in the Schedules were covered for $25 million, while any unnamed direct contributing properties were covered for $10 million. Millennium did not list any contributing properties on the provided Schedules. The Endorsements also each contained a loss-mitigation provision requiring Millennium to “use [its] influence to induce the CONTRIBUTING PROPERTY(IES) to make use of any other machinery, equipment, supplies or location available in order to resume operations and delivery of materials to [Millennium].” (J.A. 1393, 1497.)

B. Millennium's Coverage Claim

Millennium was in the business of processing titanium dioxide, a compound often used for its white pigmentation, at its processing facility in Western Australia. 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 of which was Apache Corporation (“Apache”).

As a natural gas producer, Apache extracted and processed natural gas from wells on Varanus Island, an island located off the coast of Western Australia. Once Apache processed the natural gas, it would inject the gas into the DB Pipeline, at which point custody, title, and risk passed from Apache to Alinta. The natural gas received from Apache's facility then comingled with that obtained from other producers, resulting in an amorphous mix of gas in a single pipeline.

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. Under Alinta's end-user contract with Millennium, title to the gas passed to Millennium only at the time of delivery, i.e., when the gas left the DB Pipeline and was delivered to Millennium's facility by way of a separate delivery line. Millennium's contract for the purchase of natural gas was solely with Alinta. Millennium had no contract or business relationship with Apache, and the contract with Alinta made no reference to Apache. At the time period relevant to this appeal, Apache produced about 20% of the natural gas that Alinta sold.

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. The Australian government quickly intervened and imposed controls prioritizing delivery of natural gas to domestic customers and essential services. 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 days after the explosion, on June 5, 2008, Millennium sent notice of claim letters to National Union and ACE, seeking CBI 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.

Millennium responded by asserting, inter alia, that Apache was a direct supplier to it because Alinta provided only a service, the delivery of natural gas, whereas Apache provided the actual material at issue. National Union reaffirmed its denial of Millennium's claim, contending that Alinta, and not Apache, was the only direct supplier of natural gas to Millennium. There was no further communication between the parties.

C. Proceedings in the District Court

In July 2009, Millennium filed a complaint against the Insurers in the United States District Court for the District of Maryland, invoking the court's diversity jurisdiction.³ Millennium requested a declaratory judgment regarding the rights and liabilities of the parties with respect to the Policies. Further, Millennium asserted claims of breach of contract ⁴ and failure to act in good faith pursuant to section 3–1701 of...