Mother Nature Intervenes and Causes a Business Interruption Claim

Insurance Claim, North America

An accident in a busy ship channel closed shipping traffic for a number of days, resulting in refineries and chemical plants having to adjust process rates to avoid shutdowns. Baker & O'Brien assessed the reasonableness of a refiner's business interruption claim based on lower crude throughput, lower secondary processing, and ship demurrage charges. Our independent review of the refiner's actions and quantum of the losses figured in to negotiating a settlement.

Petroleum refineries depend on timely crude oil deliveries to continuously operate the facilities at planned rates. As coastal refineries typically receive most of their crude oil feedstock via large waterborne vessels, unrestricted waterways are a critical element in the supply chain. Thus, when Mother Nature and/or human error intervene to impede such regular waterborne transit, significant refining losses can result.

Heavy fog in a busy shipping channel contributed to the collision of a barge with a large bulk carrier. A resulting spill caused the channel to be closed for several days, delaying the arrival of several crude oil supply vessels at a major petroleum refinery. Due to the uncertainty concerning the duration of the channel closure, the potential risk of an entire plant shutdown was considered to be high by refinery management. Therefore, in order to mitigate this risk, the decision was taken to reduce crude oil processing rates. As refining economics were very favorable at the time, the refiner filed a business interruption (BI) claim.

Baker & O'Brien was engaged to provide an independent assessment of the reasonableness of the refiner's actions in support of its BI claim. The claim consisted of three components: (1) losses due to lower crude oil process rates; (2) losses due to lower secondary processing unit rates and yields; and (3) costs related to ship demurrage charges. Our consultants reviewed the information supporting the claim and offered our independent view on the refiner's actions and quantum of the estimated losses. Our report assisted the parties in negotiation of a mutually satisfactory settlement amount.

Gary N. Devenish

Vice President

Transportation and Storage
Insurance Claims / Water/Marine / Expert Witness Testimony / Quantum/Damages Assessment
North America