Refinery Fire Leads to Substantial Business Interruption Claim

Insurance Claim, North America

As a result of a fire occurring at a refinery's crude distillation unit, a refiner experienced a business interruption loss that led to a claim being submitted to its insurer. To assess the loss, Baker & O'Brien considered the pre-incident operating plans to develop the "but for" operating case for calculating the business loss. Our analysis and opinions were summarized in an expert report, which was used by the client in settlement negotiations.

The first step in petroleum refining is the separation of the crude oil in the crude and vacuum distillation units. These distillation units separate the petroleum fractions of crude oil by boiling point and provide intermediate feedstocks to the downstream process units to maximize gasoline, jet, and diesel production. When a refinery suffers a loss of its crude or vacuum distillation units, depending upon the length of time involved, the refinery may be forced to reduce processing unit rates or even completely shut down once the intermediate feedstock inventory is depleted. Such an event occurred at a refinery as a result of a fire that caused a lengthy period of time in which the refinery was operated below historical and planned crude oil charge rates, leading to a substantial business interruption claim.

Baker & O'Brien was retained to calculate the business loss incurred from the refinery fire incident, including a detailed review of the forensic accounting reports. In calculating the business loss, Baker & O'Brien employed a plan (but for the incident occurring) versus the actual approach to quantify the lost production and resulting lost profits. Typically, a refinery prepares a rolling three-month operating plan that details the crude oil and feedstocks planned to be processed and the resulting products. These operating plans were used as the basis of what would have occurred "but for" the fire incident. Baker & O'Brien also reviewed and provided opinions of the alternative methodology used by the forensic accountant based on historical refinery performance for the "but for" case. In addition to the calculated lost profits, the additional mitigation expenses, such as distressed crude oil sales, increased transportation costs, and incremental product purchases to supply customers were evaluated.

Baker & O'Brien summarized its findings and opinions in a report, which was used during settlement negotiations.

Gary N. Devenish

Vice President

Petroleum Refining
Insurance Claims / Standard of Care / Forensic Analysis / LP Planning / Practice / Quantum/Damages Assessment / Operations and Maintenance
North America