Because the refinery was unable to utilize crude oil in the pipeline for the downtime period, it chose to sell off a portion of its crude at a discount to avoid contractual penalties. The insured included in its claim the difference between its crude oil purchase price and its selling price to third parties. All parties involved participated in several discussions regarding the accounting aspects and coverage that may be afforded to these discounted sales. From an accounting perspective, the sale of this crude did not constitute a savings of raw material, it did not mitigate any of the insured’s business interruption loss and was not an incremental cost incurred to continue operating its facility.
Ultimately, a resolution was reached between the parties. Many refinery business interruption claims result in losses associated with feedstock commitments such as this, including distressed crude sales losses, demurrage and increased tank storage costs. While they clearly result directly from the damage and ensuing interruption to production, where they fit in terms of policy coverage is often hotly debated.
Although the interplay of above items created measurement challenges, MDD’s understanding of both the refining process and local markets played a key role in the resolution of this matter. Please stay tuned as several of the issues that arose in this case will be discussed in future technical briefings that will be published over the coming months.