News reports indicate at 1.40 pm on 3 June 2008 a pipeline rupture and fire occurred at a gas processing and transportation hub operated by Apache Corporation on Varanus Island which is some 100 kms from Karatha in Western Australia. The facility is a major supplier to industry as well as satisfying approximately 30% of Western Australia's domestic needs.
As at 5 July 2008 full gas supplies had not been restored.
These events are reminiscent of the gas disruption which occurred in Victoria when, on 25 September 1998, a fire at the Esso/BHP Longford plant severely disrupted gas supplies causing considerable financial loss and a plethora of Business Interruption claims.
Property loss also occurred as some industries experienced uncontrolled plant shutdowns damaging plant.
Claim Solutions prepared and settled a large volume of these claims.
Similar losses are likely in Western Australia. Many WA companies including miners, smelters and refineries are reporting reduced production as a consequence of the interruption to gas supplies. News reports indicate scheduled maintenance is being brought forward where possible. Companies should ensure any additional costs or changes in market prices associated with rescheduling maintenance are quantified.
If the outage remains after maintenance is complete ongoing losses and further shutdowns are likely.
The possibility of shut downs and the magnitude of financial losses increase as each day passes. So too does the need to: -
1. Secure alternate fuel (e.g. LPG, diesel, etc) and convert plant where possible.
2. Utilise spare capacity in interstate or overseas operations.
3. Purchase competitor product to satisfy local demand, if possible.
4. Conserve energy when it is not required.
News reports suggest losses could run into the hundreds of millions of dollars.
Are these financial losses insured?
The cause of the rupture and fire at Varunus Island needs to be determined. If it is not an excluded peril, Industrial Special Risks policies may respond.
Insurance policies should be reviewed to determine if they include extensions for: -
1. Public Utilities.
2. Suppliers' Premises.
The Mark IV Industrial Special Risks policy contains a "Public Utilities Extension". Paraphrased this reads, "Any loss resulting from interruption of ... the Business in consequence of damage to property, caused by a peril damage as a result of which is insured hereunder, at any ... gas works ... situated on or immediately adjacent to the Premises shall be deemed to be loss resulting from Damage to Property used by the Insured at the Premises"
While specifically referring to "gas works," the application of this clause appears limited. The "gas works" must be adjacent to the business which sustained the loss.
Broader Public Utility Extensions may exist under manuscript or endorsed covers.
The cover may also contain a Suppliers' Extension which may read, "Loss resulting from interruption ... with the business in consequence of Damage to property at Suppliers/Customers Premises shall be deemed to be loss resulting from Damage to property used by the Insured at the Premises for the purpose of the Business".
Apache Corporation may be a "Supplier" within the meaning of this clause and Business Interruption losses sustained by its customers may be covered. Its customers sustain the first tier of losses.
If those companies which have sustained loss purchase gas direct from Apache they may fall within the first tier. If they purchase gas from Apache via a retailer they may be a second tier customer i.e. a supplier of a supplier. Insurance covers need to be reviewed to determine if cover is provided for this further level of loss.
The Victorian Gas Crisis, almost 10 years ago, was the subject of a class action against the gas supplier. Even if financial losses are not insured they need to be quantified, documented and supported in the event that a similar experience occurs in Western Australia.
Author
Claim Solutions Pty Ltd
Insurance Policy
Country: - Australia
Policy Description: - Mark IV Industrial Special Risks Policy and others
Insurer: - Various
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