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AIG unit not liable in natural gas explosion

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An American International Group Inc. unit is not obligated to provide coverage to a natural gas supplier for an explosion at its plant because of its policy’s pollution exclusion, says an appeals court, upholding a lower court ruling.

Enid, Oklahoma-based Hiland Partners GP Holdings L.L.C., which operates a natural gas processing facility in Watford City, North Dakota, entered into service contract with Belfield, North Dakota-based Missouri Basin Well Services Inc., which obtained a commercial general liability insurance policy from AIG unit National Union Fire Insurance Co. of Pittsburgh, Pa., according to Tuesday’s ruling by the 8th U.S. Circuit Court of Appeals in St. Louis in Hiland Partners GP Holdings L.L.C. et al. v. National Union Fire Insurance Co. of Pittsburgh, Pa.

Hiland was an additional insured on the policy, which had a pollution exclusion for the discharge of pollutants, according to the ruling. Pollutants were defined as “any solid, liquid, gaseous or thermal irritant or contaminant.”

In October 2011, Hiland asked that Missouri Basin remove water from its hydrocarbon condensate tanks at its Watford City processing facility. 

A subcontractor’s employee, Lenny Chapman, positioned his truck in front of one of the tanks when it overflowed. The condensate then caused an explosion that seriously injured Mr. Chapman, according to the ruling.

Mr. Chapman and his wife filed a lawsuit against Hiland, which was later settled for an undisclosed amount. National Union refused to defend and indemnify Hiland under its policy, and Hiland filed suit against the insurer. The U.S. District Court in Bismarck, North Dakota ruled in National Union’s favor, and a three-judge panel unanimously upheld the lower court’s ruling.

Among Hiland’s arguments was that condensate is not a pollutant. Mr. Chapman’s complaint describes condensate as “flammable, volatile and explosive,” said the ruling. 

“Condensate is therefore a contaminant because flammable, volatile and explosive liquid and gas has the ability to soil, stain, corrupt or infect the environment,” said the ruling.

Hiland also argued that condensate does not fall within the policy’s definition of a contaminant because it “caused harm in a manner other than by contamination.”

However, because Mr. Chapman’s injuries were the result of an explosion caused by condensate’s flammability, “the nature of the harm here is directly related to the nature of the contaminant,” said the decision, in affirming the lower court’s ruling.