A federal appellate court has affirmed a $3.8 million judgment in favor of Factory Mutual Insurance Co. in connection with a subrogation claim involving the 2008 destruction of a waste treatment plant.

According to Wednesday's ruling by the 5th U.S. circuit Court of Appeals in New Orleans in Factory Mutual Insurance Co. v. Alon USA L.P., Dallas-based Alon owns and operates an oil refinery in Big Spring, Texas, and relied upon the equipment and services provided by a Factory Mutual policyholder, Boston-based Veolia North American-West L.L.C., a unit of Paris-based Veolia Environmental Services.

On Feb. 1, 2008, a cloud of vapor exploded at the Scalfuel waste treatment facility, destroying it. Veolia filed a $6.1 million claim with Johnston, R.I.-based Factory Mutual, which the insurer paid in accordance with the insurance policy. In 2010, the insurer filed a subrogation claim against Alon to recover damages stemming from the explosion, alleging that Alon's negligence caused the damages at issue.

Before a bench trial began, Alon stipulated to liability, leaving only the issue of damages to be determined, according to the ruling. At trial, while both parties agreed damages would be determined by the plant's fair market value, “they fundamentally disagreed” as to how that could be calculated, the appellate ruling said.

Alon argued Factory Mutual was entitled only to the cost of the plant's component parts, or $878,000. FM sought $6.1 million, contending it was entitled to the plant's replacement cost, including the cost of new parts and labor adjusted downward to account for the original plant's depreciation at the time of the explosion, because there is no market for plants that can be used as a measure of value.

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The Dallas-based district court “found that, even though there is a market for specific used components, there is no market for used Scalfuel systems.” It found Alon liable for $3.8 million plus interest, based on an estimate for new equipment, as well as the costs of installation, testing and startup, among other factors. Alon appealed the ruling

The appellate court agreed with the district court's calculation. “Based on the evidence presented, the district court did not err when it found that no market for Scalfuel systems exists,” said the appellate ruling.

“Ample evidence was presented to support such a finding. Furthermore, Alon never actually addresses the finding that no market exists. Rather, they reiterate their ability to price out component parts, assuming that this fact alone precludes the use of replacement costs as a measure of damages. This position effectively glosses over the substance underlying the district court's conclusion that market for complete, operational Scalfuel plants does not exist,” said the ruling.

“It necessarily follows that replacement cost was the appropriate measure of damages,” said the appellate court in affirming the lower court ruling.