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Liberty Mutual off hook for pipe maker’s mitigation costs after fire

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About $14 million in mitigation costs incurred by a pipe manufacturing company when it had to shift production to India after a fire were extra expenses, whose policy limits were already exhausted under its Liberty Mutual Fire Insurance Company coverage, says a federal appeals court, in upholding a lower court ruling.

In May 2012, Little Rock, Arkansas-based Welspun Pipes Inc., a steel pipe manufacturing company, was awarded a contract to supply 220,000 tons of pipe for a 670-mile Seaway Loop Pipeline from Cushing, Oklahoma, to Houston, Texas, according to Thursday’s ruling by the 8th U.S. Circuit Court of Appeals in St. Louis in Welspun Pipes Inc., et al. v. Liberty Mutual Insurance Co.

It planned to produce 180,000 metric tons of the pipe, which had a sales value of $275 million, in its Little Rock plant, according to the ruling. But a fire suspended the plant’s operations, and it was decided to move production to the company’s India affiliate.

Its insurer, Boston-based Liberty Mutual, whose policy provided real property, personal property, equipment breakdown, loss of business income and extra expense coverages, paid Welspun $22 million for its business income losses and $1 million for extra expenses, but refused to pay an additional $14 million in mitigation costs associated with the move to India.

The insurer argued these were an additional “extra expense” under the policy, whose limit was paid in the settlement, while Welspun argued they should be viewed as “necessary expenses” and covered.

Welspun and Liberty Mutual filed cross motions for summary judgment in U.S. District Court in Little Rock, which ruled in the insurer’s favor.

On appeal, a three-judge appellate panel unanimously upheld the lower court’s ruling.  As the “plain language of the Liberty Mutual policy, the origins of loss of business income coverage, prior cases and insurance treatises, and the undisputed facts established in this summary judgment record make clear, the incremental costs Welspun incurred in shifting some Seaway production to an affiliate in India were not ‘necessary expenses’ within the meaning” of the policy, said the ruling, in affirming the lower court’s decision.