Bankruptcy Court Ruling Secures $93M in Additional Coverage for Refinery Owners

The owner of a Philadelphia refinery that was shut down after a June 2019 explosion secured at least $93 million in additional coverage from its insurers after a U.S. Bankruptcy Court judge ruled in favor of the policyholders’ interpretation of the policy, the plaintiffs’ law firm says.

U.S. Bankruptcy Court Judge Mary Walrath on Wednesday granted partial summary judgment in favor of PES Holdings LLC on two provisions in the policy and denied the insurers’ motion to dismiss a bad faith claim. She rejected the insurers’ argument that a “stipulated loss value” of $250 million included in the policy did not apply to PES’ claim because it would result in a payment that amounts to more than the actual cash value of the property.

“While the final replacement cost and actual cash value amounts remain in dispute, the record reflects that the insurers have calculated these amounts as approximately $166 million and $73 million, respectively,” the plaintiff’s law firm, Cohen Ziffer Frenchman & McKenna, said in a press release. “Now that the court has determined that PES is entitled to a minimum of the replacement cost up to $250 million, the insurers will be required to make up the difference.”

A fire at the hydrofluoric alkylation unit of the Philadelphia Energy Solutions refinery led to a series of explosions that rendered the refinery inoperable. PES filed for Chapter 11 bankruptcy a month after the explosions.

PES had a mortgage on the property with ICBC Standard Bank that required it to maintain at least $750 million in insurance on the site. PES purchased policies through 30 insurers that provided $1.25 billion in coverage.

Rather than rebuild, the company sold the property to Hilco Redevelopment Partners, which plans to build a logistics facility on the 1,300-acre site.

The decision not to replace the refinery, however, led to a dispute with PES’ insurers, which included Allianz Global Risks US Insurance, several Lloyd’s of London syndicates, HDI Global Insurance Co., Liberty Mutual, XL Insurance America, Ace American and Zurich American Insurance Co.

PES filed a lawsuit against 26 of those insurers in February 2020, alleging a breach of contract and a breach of their duty of good faith and fair dealing.

The insurers argued that PES could recover only the actual cash value of the refinery, which was an amount equal to the replacement cost less a deduction for “physical depreciation.” But Walrath ruled that a “stipulated loss value clause” in the policies allowed PES to recover either the actual cash value or the full replacement cost, up to $250 million.

The parties also disputed how much could be deducted from the payout for depreciation. The insurers argued that labor costs should be included in that depreciation because PES had decided not to rebuild. This resulted in an actual cash value of $73 million, compared to the insurer’s estimated replacement cost of $166 million.

Cohen Ziffer says that Judge Walrath’s ruling means that PES is owed at least $166 million, but it continues to seek payment of the full $250 million policy limit.

Walrath also rejected the insurers’ argument that PES may not pursue its bad faith claim because it did not show the amount of its damages by submitting the legal bills that were paid. The insurers also argued that New York law, which governs the insurance contract, does not allow parties to recover attorney fees as “consequential damages’ from bad faith claims.

Walrath said in her opinion that she was not persuaded by the case law that the insurers submitted.

“The court agrees with PES that the time to consider any claim it may have for legal fees is after trial,” the opinion says. “Such consequential damages are due only if, and when, the court determines that the insurers’ acted in bad faith.”

With that decided, Walrath “bifurcated” the case so that liability for damages and the amount of those damages will be decided during separate trials. The Bankruptcy Court has scheduled the first trial, which will determine liability, to begin Jan. 24.

“This has been a long road, but as we are approaching trial, this decision goes a long way towards getting PES the insurance coverage to which it is entitled,” the Cohen Ziffer law firm said in a statement. “We look forward to establishing our right to the remaining disputed funds at trial.”

About the photo: Flames and smoke emerge from the Philadelphia Energy Solutions Refining Complex in Philadelphia, Friday, June 21, 2019. (AP File Photo/Matt Rourke)