Explore a case study involving a $25 million fire damage claim on sold business assets, where insurance coverage was denied due to contractual breaches. Learn about the legal implications and the court’s decision in Murphy Oil Corporation v. Liberty Mutual Fire Insurance Company.
May 8, 2020
Introduction:
When selling a business, the seller often retains legal responsibilities related to the business’s risks. This is achieved through agreements outlining promises and protections. Such risks can lead to substantial costs.
The Deal:
In this instance, a business sold assets of an oil refinery for $625 million. The seller, in the asset purchase agreement (APA), assured that the refinery met industry standards, followed environmental regulations, and was suitable for its purpose. The seller also committed to compensating the buyer for any breaches of these assurances.
The Lawsuit:
After the sale, a fire severely damaged the refinery. The buyer sought damages from the seller based on the APA’s compensation clause. The seller turned to their Comprehensive General Liability insurer for coverage, but the insurer declined, arguing that contractual breaches were not covered, unlike property damage from accidents. The seller then took the insurer to an Arkansas federal district court but was unsuccessful.
Appeal Outcome:
The federal appeals court upheld the earlier decision. They determined that the money owed by the seller to the buyer due to breaching the APA was categorized as “economic loss,” not covered by the insurance policy. Hence, the insurer wasn’t obligated to defend the seller.
Comment:
The appeals court highlighted that the insurer might have been required to defend the seller if the buyer had pursued a lawsuit based on property damage caused by negligence, but this option was no longer available due to the statute of limitations.
Case Reference:
This case is referred to as Murphy Oil Corporation v. Liberty Mutual Fire Insurance Company, No. 19-1140, United States Court of Appeals, Eighth Circuit, (Submitted: January 15, 2020. Filed: April 21, 2020).
By John McCauley: I help companies and their lawyers minimize legal risk associated with private business acquisitions.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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