Wade Clark Mulcahy LLP

<p style="text-align: justify;">A New York court recently ruled, in <a href="https://www.wcmlaw.com/wp-content/uploads/2020/08/Caryle-v.-Underwriters.pdf"><em>Carlyle v. Underwriters</em></a>, that a $400 million loss of crude oil was not covered under an “all risks” insurance policy, as the loss resulted from non-payment of the insured’s business partner, and not a “theft.”</p>
<p style="text-align: justify;">In 2015, plaintiffs Carlyle Commodity Management LLC (“Carlyle”) entered into a Master Commodity Transaction Agreement with now-defunct Moroccan refinery SAMIR.  SAMIR entered into agreements with various third-party suppliers to purchase oil that SAMIR would hold at its refinery.  Under the Agreement with Carlyle, Carlyle would purchase the oil to keep at SAMIR’s refinery and retain a “Put Right” which would require SAMIR to purchase the oil from Carlyle.  SAMIR could not use the oil Carlyle had purchased unless Carlyle consented.  In practice, however, SAMIR processed the oil and sold the resulting refined product without Carlyle’s consent, but would later pay Carlyle at a later date.  In August 2015, the Moroccan government seized SAMIR’s bank accounts for non-payment of taxes.  At the time of the seizure, SAMIR owed Carlyle approximately $400 million in shipments of oil for which Carlyle had paid.</p>
<p style="text-align: justify;">The issue before the court was whether the resulting loss was covered under Carlyle’s insurance policy, which covered against “all risks of physical loss or damage from any external cause.”  Carlyle claimed that SAMIR had “stolen” the oil, but the court ultimately held that “Carlyle’s losses were not occasioned by the unlawful taking of the oil, but rather by SAMIR’s non-payment.”  The court distinguished cases where a “pretend purchaser” absconded with the goods based on fraudulent intent and held that this was a case of simple non-payment under a business agreement, which is not a covered loss under the policy.</p>
<p style="text-align: justify;">The decision acknowledges the limits of “all risk” policies.  The policies do cover losses for theft, but New York law draws a distinction between theft and non-payment.  While fraud is covered as a form of theft, a <em>bona fide </em>party’s non-payment in the ordinary course of business is not considered theft.</p>
<p style="text-align: justify;">Thank you to Doug Giombarrese for his contribution to this post.  Please email <a href="mailto:gcoats@wcmlaw.com">Georgia Coats</a> with any questions.</p>