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Ameron Sues Insurer in Sable Project Coatings Case

Saturday, September 15, 2012

More items for Program/Project Management

Mired in years of litigation alleging widespread coating failure on Nova Scotia’s Sable Energy Project, Ameron International Corp. is now suing its own insurer for refusing to pay for Ameron’s multimillion-dollar defense in the case.

Canada-Nova Scotia Offshore Petroleum Board

The suit against Ameron alleges that the coatings on the Sable Energy Project are failing prematurely, causing ongoing damage to onshore and offshore structures.

Ameron has already spent more than $6 million to defend itself in the eight-year-old case, according to Ameron International Corp. et al. v. American Home Assurance Co., (Case No. BC491626), filed Sept. 6 in California’s Superior Court.

And the case is far from over. Sable Project officials are contending that the coating problems caused ongoing corrosion and property damage at the $1.4 billion facility and that repairs could cost hundreds of millions of dollars.

Insurance Claims

Greenwich Insurance Co., another Ameron insurer, has spent more than $5.4 million in legal fees and costs in the case and joined Ameron in the suit against American Home. (Greenwich had also balked earlier at covering its claim, and Ameron won a settlement with that company.)

Ameron’s suit against American Home contends that the coating provider held “one or more” Commercial General Liability insurance policies in force for one year beginning July 1, 2002. The policy provided $1 million per occurrence "and $2 million aggregate for each annual period of part thereof....”

And yet, Ameron’s suit says, American Home “has refused and continues to refuse to provide Ameron and Ameron B.V. with any defense to the [Sable Project] Action, including the failure to pay for any of the defense costs.”

Information on attorneys for American Home was not immediately available, and the company could not be reached for comment.

American Home is affiliated with scandal-plagued AIG, which was the world’s largest insurance company until it collapsed in 2008.

Troubled Coating Project

The case dates to 1998, when Sable Offshore Energy Inc. (SOEI) began construction of offshore and onshore facilities on Sable Island, in Nova Scotia, to produce natural gas and natural gas liquids. The SOEI consortium consists of ExxonMobil, Shell Oil, and three other oil companies.

Ameron International and Ameron B.V. supplied the paint systems used on portions of all of the structures. Some of the paint was also supplied by Allcolour Paint Limited, Amercoat Canada, and others.

On April 28, 2004, the Sable consortium filed suit in the Supreme Court of Nova Scotia, Canada, against Ameron, Ameron B.V. and a dozen other contractors and applicators involved in the manufacture, sale and application of the coating system, alleging negligence, negligent misrepresentation, and breach of a collateral warranty.

Sable’s allegations (reiterated in Ameron’s new suit) say the project “began to experience premature failure of the Amercoat 132 / PSX 700 system, including failure of the paint system to preferentially corrode, thus avoiding corrosion of the steel beneath the paint.”

Sable alleges “that these failures are due in part to the fact that the Amercoat 132 primer is not zinc-rich, and contains less than the 85% by weight zinc specified,” the defendant reports.

Because of the coatings, Sable says, onshore and offshore structures at the C$1.4 billion facility “experienced and are continuing to experience property damage in the form of corrosion” and “the structural integrity of the facilities is being compromised by ongoing corrosion damage,” court papers say.

Damage and Damages

Sable's suit sought unspecified damages, but damage estimates in various court documents have ranged from $135 million to $440 million, depending on the repairs required. Most of the defendants named in the original suit have settled their claims with SOEI. Ameron is the principal remaining defendant.

Sable alleges that structural damage “has continued and progressed” over the years and that “repairs will be required to protect the safety of the workers” on the project.

Whatever happens, Ameron is determined to have American Home help pay for it.

“American Home has this obligation to defend,” Ameron attorney Cary B. Lerman said in a statement. "The costs are mounting, and it's important now that they be ordered to perform and take this mounting defense burden off the shoulder of Ameron.”

Comment from peter gibson, (9/17/2012, 11:12 AM)

Ameron's coatings failed. Now they want relief from their insurance carrier !!! You cannot get insurance for sub par coating materials. The audacity! Outrageous ! Ameron refuses to accept their part of the problem. Nice try ,though !

Comment from Gerald Burbank, (9/17/2012, 11:50 AM)

Depends on the insurance policy. As I understand it, the case against Ameron has yet to be settled. If the insurance company policy obligates them to defend Ameron, then the suit doesn't sound unreasonable to me. It will be interesting o see if Ameron did in fact provide "sub par coating materials" that were outside of the spec, or otherwise misrepresented their product. The project started in 1998. The suit was filed in 2004 (six years later). I would be interested in finding out how long the paint was exposed in a marine environment, what areas were failing, and if, in fact, the primer was less than 85% zinc by weight. Even if it was the correct paint formulation, then there could be myriad explanations for the paint's failure. This is by no means a clear cut case. Without examining all of the evidence, I'm not sure I would even want to guess who may or may not be at fault.

Comment from Simon Hope, (9/18/2012, 3:52 AM)

This one will grind on for years to come as the cost and scale of the failure will not allow for an easy settlement, admission of a defective or sub par coating system would open the floodgates for claims, hence the reason I would guess that the insurers are distancing them selves as far away as possible!

Comment from Mark Schilling, (9/18/2012, 2:12 PM)

Some good comments from Gerald Burbank. There is so much that so many of us don't know about this one. Part of the problem is simply technical. The paint system failed. Why? The insurance bit is business. What was agreed to? I don't know. In my experience one can insure damn near anything. Right is right and wrong is wrong but people can agree to and insure anything. The real question that lurks here is - what exactly is a sub par coating material? And how would anyone know? What are the metrics? Is it an issue with coating composition? Is it an issue with coating performance in standardized "accelerated" test methods (e.g., ASTM B117)? My first concern would be that coating materials are supplied for testing and approval. Industrial coatings are proprietary materials subject to reformulation with or without notice. The new version is always new and improved. It's lead or chromium free, high solids, low VOC, higher build - whatever. The point is - it's different than the stuff that was tested and approved for use by the specifier. Coating manufacturers can tell us that a product is new and improved, or that it is now more cost competitive (aka - "cheaper"). But the anchor can be - it's not what we tested, approved, and specified. It turned out to be no longer what we thought it was. Just a thought -

Comment from Gerald Burbank, (9/19/2012, 9:16 AM)

Yes. You can insure just about anything (AIG's insurance policies covering credit default swaps for hedge funds is one example). These sorts of cases are never clear cut. The owner may want to argue that the failure is due to the fact that the paint is out of spec, and that it didn't contain the required amount of zinc in the coating. but that is only one side of a convoluted arguement. Even if an analysis were performed to determine how much zinc was in the coating, how will they be able to prove that it was Ameron's fault? Who is to say that the test method is valid or accurate? Perhaps Ameron provided paint that was within the spec, but the applicators mixed the coatings improperly (in an attempt to save money by not adding the proper amount of filler)? Was the paint tested prior to delivery? Who was responsible for QC? What tests did the fabricator and/or applicator perform after they received the paint, once the surfaces were prepared and while the coatings were being applied? There are a lot of reasons the paint might have failed. Reconstructing the chain of events and discovering what actually happen here (if that is even possible) will take some time. It will be no easy task to determine who is at fault.

Comment from Steve Bowditch, (9/20/2012, 9:08 AM)

Seems everyone is concerned about poor old Ameron. What about Sable? While the suit drags on has Ameron come to the client and offered any solution? That would be the mark of a professional orginization I would want to be associated with. The court case may drag on for many more months/years and it will certainly enrich the lawyers on both sides of the table.

Comment from Mark Schilling, (9/20/2012, 4:15 PM)

Just one more quick comment - at the time this problem came to light I was an ExxonMobil employee. ExxonMobil is part "owner" of the Sable facilities. I know some things that I cannot or should not say in this kind of open public forum. The only point I really wanted to make is that there are at least 2 distinct issues here. And Gerald Burbank has it pretty much right on target. First, there was a technical fault. Something was or something went wrong. Was it sub-par or off-spec coating materials? Was it a faulty application? Did any 3rd party inspection firm fail to do their job? Technically, it could be a complicated mix of things. And second, one can insure damn near anything. Were there issues with the coating materials as supplied or with their application - or both? And does that really much matter from an insurance point of view? I'll just say that I know something of the former and nothing of the latter. I'm not a lawyer and I have not been privy to any of that. My take on the posted article is that Ameron wants "help" from an insurer and that right or wrong - it is a contractual obligation. I am an expert in failure analysis. But this legal matter doesn't really seem to be about fault-finding. It doesn't seem to be about right and wrong and who's to blame. It seems to be about contractual obligations. And Steve Bowdiditch made a good comment in that respect - whatever happens, this will certainly enrich the lawyers on both sides.

Comment from John Fauth, (9/21/2012, 8:50 AM)

Mark, you make an excellent point. The law has nothing to do with concepts of "right" and "wrong"; only one's legal obligations are by statute or contract. Nor should judges "look out for the little guy"; their job is to fairly interpret and apply the law regardless of one's stature. Emotional terms and concepts may have an innate appeal to people, but they're completely irrelevant to the law.

Comment from Simon Hope, (9/24/2012, 4:05 AM)

Mark, very valid comments and not far off the money, when everything eventually comes out it will be interesting to see how this is defended particularly as the insurers have now publicly tossed Ameron to the wolves, which ever way you look at it this sort of publicity is not good for the manufacturer!