When Alon’s Big Spring, Texas oil refinery exploded on February 18, 2008, destroying Veolia’s waste treatment facility, Alon did not even bother to contest its liability for the damages to Veolia’s facility. Nor did Alon dispute that the only proper measure of damages for the completely destroyed facility was its fair market value immediately prior to the explosion. However, the problem faced by the Fifth Circuit in Factory Mutual Insurance Co. v. Alon USA L.P. is that there is a market for the facility’s used parts but no “market” for the facility system itself.
After stipulating to liability, Alon contended that Veolia’s insurer, FM, was only entitled to the cost of the facility’s component parts. The value of the component parts was $877,882. FM claimed that Alon instead owed $6,106,880, the total replacement cost of new parts and labor adjusted downward for depreciation from the time the facility was built until the explosion that destroyed it. The Northern District of Texas court ultimately awarded FM $3,790,391.96 plus interest. The trial court first took the total cost of new equipment, including taxes and shipping, then incorporated additional money for contingency, installation, testing, and startup and finally multiplied the total by .65 to account for 35% depreciation. Alon appealed. Based on the reasoning below, the Fifth Circuit affirmed.
Typically, a court called upon to determine fair market value would simply look to the price that willing buyers were offering for similar property being sold by unobligated sellers. Thomas v. Oldham, 895 S.W.2d 352, 359 (Tex. 1995). The Northern District of Texas court faced with Alon’s case said that it could not do that because “the market price of such used subsystems does not reflect the market value of a running [facility]... No reasonable person would construct a working [facility] out of used components.” Factory Mutual Insurance Co. v. Alon USA L.P., Slip Op. No. 11-11080 (January 23, 2013, 5th Cir.)
The Fifth Circuit affirmed the lower court’s decision for two main reasons. First, FM presented credible expert testimony on valuation, rather than merely relying on its payment to its insured, Veolia, to prove market value. Second, Alon failed to address the fact that no market existed for the facility. Alon instead repeatedly stated that its calculations for used equipment “sitting on the ground, not assembled” should be adopted because it could reliably price out those individual parts.
Examining all of the expert testimony and complete trial record, the Fifth Circuit concluded that the Dallas-based district court was correct: “the market value of a fully operational [facility] is greater than the sum of its component parts.”
In reviewing the recoverability of damages in a particular case, it is important to note that the law as to what is recoverable and what test to apply varies in each state. While this case reflects upon the Fifth Circuit, it is important to consult with counsel regarding the laws of the state in which your loss occurred.