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Gas disruption insurance rarely includes Maui pipeline: industry expert

Friday 28th October 2011

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Businesses expecting to claim on business interruption insurance policies for losses caused by this week’s Maui gas pipeline break may be in for a “rude awakening”, says veteran insurance risk consultant John Sloan.

While business interruption policies typically offer what is termed a “dependency extension” for water, electricity and gas outages, such contracts have often excluded breaks in the Maui gas pipeline for the 30 years the pipeline has been in place.

“It’s a historic exclusion,” said Wellington-based Sloan, who has advised on major civic and corporate insurance risk over several decades and showed BusinessDesk a typical business interruption policy “from a multi-national broker” which specifically names Maui Gas Dependency as “excluded”.

“Some may have been able to take the exclusion clause out, but even they will often have exclusion periods”, meaning that insurance may not kick in until a gas or other utility outage has been running for more than a specified period of days or weeks.

At various times since the break was notified early on Tuesday, all gas consumers north of the Waikato, other than householders, have had gas supply interrupted.

Auckland networks operator Vector, which is coordinating the emergency response to the break, indicated this morning it believed there was “slightly longer than four or five days” of gas in the pipe, north of the break, available for use by affected consumers.

That calculation includes the progressive resumption of supply today to some 1,000 so-called “Band 4” consumers, comprising hotels, commercial buildings, shopping centres and mid-scale manufacturers.

All consumers are being urged to remain frugal in their gas use and future cutbacks cannot be ruled out if repairs take longer than the currently anticipated three to four days.

“It’s a dynamic situation,” said Vector chief executive Simon Mackenzie. “It’s an issue we have to monitor closely.”

Essential services including hospitals and resthomes, and dairy factories coping with the peak spring milking “flush” resumed consumption yesterday, two days after the initial emergency was declared after a farmer discovered gas bubbling from farmland in northern Taranaki.

The affected piece of pipe has been uncovered and a replacement section manufactured, with welding expected to start today. Safety regulations require that a successful repair must be retested after a wait of 24 hours, Mackenzie said.

He declined to comment on whether Vector, as the contracted manager of the pipeline, or its owner Maui Developments, would be the liable party if gas customers sought direct compensation after discovering their insurance policies excluded Maui pipeline breaks.

It was also “premature” to discuss whether the pipeline break could constitute a “force majeure” event, in which the liable party can seek to avoid compensation claims by blaming unforeseeable circumstances.

BusinessDesk inquiries were not immediately able to establish whether the capacity to invoke force majeure rests with Vector or with Maui Developments, which is jointly owned by Shell New Zealand and Todd Energy.

A Fonterra spokeswoman confirmed the dairy cooperative is compensating farmers for the up to $20 million a day of spilt milk at the height of the short-lived closure of all but two upper North Island milk processing plants.

Returning to normal processing volumes was the current priority and the issue of claiming compensation from a supplier had not yet been considered.

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