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A Houston-based oil and gas trader, Grey Rock Gathering and Marketing LLC, has set its sights on recovering over $2.4 million from Liberty Mutual Insurance Co., alleging wrongful denial of coverage concerning a contaminated oil shipment. In a move that has ignited a legal firestorm, Grey Rock contends that Liberty Mutual's refusal is based on a perilous interpretation of the policy's perils and property exclusion.

 Liberty Mutual Contamination Lawsuit : Exclusion Under Scrutiny

Grey Rock asserted in a motion filed on Monday that it is unequivocally entitled to summary judgment in its coverage lawsuit against Liberty Mutual. The oil trader argued that the insurer's actions constitute a breach of its all-risks warehouse policy and further, a case of bad faith.

Grey Rock argued passionately, stating, "The exclusion relied upon by defendant is vague and ambiguous," adding that Liberty Mutual's interpretation of the exclusion "results in illusory coverage." The trader claims that this interpretation does not hold water when considering the broader declaration page covering contamination.

 A Costly Discovery

The dispute between Grey Rock and Liberty Mutual stems from an alarming discovery made by the oil trader in July 2021. It was revealed that their inventory of crude oil at the primary storage facility in Lake Charles, Louisiana, had become contaminated with organic chlorides, potentially causing extensive damages.

Grey Rock's investigation uncovered that the oil contamination could be traced back to one of its providers, Phoenix Oil and Firebird Bulk Carriers. The oil trader wasted no time in informing Liberty Mutual of this loss and even took measures to mitigate the damage by selling the contaminated oil at distressed prices.

However, Grey Rock claims that Liberty Mutual failed in its obligations by not conducting a timely investigation and refusing to make a swift decision regarding coverage and payment.

The Basis for Denial

Liberty Mutual's denial of coverage was grounded in the perils and property exclusion clause. This clause specifically precludes coverage for "loss or damage due to any process or while the property is actually being worked upon."

Grey Rock countered, alleging that Liberty Mutual's interpretation of the term "process" is overly restrictive, which led to the denial of their contamination-related claims. Grey Rock urged a broader reading of the exclusion clause, arguing that it should not extend to mere storage and mixing of oils in tanks, as it would render the entire policy contradictory.

 The Nature of the Event

Grey Rock emphatically rejected Liberty Mutual's argument that the oil contamination was caused by an inherent defect or latent vice. To substantiate their claim, they cited lab analysis reports demonstrating that the oil was uncontaminated before being introduced to Phoenix oil.

The trader asserted, "This was a fortuitous event that arose from Phoenix's neglect in not disclosing the true nature of the oil delivered to Grey Rock." Grey Rock depicted the situation as an unexpected event, resulting from Phoenix's lack of transparency.

 Liberty Mutual Contamination Lawsuit : Enormous Losses

Grey Rock, a supplier of crude oil to Chevron, emphasized the gravity of the situation. They revealed that Chevron had purchased more than 850,000 barrels of oil from Grey Rock between September 2020 and June 18, 2021, with no issues until the last uncontaminated delivery.

On June 24, 2021, Grey Rock delivered a batch of oil to Chevron, which the company promptly rejected due to high levels of organic chlorides. According to Grey Rock, the contract with Chevron stipulated that the oil should contain less than one part per million organic chlorides, making this incident an exceptional breach.

 Legal Battles and Damages

Adding to the complexity of the case, Grey Rock engaged in a separate legal battle with Phoenix in a Texas state court, ultimately securing a $1.3 million settlement. The total liquidated damages for Grey Rock now stand at a staggering $2.4 million, including $260,000 in attorney fees related to the Phoenix suit and an additional $230,000 for barge demurrage.

Representatives from Liberty Mutual declined to comment on the ongoing legal battle, while Grey Rock remains tight-lipped as well.

Grey Rock is represented by Paxton N. Crew of The Crew Law Firm PC and Jacob Shisha of Tabak Mellusi & Shisha LLP, while Liberty Mutual is represented by John A.V. Nicoletti and Robert A. Novak of Nicoletti Hornig & Sweeney.