Insurers Balk at Coverage for Firm Accused of Delivering Damaging Biofuel to Customers

Two Crum & Forster subsidiaries have asked a federal court in Massachusetts to declare that they have no duty to provide coverage to an insured heating oil company over its delivery of oil diluted with high quantities of biodiesel that allegedly caused operating difficulties and damages to furnaces for some Massachusetts customers.

U.S. Fire Insurance Co. and The North River Insurance Co. are fighting involvement in a class action filed by customers against its insured, Peterson Oil Co. and three of its executives. The insurers are currently providing a defense but that is subject to a complete reservations of rights to deny indemnity, withdraw from the defense and to seek a judicial declaration.

According to the underlying suit in the case, Peterson allegedly delivered oil averaging 35% biodiesel in many years and, in many months, 70% or higher in order to qualify for lucrative tax breaks. According to suit, the U.S. Department of Energy Resources does not recommend fuel that contains greater than 20% biodiesel for traditional home heating oil applications and that prior to 2021, no burner manufacturers had approved their burners for use with fuel containing more than 5% biodiesel without a conversion kit, which only permits burners to use up to 20% biodiesel.

The complaint alleges that Peterson began delivering the incompatible fuel in 2012 but did not inform customers until 2019, when it sought to qualify for federal tax breaks for selling the biodiesel. The plaintiffs allege that Peterson “still has not disclosed any known risks of using biodiesel to its customers, and purposefully concealed the true contents and characteristics of its fuel to increase profits.”

The incompatible fuel ended up causing damage, requiring repairs and replacement, and providing less efficient heating. Some customers claim they spent thousands of dollars on replacing or emptying tanks, repairing and cleanup after oil pipes burst, and acquiring replacement fuel.

The insurers argue that the class action claims fall outside the policies they issued to Peterson.

The primary and umbrella commercial insurance policies from the insurers were renewed from July 2012 through July 2016. Insurers claim both policies contain numerous exclusions including for property damage expected or intended by the insured, for property damage to impaired property, and for pollution.

Since the underlying action alleges that Peterson knew that mixing high percentages of biodiesel with fuel did not meet industry standards for heating oil and they were aware of the risks high biodiesel blends posed to customers’ heating equipment, the insurers argue that coverage is precluded by the “expected or intended injury” exclusion in the primary policies and the umbrella policies.

The insurers further maintain the policies only provide coverage for property damage caused by an occurrence “that takes place during the policy period.” While they allege Peterson began delivering the incompatible fuel in 2012, none of the claimants appear to allege damage claims before July 2016, when the policies expired.

The umbrella policies also contain a limitation of coverage related to property damage arising from the erroneous delivery of one liquid product for another.