Ameron executives knew of coating failures and corrosion damage at the Sable Offshore Energy Project well before the company applied for insurance related to those problems, according to the insurer that is now being asked to cover the multimillion-dollar legal bill.
Firing back at an Ameron lawsuit filed in September demanding insurance coverage for its $6 million legal tab, American Home Assurance Co. says top-level Ameron executives knew of coatings-related problems at Sable long before the company obtained the insurance policy.
The allegations, contained in court documents filed by the insurer, include accusations that Ameron subsituted an unspecified coating for use at Sable without notifying project officials.
“Rather than cease sales of its product when it became aware of performance problems, Ameron B.V. fraudulently substituted its defective paint coating with a different coating that had not been approved for use on the Sable Project, and it did so without informing its customers,” the documents say.
Photos: Exxon Mobil
Painting at the Sable Offshore Energy Project was completed in 1999. By May 2001, the owners were reporting premature coating breakdowns.
Furthermore, the insurer contends, Ameron executives who knew of the coating problems did not contact the Ameron risk manager who later obtained the insurance policy.
Motion for Summary Judgment
The allegations are contained in a Motion for Summary Judgment filed March 11 in U.S. District Court in California.
The motion, by American Home Assurance Co., asks U.S. District Judge Manuel L. Real to dismiss the September lawsuit by Ameron and another insurer because of Ameron’s “prior knowledge of property damage” on the $3 billion Sable project in Nova Scotia.
Allegations of protective coatings failure leading to widespread corrosion damage at Sable have been the focus of multi-layered international litigation that began in 2004.
The original suit, by Sable Offshore Energy Inc., accuses Ameron and others of negligence and negligent representation in supplying coatings that Sable says were not sufficiently zinc rich, allowing offshore and onshore structures to corrode—some near to the point of collapse, Sable contends.
Now, American Home argues, fraud and other issues have nullified the insurer’s duty to honor Ameron’s liability policy, which provides coverage for legal bills and judgments.
Anatomy of a Failure
The insurer’s Motion to Dismiss is accompanied by a 25-page Statement of Uncontroverted Facts and Conclusions of Law that details the chronology of the coatings used and alleges that Ameron substituted an unspecified primer without the customer's knowledge.
That document includes 70 assertions that the insurer calls “Undisputed Material Facts.” Each is accompanied by supporting evidence, including depositions, inspection reports, court filings, purchase orders, confidential memos, and confidential meeting minutes.
A separate filing by the insurance company’s attorney attests to the authenticity of confidential documents cited in the Statement of Uncontroverted Facts.
The assertions describe this series of events:
In 1996, Ameron International Corp. (AIC) bought a protective coating formulation called Catha-Coat 302 from a third party and redesignated it as Amercoat 132.
AIC later sold Amercoat 132 as a primer for use on the Sable Project.
AIC also sold its own polysiloxane topcoat, PSX 700, for use on the Sable Project. Together, the system was known as Amercoat 132/PSX 700, or the Amercoat 132 system.
Testing and Substitution
“To enhance its marketability,” the document says, Ameron submitted Amercoat 132 to two laboratories for performance testing, to see if the system met NORSOK standards. The results of those tests differed: One lab said the primer had passed the test; the other said it had failed.
Ameron then followed with its own internal performance testing in January 1998. The results “indicated that the Amercoat 132 system had failed certain performance tests,” the document says.
In May 1998, Ameron began selling the Amercoat 132 system through Amercoat Canada to painting subcontractors for use on the Sable Project. The sales continued during Ameron’s internal product performance testing.
The Sable Project platforms are located on the Scotian Shelf, about 200 km off the coast of Nova Scotia. Development of the facilities began in the mid-1990s, and production began Dec. 31, 1999.
Later that year, “[d]ue to its concern about the internal test results,” Ameron suspended delivery of the Amercoat 132 system.
However, the document says, “To avoid supply interruptions to customers then receiving the Amercoat 132 system, Ameron B.V. substituted a different primer (Amercoat 68) without advising its customers.”
Sable had not approved the Amercoat 68/PSX 700 system for use on the project, the document says. Amercoat 132 was reformulated in November 1998 and then replaced the Amercoat 68 system.
Breakdown and Inspections
Painting on the Sable Project was completed in 1999. By May 2001, Sable was reporting “premature coating breakdowns” at the offshore facilities.
In May 2001, Ameron’s then-Vice President of Worldwide Technology, Christine Stanley, sent James McCarthy, then Ameron’s Technical Service Manager, to conduct an on-site inspection of the project. With McCarthy were representatives of Amercoat Canada, Sable, and several of the project's coating applicators.
Those inspections “confirmed various coating breakdowns at the offshore platforms, including cracking, flaking disbondment, and delamination of the Amercoat 132 system,” the court document says.
“Reports drafted by the coating applicators also confirmed coating breakdowns at the onshore facilities,” the document adds.
McCarthy then discussed his inspection findings with Stanley and Steve Dickey, then AIC’s President of the Coatings Division. McCarthy also filed a written report of his inspection. The report, circulated to senior management at both AIC and Ameron B.V., confirmed “rusting, rust staining, corrosion and flaking” of the Amercoat 132 system at the offshore facilities, court documents say.
By April 2002, Sable had notified Ameron that the coating system was “failing everywhere” at the facility—at offshore platforms and onshore plants.
By April 2002, Sable had notified Ameron that the coating system was “failing everywhere” at the facility, which includes several offshore platforms and onshore plants.
Ameron executives then instructed McCarthy to develop a remediation plan for the offshore facilities; the plan was submitted to Tony Semerad of Sable on April 19, 2002.
On July 25, 2002, American Home Assurance issued three one-year Commercial General Liability Insurance Policies, which ran from July 1, 2002, to July 1, 2005. The policies were to cover any legal judgments that Ameron would have to pay because of bodily injury or property damage at Sable.
Who Knew What
The insurance policy was obtained by Ameron’s Risk Manager, who was never told of the coating problems being addressed elsewhere in Ameron, the document says.
The insurer’s motion to dismiss contends that its policy covers only property damage that results from an “occurrence” and that any such damage must be reported at the time it occurred.
The insurer says that the coating failures alleged do not constitute an "occurrence" covered by the policy and that Ameron knew of problems long before the policy took effect. Therefore, the insurer contends, it has no duty to defend or indemnify Ameron.
Ameron contends that prior knowledge of any problems was not an issue, because its Risk Manager did not know of the problems when she obtained the insurance policy.
In 2006, Ameron’s Protective Coatings Group was acquired by PPG Protective and Marine Coatings. PPG is not involved in the Sable litigation, a PPG spokesman said Thrusday (March 28).
The American Home Assurance motion is scheduled to be heard April 15 before Real in U.S. District Court for the Central District of California – Western Division.