Legal Liabilities for Sale, Shipment of Off-Spec Biodiesel

There are several steps that producers can take in order to avoid issues related to off-spec fuel and, once a problem has been identified, there are important measures that must be followed to successfully resolve the problem.
By James L. Pray | September 02, 2014

The consequences for producing and shipping biodiesel or other renewable fuel that fail to meet applicable specifications are grave. While many defective products can generate similar legal liabilities, defective fuel is probably unique in the far-reaching negative impacts that can ensue. There are several steps that producers can take in order to avoid issues related to off-spec fuel and, once a problem has been identified, there are important measures that must be followed to successfully resolve the problem.

First, biofuel has value as a commodity only as long as it meets an applicable specification. Once a fuel fails to qualify as a commodity fuel because of a manufacturing, transportation or storage error, then it is at risk of becoming a liability instead of a product. For off-spec fuel, the once-valuable fuel may be treated as a hazardous waste instead of just a hazardous commodity, with all of the consequences inherent in properly handling, transporting and disposing of hazardous waste.

Second, because it is a liquid, it can be mixed and blended with other fuels during the transportation, storage and distribution process. This means that 200,000 gallons of off-spec fuel may now be mixed with 1 million gallons of in-spec fuel, with the potential that there are now 1.2 million gallons of off-spec fuel. The claim has just increased six-fold in size.

Third, as with any defective product, if the defect is not caught prior to retail distribution, the off-spec fuel can generate consumer claims, class action lawsuits and complaints from transportation and storage vendors saddled with bad product in their tanks, rail cars and trailers. In addition to damage to engines, some jurisdictions and contracts may allow recovery of economic damages including demurrage charges and lost revenue because tank cars, trailers and storage tanks are effectively out of commission until the off-spec fuel is removed or blended to meet specification (if that’s even an option).

What can be done to avoid or mitigate off-spec fuel issues? First, check your paperwork. It is important that every producer know the specification stated in a purchase order. Also, make sure that your lab is testing against that particular specification. European or special-use fuels may have subtly different tolerances for certain chemicals. Also, try to make sure that invoices and orders agree on where the product will be tested for compliance, whether at the producer’s point of origin or the destination.

In my experience, it is important for manufacturers to leave some margin for error when testing fuel. While a particular brand of lab testing equipment may be consistent when tested against other lab equipment made by the same manufacturer, that fact is not always true when cross-testing the same product with lab equipment made by different manufacturers.

Carefully consider all process changes. In the manufacturing world, many vendors are intimately involved in the process that goes into making the products that they buy. That is not usually true in the arena of commodities. Products are called commodities because they meet an accepted industry specification. This means that it is up to the producer to fully understand how any change in production or source material may alter the final result.

Once a problem is identified, file a claim with all insurance companies potentially having coverage. Resist the temptation to hold back filing a claim. I have seen too many executives try to get a problem handled without getting the insurance company involved because they are worried about increased premiums. I can guarantee that if you do not alert your insurance companies quickly enough, they will argue there is no coverage because of the delay.

After the insurance company has been contacted, it is the producer’s job to cooperate with the claims agent and any attorneys retained to defend the claim. Because of the valuable nature of fuel oil, the potential losses can be staggering. It’s important to contact all umbrella and excess carriers in case the claims exceed the limits of the main liability policy.

It’s not uncommon for insurance companies to deny coverage, even when it appears that the policy provides coverage. In some jurisdictions, there is almost no disincentive for insurance companies to deny coverage and to force their customers to get a ruling from the courts in order to enforce insurance policies. In that case, be prepared to handle the claim as quickly and economically as possible. Be sure to document the basis for each decision.

Author: James L. Pray
Attorney, BrownWinick Law Firm
[email protected]

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