On March 30, 2020, the Ontario Superior Court of Justice released its decision in the case MDS Inc. v. Factory Mutual Insurance Co., 2020 ONSC 1924. The case arose out of a denial of coverage by Factory Mutual Insurance (“FM”) after the insured Plaintiff MDS sought to recover under an all-risks policy (the “Policy”) for business losses. In finding that there was coverage for MDS’ loss under the Policy, the Court rejected the potential application of a number of exclusions in the Policy, as well as making comments regarding the availability of coverage in a scenario involving “loss of use” as opposed to direct physical damage.
The case is significant because it appears to be the first case in Canada to suggest that in the context of an all-risks property policy, resulting physical damage to property can include loss of use. At the same time, it must be noted that the “loss of use” in this case was nevertheless closely tied to physical damage. This appears likely to limit the potential applicability of the case as a future precedent to only those cases which involve loss of use as a result of or at least closely tied to physical damage. The comments in MDS regarding loss of use are also limited by the fact that they were made in obiter dicta, as they were unnecessary in light of the Court’s other findings. Finally, the claim in MDS arose in a relatively unique factual matrix and coverage scenario. The physical loss occurred not to MDS itself but rather at its suppliers’ facility. Further, the interpretation of “physical damage” in this case was within the context of an exemption to an exclusion clause in the Policy. Both of these factors add to the factual complexity of circumstances underlying the decision, and further suggest that the future precedent value of the comments in this case may be of limited applicability.
Factual Background
The Plaintiff MDS was engaged in a medical supply business that relied heavily on radioisotopes produced at the Nuclear Research Universal Reactor at Chalk River, Ontario (the “NRU”), one a few such production facilities in the world. On May 14, 2009, the NRU was shut down as a result of a leak of heavy water from the reactor core (the “Leak”). The shut-down lasted 15 months, and during that time MDS could not purchase radioisotopes from the NRU, resulting in a loss of profits to MDS in excess of $121 million. MDS submitted a claim to FM under its all-risks policy, which included an endorsement for loss of profits pursuant to the Policy’s Contingent Time Element coverage.
The Policy covered “property, as defined in the Policy, against ALL RISKS OF PHYSICAL LOSS OR DAMAGE, except as hereinafter excluded, while located as described in this Policy”.
The Contingent Time Element coverage covered, subject to exclusions, “Time Element losses including loss of profits to MDS flowing from physical damage to a supplier ‘directly resulting from physical loss or damage of the type insured by this Policy’ to a maximum of US$25,000,000.00”. The Court accepted evidence that the Contingent Time Element portion of the Policy was purchased for the type of loss that had arisen in the subject case, namely: “when a supplier experienced a physical loss affecting the supply of product and hence profits of the Plaintiffs”.
All parties agreed that, pursuant to the Contingent Time Element coverage, there would be coverage for loss of profits of MDS unless either the corrosion or nuclear radiation exclusions in the Policy applied.
One of the key factual issues before the court revolved around the cause of the corrosion that had led to the Leak. The evidence suggested that there had been an ongoing, relatively low-level corrosion which was known to the NRU, for a long period of time prior to the Leak. However, the Court ultimately accepted the expert evidence suggesting that the Leak was not caused by the ongoing, known corrosion (referred to by the Court as “non-fortuitous corrosion”). Instead, the Leak was found to have been caused by a separate type of “pitting” corrosion which was not anticipated and had apparently resulted from a chemically complex interaction of various constituents present within the reactor (referred to as “fortuitous corrosion”). Ultimately, the complex cause and nature of the fortuitous corrosion resulted in the NRU being shut down pursuant to a safety order, during which time necessary testing and repairs were conducted to repair the Leak and prevent risk of future such incidents.
Issues and Conclusions
The key issues before the Court and the Court’s conclusions were as follows:
The key issues before the Court and the Court’s conclusions were as follows:
- Issue: Are the Plaintiffs’ losses recoverable or do the corrosion or nuclear radiation exclusions in the Policy apply to exclude the loss from coverage?
Conclusion: The losses are recoverable. Neither the corrosion or nuclear radiation exclusions apply to the loss.
- Issue: If the corrosion exclusion applies, does the resulting damage exemption apply allowing the Plaintiff’s recovery?
Conclusion: If the corrosion exclusion had applied, the resulting physical damage exemption would have applied allowing recovery in any event. Given the conclusion on (1), these comments were in obiter.
- Issue: If there is resulting physical damage, does the idle period exclusion limit the period of time for the recovery of the resulting damage?
Conclusion: The idle period exclusion does not limit the period of time for the recovery of the resulting damage as there was no idle period on the facts of this case. Again, given the conclusions on (1) and (2),these comments were in obiter.
Issue 1: Application of Corrosion or Nuclear Radiation Exclusions
FM took the position that the corrosion that had caused the Leak fell within an exclusion clause in the Policy and thus was exempt from coverage. The wording in the Policy excluded coverage for corrosion in section C.3):
C. This Policy excludes the following, but, if physical damage not excluded by this Policy results, then only that resulting damage is insured: …
3)deterioration, depletion, rust, corrosion or erosion, wear and tear, inherent vice or latent defect. [Emphasis added.]
The Court rejected the application of this exclusion clause to the loss, finding the term “corrosion” to be ambiguous. Upon application of the principles of policy interpretation and the reasonable expectations of the parties, the court held that the corrosion exclusion was applicable only to “non-fortuitous, anticipated corrosion”, such as the ongoing, low-level corrosion which was known to NRU staff prior to the Leak, but which ultimately did not cause it. The Court held that the exclusion did not apply to the unanticipated, “fortuitous” type of corrosion that was ultimately found to have caused the Leak.
In addition to the corrosion exclusion, FM also sought to apply the nuclear radiation exclusion, on the basis that there was nuclear radiation present in the vicinity of the Leak and which may have played some role in contributing to the corrosive environment which led to the Leak. The nuclear radiation exclusion provided:
B. This Policy excludes loss or damage directly or indirectly caused by or resulting from any of the following regardless of any other cause or event, whether or not insured under this Policy, contributing concurrently or in any other sequence to the loss:
1) nuclear reaction or nuclear radiation or radioactive contamination. However:
a)if physical damage by fire or sprinkler leakage results, then only that resulting damage is insured; but not including any loss or damage due to nuclear reaction, radiation or radioactive contamination.
b)this Policy does insure physical damage directly caused by sudden and accidental radioactive contamination, including resultant radiation damage, from material used or stored or from processes conducted on the Insured Location, provided that on the date of loss, there is neither a nuclear reactor nor any new or used nuclear fuel on the Insured Location. This coverage does not apply to any act, loss or damage excluded in item B2f of this EXCLUSIONS clause.
The Court rejected FM’s position on this exclusion as well, holding that the exclusion was intended to apply to significant nuclear events, and not to the radiation which was a known part of operating the NRU and which was present within the reactor “on a chemical, microscopic level”. This conclusion was based in part on the Court’s observation that the exception was contained in a portion of the policy dealing with large-scale events such as terrorism and war, which indicated that it was most reasonably interpreted as applying to nuclear “events” rather than the “microscopic” radiation at issue in this case.
Issue 2: Resulting Physical Damage Exemption
As set out above, the wording of the corrosion exclusion in section C.3) of the Policy excluded corrosion but included resultant “physical damage not excluded by this Policy” where “that resulting damage is insured” (the “physical damage exemption”). As a result, the Plaintiff argued that even if the corrosion damage itself was exempt, the damage which resulted from the Leak was not excluded and thus, should still be covered.
In holding that the physical damage exemption would apply to the loss, the Court rejected FM’s argument that the presence of heavy water leaking between components within the reactor did not cause actual physical damage in the reactor. The Court instead accepted the Plaintiff’s argument that the presence of the heavy water resulting from the Leak constituted physical damage, since the character of the interior of the reactor was changed in an important way requiring shutdown of the facility. The Court then went on to state that “tangible damage” to the components of the reactor itself was not required in order to qualify for the exception to the corrosion exclusion, but that the loss of use of the NRU was contemplated within the scope of the resulting physical loss exemption. The Court made clear that this conclusion was within the context of an “impairment of function or use of tangible property” caused by the loss, such that there was still an apparent physical component:
[516] The Policy must be considered as a whole. The other provisions of the Policy including the loss of use exceptions, and the Contingent Time Coverage provisions, with specific regard to the period of liability when read with the resulting physical damage exception, all appear to confirm that loss of use of the NRU caused by the leak of heavy water would constitute resulting physical damage. The effect of the leak of heavy water rendered the NRU inoperable until the safety concerns and protocol imposed by the CNSC had been met.
[517] In assessing the objective reasonable expectation of the parties as to the meaning of physical damage, it makes common sense that if the unanticipated leak of heavy water from the calandria precipitates the shutdown of the NRU ordered by the CNSC to study and rectify the problem causing the leak, that this circumstance rendering the NRU inoperable would constitute resulting physical damage.
[518] Applying the principles of Ledcor to interpret the meaning of resulting physical damage, I conclude that a broad definition of resulting physical damage is appropriate in the factual context of this case to interpret the words in the Policy to include impairment of function or use of tangible property caused by the unexpected leak of heavy water.
[519] This interpretation is in accordance with the purpose of all-risks property insurance, which is to provide broad coverage. To interpret physical damage as suggested by the Insurer would deprive the Insured of a significant aspect of the coverage for which they contracted, leading to an unfair result contrary to the commercial purpose of broad all-risks coverage.
[520] For these reasons, I conclude in the facts of this case that the Plaintiffs have met their onus of proving that the leak of heavy water from the calandria to the J-rod annulus was resulting physical damage, and that if the corrosion exclusion applies, then the exception provisions of resulting physical damage apply allowing coverage for the Plaintiffs losses.
Issue 3: Idle Period Exclusion
FM argued that even if there was coverage, it should be limited to the time required to remedy the physical presence of the heavy water inside the NRU reactor, and not to any losses arising from the lengthy subsequent repair period. This argument was based on the Time Element Exclusion in the Policy:
TIME ELEMENT EXCLUSIONS
In addition to the exclusions elsewhere in this Policy, the following exclusions apply to TIME ELEMENT loss:
This Policy does not insure against:
A. Any loss during any idle period, including but not limited to when production, operation, service or delivery or receipt of goods would cease, or would not have taken place or would have been prevented due to:
1)physical loss or damage not insured by this Policy on or off of the Insured Location.
2)planned or rescheduled shutdown.
3)strikes or work stoppage.
4)any other reason other than physical loss or damage insured by this Policy.
In rejecting this argument, the Court concluded that the Time Element Exclusion did not apply on the facts of this case. In particular, the proximity in time and place between the damage and the resultant physical damage of the leak of water was such that no line between when the heavy water leak was remedied, and when the remainder of the repairs began. The court noted that “but for the leak of heavy water, the NRU would have been operational, and the Plaintiff would have been able to receive the isotopes it required and would not have suffered business losses”.
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