Ontario Court of Appeal Decision Likely to Resonate in Covidian Business Loss Claims

Court of Appeal allowed insurer’s appeal, finding no ambiguity in corrosion exclusion, and underscoring importance of consistent interpretation of standard form insurance contracts.

Insurance law – All-risk insurance – Exclusions – Business interruption – Interpretation of policy – Damages – Economic loss – Practice – Appeals – Duties and liabilities of insurer

MDS Inc. v. Factory Mutual Insurance Co. (c.o.b. FM Global), [2021] O.J. No. 4577, 2021 ONCA 594, Ontario Court of Appeal, September 3, 2021, K.N. Feldman, A.L. Harvison Young and J.A. Thorburn JJ.A.

MDS Inc, agreed to buy radioisotopes from a particular supplier, for purposes of its global health science business. The insurer issued MDS a standard form policy covering all risks of physical loss or damage to property and contingent time element coverage resulting from a supplier’s business interruption. Coverage for loss of market or loss of use was generally excluded save to the extent provided by the policy. The policy specifically excluded coverage for losses caused by corrosion, which was not defined. The policy included an exception to that exclusion for resulting “physical damage not excluded by this Policy” at specified locations (and provided that if such physical damage occurs, only that resulting damage is insured). The parties agreed that the location of the subject reactor was property insured under the policy’s standard coverage.

Corrosion damage caused a shutdown of the reactor for 15 months. As a result, MDS lost its supplier of radioisotopes as well as substantial profits. The insurer denied coverage for the loss on the basis that the corrosion exclusion applied.

The trial judge held that (i) the term “corrosion” is ambiguous and should be interpreted in light of the dictionary definition of the term as modified by the reasonable expectations of the parties; (ii) the corrosion exclusion should be applied only to “non-fortuitous anticipated corrosion” (and not unanticipated “fortuitous corrosion”); and (iii) the exception to the corrosion exclusion for “physical damage not excluded by this Policy” should include economic loss resulting from the loss of use.

The insurer appealed on the basis that the trial judge erred in concluding that the term “corrosion” was ambiguous and should be interpreted to mean “the anticipated unpredictable process of corroding”, and that the exception to the exclusion for “physical damage” caused by corrosion was ambiguous and should be interpreted to include loss of use.

The Court of Appeal unanimously agreed with the insurer, finding that the term “corrosion”, albeit undefined in the policy, has a plain and ordinary meaning and therefore it was clear and unambiguous that physical loss or damage caused by corrosion was specifically excluded from coverage. Likewise, the Court agreed that there was no ambiguity in the exception to the corrosion exclusion; it specifically included “physical damage” and did not include damage resulting from loss of use. As the Court put it: “While economic loss may result from physical damage, it is not physical damage.”

This case was first published in the LexisNexis® Harper Grey Insurance Law Netletter and the Harper Grey Insurance Law Newsletter.

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