Consideration Of "Physical Damage" After MDS: Prosperity Electric V. Aviva

• Published date: 21 October 2020
• Subject Matter: Insurance, Litigation, Mediation & Arbitration, Coronavirus (COVID-19), Insurance Laws and Products, Trials & Appeals & Compensation, Insurance Claims
• Law Firm: Clark Wilson LLP
• Author: Mr Satinder Sidhu

Inc. v. Factory Mutual Insurance Company (FM Global), 2020 ONSC 1924, where it was held that loss of use of premises without actual tangible damage can constitute physical damage under an all-risks property insurance policy. As set out in our previous article found here many have surmised that MDS has built the necessary bridge for parties to make COVID-19 related insurance claims. MDS is an important decision to keep an eye on as it expands on what may be considered physical damage in the context of property insurance coverage in Canada.

MDS was recently distinguished by Madam Justice Fitzpatrick in the B.C. Supreme Court decision Prosperity Electric v. Aviva Insurance Company of Canada, 2020 BCSC 1171. In that case the plaintiff operated a proprietorship selling electrical equipment. He advanced an indemnity claim for loss and damage to certain stock under an Aviva commercial first party property policy. The damage was alleged to have been caused by a fire adjacent to the plaintiff's place of business (the "Premises") but the fire did not spread to the Premises. The plaintiff alleged that smoke deposits from the fire resulted in chloride contamination of some of the stock at the Premises.

Aviva carried out tests on the stock and its engineer concluded that the level of contamination was either zero or so minor that the stock could be easily reconditioned. Aviva denied coverage on the basis that the stock did not sustain "direct physical loss or damage.

To determine whether the chloride contamination amounted to "physical loss of or damage" to property, Fitzpatrick J relied on the definition of physical damage in Acciona Infrastructure Canada Inc. v. Allianz Global Risks US Insurance Company, 2014 BCSC 1568 where it was held that physical damage denotes an alteration in appearance, shape, colour or other material dimension of the property insured. Fitzpatrick J. found that there was no evidence of chloride contamination on all of the stock and any stock that was affected, the chloride could be removed. Accordingly there was no evidence of physical alteration in a "material dimension", giving rise to any "physical loss of or damage" to the property.

The plaintiff relied on MDS and argued that the definition of "physical loss of or damage" includes an impairment of function. MDS involved a leak at a nuclear facility, requiring the facility to shut down for some time even after the leak was repaired to ensure safety protocols were met. The insured claimed...