Corrosion Exclusion Denied Due To Ambiguity

• Published date: 26 June 2020
• Subject Matter: Corporate/Commercial Law, Insurance, Litigation, Mediation & Arbitration, Corporate and Company Law, Insurance Laws and Products, Trials & Appeals & Compensation
• Law Firm: McCague Borlack LLP
• Author: Mr Hillel David

This author disagrees with the determination in case: MDS Inc. v Factory Mutual Insurance

The interpretation of a corrosion exclusion was one of the major issues considered in the recent decision in MDS Inc. v Factory Mutual Insurance Company.¹ For reasons outlined below, I believe the interpretation and determination regarding its applicability in the circumstances of the case were incorrect.

A number of other issues were considered, including the interpretation and application of an exception contained in the corrosion exclusion, but those are beyond the scope of this paper, other than to say that it is questionable whether the exception to the exclusion would have saved and protected all or part of the claim under the policy even had the corrosion exclusion been found applicable. The exception is plainly directed to the preservation of coverage for resulting physical damage, whereas the vast bulk of the claim appears to have consisted of resulting economic loss.

Factual background

A leak of heavy water coolant containing a radioactive element occurred at the Nuclear Research Universal Reactor (referred to in the reasons for judgment as the NRU) in Chalk River, Ontario. The leak was discovered during the course of a generalized power shutdown in Eastern Ontario and Quebec which automatically triggered a shutdown of the NRU. Although the leak was small, the NRU was shut down, ultimately for a period of 15 months, for defueling, drainage of the heavy water, identification, investigation, and repair of the leak location and other pre-leak corroded areas, and to satisfy the regulator's protocols. The plaintiffs were insureds under an all-risk policy and claimed to have lost approximately $121 million, mostly due to loss of sales of medical isotopes and other material that could not be produced during that period of shutdown. There was coverage under the policy for this type of claim in the amount of $25 million.

The leak consisted of a single, isolated, small penetration in the wall of the calandria, a vessel or tank which contained the heavy water, resulting in the water entering what was known as the J-rod annulus. The leak was localized, unexpected, and was the result of an accelerated process. There were a further nine sites of similar localized, unexpected, and accelerated corrosion which had not yet penetrated the calandria wall. A finding of fact was made that the leak, and the other nine corrosion sites which had not yet progressed to the stage where there was a leak, were due to corrosion, which in turn had been caused by the unknown and unanticipated presence of a contaminant/aggressive agent, probably chlorine.

Interestingly, there was generalized corrosion of the outside walls of the calandria, but that corrosion had been ongoing for several decades (1974 to 2009) and was the result of nitric acid in the J-rod annulus that was created by water leaking from the reflector. The operator of the NRU (the AECL) had known about the presence of that generalized corrosion for many years, although it was not considered to be dangerous or yet to require remedial action.

The court drew a clear distinction between the two types of corrosion.

1. The localized corrosion which caused the penetration of the calandria wall (and the nine other pre-leak sites), had been quick-acting and was not known to be present. This was classified and treated as fortuitous corrosion. It was found to be unanticipated/unexpected, unpredictable, and accidental corrosion.²
   
   
2. The generalized corrosion, on the other hand, was classified as non-fortuitous corrosion, because not only was it anticipated/expected and normal, it was actually known to be present and was monitored.

The insurer acknowledged that the corrosion which caused the leak was fortuitous, in that it was unique, unexplained, unexpected, and unknown.

The corrosion exclusion

The exclusion provided as follows:

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...

The court's interpretation of the exclusion

The court started from the premise that '[The insurer] must show that an exclusion clearly and unambiguously excludes coverage.'³

The word 'corrosion' was not defined in the policy. The parties agreed that it was to be interpreted in its normal, ordinary, everyday meaning, rather than in accordance with any scientific definition. The court arrived at the following definition:

I conclude that the definition of corrosion for the Policy in this case, having regard to the Policy considered as a whole, the factual context and the reasonable expectation of the parties is: 'The anticipated and predictable process of corroding, esp. of a rusting metal.' 'Corrode is...