Sometimes "corrosion" Just Means "Corrosion": A Return To The Plain Meaning Of The Words Used

• Published date: 10 November 2021
• Subject Matter: Insurance, Litigation, Mediation & Arbitration, Insurance Laws and Products, Trials & Appeals & Compensation
• Law Firm: Clark Wilson LLP
• Author: Ms Samantha Ip and Kim Do

MDS Inc. v. Factory Mutual Insurance Company, 2021 ONCA 594

---

Last year, we commented on the Ontario Superior Court's decision in MDS Inc. v Factory Mutual Insurance Company (FM Global), 2020 ONSC 1924, which held that the loss of use of premises without actual tangible damage could constitute physical damage under an all-risks property insurance policy. We indicated that it was possible for that decision to be relied on by insureds to claim that they had sustained physical damage to premises affected by closures due to the COVID-19 pandemic in our article here.

In the recent decision in MDS Inc. v Factory Mutual Insurance Company, 2021 ONCA 594, the Ontario Court of Appeal overturned the lower court's decision and maintained a strict interpretation of physical loss, clarifying that it does not extend to economic loss. A summary of the decision is set out below. The decision signals that insureds will face an uphill battle when claiming coverage for economic losses caused by COVID-19.

Facts

Factory Mutual Insurance Company ("FM Global") issued a standard form all-risks insurance policy (the "Policy") to MDS Inc., a global health science company, and MDS (Canada) Inc., its Canadian subsidiary (collectively, "MDS"). The Policy covered all risks of physical loss or damage to property and a contingent time element coverage resulting from a supplier's business interruption.¹

On February 21, 2006, MDS agreed to buy radioisotopes from Atomic Energy of Canada Limited ("AECL") to be produced at the Nuclear Research Universal (the "NRU") reactor located in Chalk River, Ontario. On May 14, 2009, heavy water containing radioactive tritium was discovered leaking through the calandria wall of the NRU reactor. This leak was caused by corrosion that was "not expected". The reactor was shut down for 15 months to repair the leak. MDS ultimately lost its radioisotope supplier and profits of approximately CA$121,248,000.

On May 21, 2009, MDS submitted a claim to FM Global for these lost profits. On August 4, 2009, FM Global denied coverage on the basis that the loss was excluded under a corrosion exclusion.² The Policy did not define "corrosion". The Policy contained an exception to the corrosion exclusion for resulting "physical damage not excluded by this Policy". Here, the NRU constituted property of the type insured under the Policy's extended coverage (the Contingent Time Element Extended coverage) and that limit was US$25,000,000.³

The Lower Court's Decision

MDS...