Physical Damage as a Trigger for Insurance Coverage
By Catherine DiMarco, LL.B., Heal & Co. LLP
Physical Damage, but no “physical damage”?
Once the COVID-19 curve flattens and the government sees fit to allow us to begin to resume social and business life less than six feet apart from others, and once we are fortunate enough to see a return to regularly-scheduled court attendances, whether in person or otherwise, we are likely to see a spate of cases relating to the COVID-19 pandemic across a wide range of practice areas.
In the construction world, parties have turned their minds to project shut-downs, force majeure provisions, and project delay, among other things. It is a fair conclusion that many contracting parties may not have turned their minds to the risk of a pandemic during negotiations, or clearly allocated of the consequences of such a risk. As lawyers we are often asked: “is this going to be a problem?”. Often, things aren’t a problem, until they are a problem.
In the recently-released decision in MDS Inc. v. Factory Mutual Insurance Company, 2020 ONSC 1924 (S.C.J.), the Court considered the insured MDS’s claim for business interruption coverage under its all-risks policy issued by Factory Mutual. The policy covered the property as described therein against losses from all risks of physical loss or damage, except as excluded. Typically, an insurance contract describes “perils insured” and then excludes certain risks from coverage, and may then “except” from the exclusion certain risks. The net effect of the last move is to put that part of the excluded risk back into coverage. For property policies, the usual trigger for coverage is “damage to the property insured” which is often understood in the sense of physical damage.
In this case, MDS purchased radioisotopes produced at the AECL reactor at Chalk River. In turn, MDS processed them for sale to be used for cardiac imaging, cancer treatment, and sterilization of medical products. Here, there was an unanticipated heavy water leak at the Chalk River reactor, causing a shut-down. The shut-down, originally anticipated to last for 36 hours, ultimately lasted 15 months. The heavy water leak did not cause physical damage to the reactor.
Because of the shut-down, MDS was unable to purchase the radioisotopes from AECL, and it submitted a claim for loss of profits to its own insurer. Factory Mutual denied the claim on the basis that the reactor had not sustained physical damage. In its statement of claim, MDS argued that it was entitled to coverage for business interruption losses arising out of the physical loss or damage to its suppliers’ property. It was conceded that MDS experienced loss of profits during the shut-down period of more than $120,000,000. The quantification of the loss was not in issue.
There were a number of issues before the court, including the meaning of the term “physical damage”, and whether it was to be defined narrowly to require actual physical damage, or whether, as MDS argued, physical damage should be defined broadly to include loss of use of the property insured. All-risk insurance, as the Court noted, is not “all loss insurance”, but rather something that covers only fortuitous or accidental losses, subject to express conditions or exclusions. Additionally, the Court noted, exceptions to exclusions should be interpreted broadly.
In the result, the Court concluded that the heavy water leak was resulting physical damage. Also, even if the corrosion exclusion applied (the Court held that it did not), the exception provisions of resulting physical damage also applied, allowing coverage for MDS’ losses. In other words, the court interpreted that term “physical damage” under the MDS policy was broad enough to include the loss of use of that property, even in the absence of actual physical damage to that property.
We can reasonably expect a number of claims in Canada relating to COVID-19, and whether coverage is provided in the particular circumstances of a matter, including whether the loss of use of business property arising as a result of the pandemic is a fortuitous or accidental loss which constitutes “property damage” pursuant to a particular policy so as to trigger coverage will likely become the matter of contentious debate in the coming months.
We are all guided when reading any court decision, but particularly decisions in insurance matters, that particular policy language is usually very specific, and decisions often turn also on an application of those specific policy language on the specific facts of each case. As always, insureds should consult with their lawyers and other advisors when considering whether or not to give notice of claim. There is usually no harm in making a claim for coverage, albeit care should be taken to maximize the arguments in favour of coverage. Also, care should be given to follow up within the appropriate limitations periods to ensure a denied claim, which may otherwise have merit, is properly pursued in time.