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THE INSURANCE CONTRACT - Coverage provisions and exclusion clauses

Friday, October 01, 2021 @ 6:36 AM  

Lexis Advance® Quicklaw®
Appeal by the insurer, FM Global, from trial judgment finding it was liable for losses incurred by its insured, MDS, for losses resulting from the unplanned shutdown of MDS’s supplier of radioactive isotopes. The shutdown was caused by a leak of heavy water caused by unanticipated corrosion of a reactor wall. FM Global issued MDS an all-risk insurance policy which covered all risks of physical loss or damage to property and contingent time element coverage resulting from a supplier’s business interruption. The Policy excluded coverage for losses caused by corrosion. The term “corrosion” was not defined. Lost profits flowing from physical damage to the property of the insured’s supplier were payable only if the physical loss or damage was of the type insured by the Policy. The Policy did not define resulting physical damage. The parties agreed that the supplier’s reactor constituted property of the type insured under the Policy’s extended coverage. Because of the shutdown, MDS lost its supplier of radioisotopes and lost profits of $121,248,000. FM Global denied coverage for the loss on the basis that corrosion exclusion applied. The trial judge held that the term corrosion was ambiguous and should be interpreted in light of the dictionary definition of the term as modified by the reasonable expectations of the parties. He held the exclusion did not apply to unanticipated and fortuitous corrosion but only applied to non-fortuitous anticipated corrosion. Furthermore, the exception to the corrosion exclusion for physical damage should be interpreted broadly to include not just physical damage caused by the corrosion but economic loss caused by the inability to use the insured property during the shutdown.

HELD: Appeal allowed. The trial judge erred in finding that the term “corrosion” was ambiguous and in deciding that losses other than physical damages were covered. Read in the context of the Policy as a whole, the meaning of the word corrosion was clear. It was clear and unambiguous that physical loss or damage caused by corrosion was a loss that was specifically excluded from coverage in the Policy. Fortuitous or unanticipated corrosion was not covered by the Policy. Defining “corrosion” to include both anticipated and unanticipated corrosion was consistent with commercial reality, the clear terms of the Policy, and the need to interpret standard form policies consistently and objectively because the parties did not negotiate terms. If the corrosion exclusion were interpreted to apply only to non-fortuitous or anticipated corrosion, as the trial judge held, the exclusion would be meaningless as non-fortuitous or anticipated corrosion was not covered in the first place since all damage covered by all-risk policies must be fortuitous. The corrosion exclusion thus applied and MDS’ losses were not covered by the Policy. The term physical damage in the exception to the exclusion clause was also clear. It did not apply to economic losses caused by the inability to use the equipment during the shutdown. The exception to the corrosion exclusion did not include coverage for economic loss since the exception to the exclusion for corrosion was restricted to resulting physical damage to MDS’ insured property or that of its suppliers. The plain meaning of physical damage did not include economic loss. A contextual analysis of the Policy did not lead to a broader interpretation of resulting physical damage. The only resulting physical damage was the leak in the calandria wall caused by corrosion. The exception to the corrosion exclusion for resulting physical damage included physical damage, but not damage resulting from loss of use. While economic loss might result from physical damage, it was not physical damage.

MDS Inc. v. Factory Mutual Insurance Co. (c.o.b. FM Global), [2021] O.J. No. 4577, Ontario Court of Appeal, K.N. Feldman, A.L. Harvison Young and J.A. Thorburn JJ.A., September 3, 2021. Digest No. TLD-September272021009