The March 30, 2020 decision of the Ontario Superior Court of Justice in MDS v. Factory Mutual flows from an unanticipated leak of heavy water containing radioactive Tritium discovered to be draining through a wall within the nuclear reactor at Chalk River operated by Atomic Energy of Canada ("AEC") into an area of the reactor known as J-rod annulus. Some of the heavy water evaporated which resulted in Tritium being released into the building's ventilation system. The leak triggered a Canadian Nuclear Safety Commission requirement that the reactor be shut down until the source of the leak was identified and the Commission imposed a safety protocol that had to be complied with before the reactor was re-started 15 months later.
MDS purchased radioisotopes from AEC that were produced in the reactor and MDS sold them for profit for use in cardiac imaging, cancer treatment and the sterilization of medical products.
MDS experienced lost profits exceeding $120 million CAD as a result of the shutdown and it had an all risk policy (the "Policy") underwritten by Factory Mutual covering described property against losses from all risks of physical loss or damage except as excluded. The Policy provided MDS with coverage with a limit of $25 million USD for the loss of profits flowing from physical loss or damage at suppliers' locations. The decision is 111 pages and it deals in detail with a number of issues. This article will focus on the physical damage issue.
Before dealing with the physical damage issue, Justice Wilson dealt with the corrosion exclusion in the Policy and concluded that this exclusion did not apply. There were 2 types of corrosion that occurred within the reactor. There was known, anticipated generalized corrosion resulting in the predictable thinning of the reactor wall which this was the type of corrosion contemplated by the corrosion exclusion. The second type of corrosion was unanticipated localized corrosion that penetrated through the reactor wall at a location known as J-41. It was the localized corrosion that caused the heavy water leak and the Court concluded that the corrosion exclusion did not apply to the localized corrosion at J-41.
The physical damage issue
After concluding that the corrosion exclusion did not apply, Justice Wilson asked if another court were to conclude that she was wrong in reaching that conclusion, whether the resulting physical damage exception to the corrosion exclusion applied to allow coverage.
The Policy said:
"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 …" (emphasis added)
The Court noted that the Policy did not define "physical damage" and set out the positions taken by MDS and by Factory Mutual
- MDS asserted that resulting physical damage included the loss of use of the reactor as a result of the heavy water leak.
- Factory Mutual asserted that to qualify as resulting physical damage there had to be actual tangible damage to the reactor caused by the leak of heavy water.
The Court noted that there are 2 lines of cases:
- Cases that take a broad or expansive view of physical damage that includes not only tangible damage but also the impairment of use or function (cases of assistance to MDS).
- Cases that take a narrow or restrictive view of physical damage that limit it to corporeal, tangible damage (cases of assistance to Factory Mutual).
After considering the 2 lines of authority, the Court concluded that in assessing the objective reasonable expectation of the parties as to the meaning of "physical damage", it makes common sense that if the unanticipated leak of heavy water precipitated the shutdown of the reactor in order to study and rectify the problem causing the leak, that this circumstance rendering the reactor inoperable would constitute resulting physical damage. The Court said:
"…I conclude that a broad definition of resulting physical damage is appropriate in the factual context of this case to interpret the words of the Policy to include impairment of function or use of tangible property caused by the unexpected leak of heavy water.
This interpretation is in accordance with the purpose of all-risks property insurance, which is to provide broad coverage. To interpret physical damage as suggested by the Insurer would deprive the Insured of a significant aspect of coverage for which they contracted, leading to an unfair result contrary to the commercial purpose of broad all-risks coverage.
For these, reasons I conclude in the facts of this case that the Plaintiffs have met their onus of proving the leak of heavy water…was resulting physical damage…".
What does this mean in the context of business interruption loss claims arising from COVID-19?
Short answer: Probably not much.
Longer answer: In order to analyze whether this decision will be significant, paving the way for successful business interruption loss claims arising from the COVID-19 pandemic, it might be helpful to assume a set of facts that MAY be common to many businesses as a result of the pandemic:
- Assume a business has an all risk insurance policy with traditional coverage for direct physical loss or damage to property.
- The business suffers a financial loss due to the economic downturn caused by the COVID-19 pandemic.
- The business has no evidence that the COVID-19 virus was present on the property of the business.
It is the author's view that the facts and reasoning of the Court in MDS v. Factory Mutual, where the unanticipated leak of radioactive water within a nuclear reactor due to corrosion was found to constitute physical damage, would be unlikely to pave the way for a court to conclude that in our hypothetical situation, there was direct physical loss or damage to property in the absence of evidence of the presence of the virus on the business's property.