In many cases, parties approach pre-judgment interest ("PJI") as a mechanical exercise, applying rates set out under the Courts of Justice Act ("CJA") and calculating them on a simple interest basis. In MDS Inc. v. Factory Mutual Insurance Company (FM Global), 2020 ONSC 1924, the Ontario Superior Court considered when it is appropriate to depart from this standard approach in favour of an interest award based on the actual interest rates paid by the plaintiff and calculated on a compound basis aimed at more fairly compensating the plaintiff for its actual loss.
MDS made a claim for loss of profit under its insurance policy. MDS had suffered a loss of profits following the shutdown of a nuclear facility that supplied MDS with the radioisotopes it was in the business of selling to the medical market. The insurer denied coverage and the parties engaged in a decade long legal dispute.
Among the many issues raised in the litigation, MDS claimed it was entitled to PJI equal to the cost of its borrowing over the previous 10 years due to the lack of cash flow brought about by the denial of coverage. The cost of MDS's borrowing was considerably higher than the PJI under the CJA. The insurance policy itself was silent on what interest rate would be applicable in the event that a claim pay out was delayed due to a denial of coverage. The insurer argued this silence indicated an intention by the parties to apply a simple interest calculation under the standard PJI rates under the CJA. The Court rejected this argument.
Factors the Court Considered
The Court awarded MDS a PJI payment equal to its actual cost of its borrowing calculated on a compound basis. In doing so, the Court relied on its statutory discretion under the CJA to vary the standard PJI rate where it considers it "just to do so". The difference in the MDS case between a simple interest calculation under the rates provided for in the CJA versus the actual average rate of borrowing calculated on a compound basis was considerable -- $1.6 million versus $12+ million.
The Court highlighted, among other things, the following factors in concluding that it was just in these circumstances to award the enhanced PJI award:
- Notice: MDS gave clear notice in its statement of claim that it was seeking all losses, damages and expenses flowing from the insurer's refusal to pay in accordance with the insurance policy, which included its out of pocket borrowing expenses during the relevant period.
- Duty of Utmost Good Faith: The relationship between an insurer and the insured is one of mutual dependency and gives rise to a legal obligation of "utmost good faith", which is a duty that exists from the formation of the agreement to its enforcement. While the insurer did not act in bad faith, the Court held that the insurer remained steadfast in its "no coverage" position notwithstanding mounting evidence that its position was not supported by the facts.
- Specific Knowledge: The insurer had specific knowledge of how vulnerable MDS' business was in the face of the denial of coverage. The Court found that the insurer had knowledge that MDS required funds to purchase radioisotopes from alternative sources in order to continue its business and could not wait for the resolution of its 10+ year fight with the insurer. In other words, the insurer had specific knowledge that MDS would have to cover the lack of insurance proceeds by borrowing funds.
- Loss Provable: According to the Court, the evidence of the actual borrowing costs claimed by MDS was clear and undisputed.
In addition to these factors, the Court considered the inequity that would result from a traditional PJI award. According to expert evidence, the insurer earned over $17M in profit on the moneys that it was ultimately ordered to pay to MDS, and MDS' actual borrowing costs resulting from not being paid out on its claim were over $12M. Awarding PJI under standard CJA rates on a simple interest basis would have resulted in a $1.6M award. The Court considered this to be an unjust result, as it would not fairly compensate MDS for its actual loss and would allow the insurer to earn a significant profit on a claim that it was held to have wrongfully denied.
The Court in MDS cited numerous cases over the last 30 years that demonstrate an increased receptivity by the courts to depart from the traditional view of compound interest calculations as punitive or usurious. These cases highlight a greater appreciation of the time value of money.
In light of the MDS decision, we expect some insurers will protect themselves by expressly providing in their insurance policies that interest rates for all payouts, irrespective of whether coverage is accepted or denied, will be the rates set under the CJA calculated on a simple interest basis. However, the Court's analysis in this case is not limited to insurance claims. Namely, the common law principle of compensating plaintiffs for their losses – i.e. making plaintiffs whole – may increasingly be extended to PJI awards.
Note: A notice of appeal has been filed in the MDS case.