The novel coronavirus causing the COVID-19 infection is likely to impact insurers in several ways. In addition to an anticipated decrease in premium collection due to cancellation of policies, and a probable shrinking of investment returns, it is anticipated that there will be numerous claims that arise from the pandemic, including business interruption claims.
The 30 March 2020 decision of the Ontario Superior Court of Justice in MDS Inc. v. Factory Mutual Insurance Company (FM GLOBAL), 2020 ONSC 1924 (CanLII) has been touted by some as a decision that could potentially impact COVID-19 business interruption claims under all-risks property policies. This case comment considers that issue.
THE DECISION
MDS purchased radioisotopes produced at Atomic Energy of Canada Limited’s Nuclear Research Universal Reactor (“NRU”) in Chalk River, Ontario. Radioisotopes are used for cardiac imaging, cancer treatment and sterilization of medical products.
On May 14, 2009 an unexpected leak of heavy water containing radioactive Tritium was discovered at the NRU. Pitting corrosion on the outside of the reactor vessel caused by an agent, probably chlorine, in the water from the Ottawa River had caused water to leak inside the reactor. The unexpected leak and the Tritium levels triggered mandatory reporting to the regulator. The regulator required the NRU to be shut down until the source of the leak was identified, and a safety protocol had been met.
At the time of the shutdown, Factory Mutual had issued an all-risks property insurance policy to MDS from all risks of physical loss or damage (this term was undefined) except as excluded. MDS made a business interruption claim related to its radioisotopes lost as a result of the shutdown of the NRU.
Factory Mutual conceded that the NRU constituted insured property under the subject policy. It conceded that MDS experienced lost profits during the shutdown period. However, Factory Mutual denied indemnification on the basis that exclusions applied.
One of the exclusions at issue was the corrosion exclusion. The Court found that it did not apply. The corrosion exclusion contained an exception for resulting physical damage. The Court found that had the corrosion exclusion applied, the exception to the exclusion would have allowed indemnity.
On this issue, Factory Mutual argued that the exception did not apply because the penetration of water into the reactor did not cause physical damage to it. The damage was to the outer area due to corrosion.
Physical damage was not defined in the policy, leaving the interpretation to the Court. The Court made the analogy to vapours from substances such as oil causing shutdown of a facility. The Court held that it was not necessary for the physical damage to be limited to areas of the pitting corrosion only; the loss of use of the facility caused by the water penetration was sufficient to qualify as physical damage under the subject policy.
POTENTIAL IMPACT ON COVID-19 BUSINESS INTERRUPTION CLAIMS
The potential impact of this case on COVID-19 business interruption claims is questionable. The MDS case is, at its heart, a water damage case. Because the policy did not define the key term of “physical damage”, the Court interpreted it very liberally to include loss of use.
The Court arguably conflated liability policy and property policy concepts. The majority view in Canada has tended to be that some sort of physical damage is required to trigger a property policy; whereas loss of use is a coverage trigger in commercial general liability policies. As such, this part of the decision, which is obiter, was arguably decided using liability policy concepts. In any event, the case appears to be on appeal.
Even assuming that liability policy concepts can be used to interpret property policies, it should not be forgotten that there was a substance causing property damage in the first place in this case. An agent in water caused corrosion damage to part of property allowing water to penetrate other parts of the property. While parts of the NRU might have been capable of containing heavy water, clearly the part that had water penetration was not. Simply put, the inner section of the reactor could not function with water in it, even though water did not strictly cause ‘damage’ in the same way as corrosion damage. If damage equates to functionality as per the Court’s analysis, then the inner section was not functional due to the heavy water.
How does a virus on the premises compare? If a virus were present in the inner section of the reactor, chances are the reactor would still be functional. Similarly, if a virus is present in a supermarket, apart from the store having to sterilize its products, the premises can still function, unlike if there was a flood or fire. As such, even using the Court’s analysis in MDS, it is questionable whether a virus would have triggered the MDS policy in question.
There is a practical aspect to this as well. It is not difficult to detect fire damage, water damaged, etc. However, there is a plethora of bacteria and viruses all around us which we cannot detect. If the presence of such organisms could ‘damage’ property, how would one detect that damage? Moreover, would that ‘damage’ extend to the potential presence of the organism?
Accordingly, the MDS case should not materially impact COVID-19 business interruption claims under all-risks policies because, exclusions aside, courts will still have to decide whether the presence or potential presence of the virus constituted damage to property in accordance with the subject policy. The wording of each policy and specific facts of that case will be paramount to any comparison to the MDS case.
