By way of our April 16, 2020 article Commercial All-Risks Property Policies and Business Losses in the Age of COVID-19, partner Celeste Small provided a cogent analysis as to how commercial all-risk property policies may respond to business interruption claims arising from the COVID-19 shutdown based on a review of recent Canadian and American jurisprudence. Ms. Small summarized the Ontario Superior Court decision in MDS Inc. v. Factory Mutual Insurance Company (FM Global), 2020 ONSC 1924 as a case that may pave the way for our Courts to apply the broader interpretation of "physical damage" and extend coverage for business losses despite the lack of any tangible damage to insured premises. She expressed the view that this decision could have major implications for COVID-19 related business interruption claims. The Ontario Court of Appeal has recently overturned the Ontario Superior Court's decision and has maintained the strict interpretation of "physical damage" in the scope of business interruption coverage.
The Lower Court Decision
As outlined in Ms. Small's prior article, MDS Inc. brought a claim for business interruption coverage under an all-risks policy issued by its insurer after the facility from which MDS Inc. purchased radioactive isotopes was shut down for 15 months. The closure was due to a leak of heavy water through a chamber wall caused by unanticipated corrosion of the wall as a result of the presence of chlorine. The policy in issue included a Contingent Time Element Endorsement which covered loss of profits if a supplier was unable to furnish a project, subject to any relevant exclusions. The policy also included a Corrosion Exclusion which had an exception for resulting "physical damage" not otherwise excluded by the Policy.
The Ontario Superior Court ultimately determined that the Corrosion Exclusion did not apply to the loss. However, even if the exclusion had applied, the Court determined the exception would bring the losses back within coverage. The Court indicated that the leakage of heavy water (rather than corrosion of the chamber wall) presented an imminent threat (i.e. nuclear meltdown) which caused the facility's governing regulatory body to order it be shut down until a complete investigation was conducted and repairs implemented. As such, the physical loss or damage of the leak of heavy water was what triggered the closure and resulted in the losses to MDS Inc.
While the facility did not suffer tangible physical damage due to the presence of heavy water in the interior of the chamber, the Court found this event rendered the facility unusable which amounted to resultant physical damage which was covered under the exception to the Corrosion Exclusion. In effect, the Court held that the loss of use of the facility was encompassed within the meaning of "resultant physical damage".
While the Ontario Superior Court in in MDS Inc. made clear that its interpretation of resultant physical damage was largely dependent upon the specific wording of the policy and the factual matrix/context at issue when the policy was placed, it caused concern for the insurance industry; it opened the door for a Court to apply a broad definition of "physical damage" such that a business might be entitled to business interruption coverage if their business was rendered unusable even due to a non-tangible physical pathogen such as COVID-19.
The Court of Appeal Decision
On September 3, 2021, the Ontario Court of Appeal released their decision overturning the Ontario Superior Court decision on various grounds. Of central importance to insurers, the Court of Appeal found that the term "physical damage" in the exception to the exclusion was clear and went on to conclude that it does not apply to economic losses caused by the inability to use the equipment during the shutdown.
The appeal was brought on two central policy-related grounds, in addition to a general standard of review appeal and an appeal regarding pre-judgment interest:
- Whether the trial judge erred in concluding that the term "corrosion" was ambiguous and should be interpreted to mean "the anticipated and predictable process of corroding"; and
- Whether she erred in finding that the exception to the exclusion for "physical damage" caused by corrosion in the Policy was ambiguous and should be interpreted to include loss of use.
Starting at paragraph 29 of the decision, the Court of Appeal discussed the proper interpretation of the insurance policy. First, the Court rightly agreed with the lower Court that the Policy is an all risks policy that covers all risks of physical damage except where specifically excluded. The main exclusion and exception at issue before the Court is reproduced below:
A. This Policy excludes:
3) loss of market or loss of use, except to the extent provided by this Policy.
C. 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 or erosion, wear and tear, inherent vice or latent defect. [Emphasis added.]
The Court of Appeal held that this Exclusion, and the exception thereafter, meant that, if an excluded peril (such as corrosion) caused physical damage not excluded by the Policy, that resulting damage (and only that resulting damage) was insured. In tandem with the contingent time element section of the Policy, the Policy provided for economic losses including loss of profits arising from physical damage up to a maximum of US$25,000,000. As such, MDS's argued that resulting damage included economic losses due to the 15-month government ordered shutdown.
After a general review of how insurance policies should be interpreted by the Court, the Court of Appeal first found that the term "corrosion" was not ambiguous and that the loss that occurred was excluded by the "corrosion" exclusion.
As referenced above, the most important portion of the decision to insurers begins at paragraph 79 wherein the Court interprets the meaning of "physical damage" in the scope of the Policy at issue. The Court rightly framed the issue on appeal as follows: "The question on this appeal was, if the corrosion exclusion applies, whether the damage suffered by MDS resulting physical damage within the meaning of the exception to the exclusion for corrosion in the Policy."
The implications are clear for COVID-19 related business interruption claims: if physical damage were afforded a broad meaning (as found by the Ontario Court of Appeal in MDS), it is possible that a Court could find a shutdown caused by COVID-19 created "physical damage" thereby providing coverage for economic losses suffered during a COVID-19 shutdown in similarly worded policies.
Resoundingly, the Court of Appeal in MDS held that the plain meaning of resulting physical damage does not include economic loss based on the fact that the majority of cases in Canada, the United States and the United Kingdom have not interpreted resulting physical damage to extend beyond physical repairs to include loss of use and therefore, economic loss. Had there been actual physical damage in this case, economic loss might have been covered under the policy.
At this time, it does not appear that MDS has filed for leave to appeal this decision to the Supreme Court of Canada.
Implications for COVID-19 Related Claims
The proposition still remains that current American and Canadian cases appear to find that "physical damage" may include loss of use of property which has not suffered any actual, tangible corporeal damage if the premises is rendered unusable or uninhabitable by a covered cause of loss. However, the Ontario Court of Appeal has clarified that this does not extend to economic loss. This may nullify the possibility of a restaurant establishing that COVID-19 is a covered loss that has rendered the insured premises unusable, therefore entitling them to a claim for business interruption coverage.
While it appears possible that a business could show that COVID-19 is a covered loss entitling them to a loss of use claim arising from the inability to use the premises, it appears that the Court would stop short of allowing economic losses (business interruption) to flow from that coverage.
Of course, it is possible that a Court could find that a COVID-19 ordered shutdown is different from what occurred in the MDS case, but the cases are sufficiently similar to be considered analogous and persuasive to Courts making determinations of COVID-19-related claims. Further, it is important to remember that the interpretation of an insurance policy requires a careful examination of the specific policy at issue. Analogous case law can be used to aid the interpretation, but in each case, the Court must analyze the policy at issue as a whole. In any event, the Ontario Court of Appeal's case certainly deals a direct blow to business owners who are evaluating the possibility of bringing business interruption claims to their insurers arising from COVID-19 related shutdowns.
About Mackrell International - Canada - Scott Venturo LLP is a full service business law firm in Calgary, AB and a member of Mackrell International. Mackrell International - Canada is comprised of four independent law firms in Alberta, British Columbia, Ontario and Quebec. Each firm is regionally based and well-connected in our communities, an advantage shared with our clients. With close relations amongst our Canadian member firms, we are committed to working with clients who have legal needs in multiple jurisdictions within Canada.
This article is intended to be an overview and is for informational purposes only.