THE INSURANCE CONTRACT – Cover provisions and exclusion clauses

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Appeal by insurer FM Global from a trial judgment finding it liable for losses suffered by its insured, MDS, for losses resulting from the unexpected shutdown of MDS’s radioactive isotope supplier. The shutdown was caused by a heavy water leak caused by unexpected corrosion of a reactor wall. FM Global issued an all-risk insurance policy to MDS which covered all risks of physical loss or property damage and contingent time element coverage resulting from a business interruption of a supplier. The policy excluded coverage for losses caused by corrosion. The term “corrosion” has not been defined. Lost profits arising from property damage to property of the insured’s supplier were only payable if the property loss or damage was of the type insured by the policy. The policy did not define the resulting physical damage. The parties agreed that the supplier’s reactor was an asset of the type insured under the extended coverage of the policy. Due to the shutdown, MDS lost its radioisotope supplier and lost profits of $ 121,248,000. FM Global refused to cover the loss on the grounds that the corrosion exclusion applied. The trial judge concluded 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 concluded that the exclusion did not apply to unforeseen and fortuitous corrosion, but only to anticipated non-fortuitous corrosion. In addition, the exception to excluding corrosion for physical damage should be interpreted broadly to include not only physical damage caused by corrosion, but also economic loss caused by the inability to use the property. insured during closing.

DECISION: Appeal allowed. The trial judge erred in concluding that the term “corrosion” was ambiguous and in ruling that losses other than physical damage 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 corrosion damage was a loss specifically excluded from policy coverage. Incidental or unforeseen corrosion was not covered by the policy. Defining “corrosion” to include both anticipated and unforeseen corrosion was consistent with business reality, clear policy terms, and the need to interpret standard form policies consistently and objectively because parties do not have not negotiated the terms. If the exclusion of corrosion were interpreted as applying only to non-fortuitous or anticipated corrosion, as the trial judge held, the exclusion would be meaningless since non-fortuitous or anticipated corrosion was not covered in the first place since all damages covered by the policies must be incidental. The corrosion exclusion thus applied and losses of MDS 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 exclusion of corrosion did not include coverage for economic losses since the exception to the exclusion of corrosion was limited to physical damage resulting from insured property of MDS or its suppliers. The ordinary meaning of physical damage did not include economic loss. A contextual analysis of the Policy did not lead to a broader interpretation of the resulting physical damage. The only physical damage that resulted was the leak in the grille wall caused by corrosion. The exception to the exclusion of corrosion for resulting physical damage included physical damage, but not damage resulting from loss of use. While economic loss can result from physical damage, it is not physical damage.

MDS Inc. v. Factory Mutual Insurance Co. (cob FM Global), [2021] JO # 4577, Ontario Court of Appeal, KN Feldman, AL Harvison Young and JA Thorburn JJ.A., September 3, 2021. Reports # TLD-September272021009


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