This is a coverage decision which focuses on the need for “physical damage” to trigger coverage. The Policy at issue contains a corrosion exclusion and an exception for resultant physical damage. This case could telegraph how the courts may approach cases involving loss of profits due to COVID-19.
MDS held an all-risk insurance policy which covered all risks of physical loss or damage to property, and included a contingent time element coverage resulting from a supplier’s business interruption. This means that lost profits flowing from physical damage to the property of the insured’s supplier are payable only if the physical loss or damage is of the type insured by the Policy. MDS supplies radioisotopes for medical purposes.
At MDS’s supplier, on May 14, 2009, heavy water containing radioactive tritium was discovered leaking through the calandria wall of the NRU reactor. The reactor was shut down for 15 months to repair the leak. The leak was caused by corrosion. As a result of the shutdown, MDS lost its supply of radioisotopes and lost profits of approximately CA$121,248,000. The only resulting physical damage was the leak in the calandria wall caused by corrosion. The presence of the leaking heavy water in the J-rod annulus did not cause actual tangible damage in the interior of the J-rod annulus; however it did shut down the equipment. As such, although the leak resulted in the shutdown, the shutdown itself is not resulting physical damage.
The only physical damage was in the form of corrosion which was excluded. The shutdown rather, was caused by the presence of heavy water in the system which did not damage it but none the less rendered it inoperable.
The Ontario Superior Court found that the presence of heavy water was sufficient to constitute physical damage because it impaired the functioning of the reactor. This decision was reversed by the Ontario Court of Appeal.
The exception to the exclusion for corrosion is restricted to “resulting physical damage” to MDS’ insured property or that of its suppliers. The plain meaning of physical damage does not include economic loss. Idled machinery is not injured or destroyed tangible property and, therefore, there is no ‘physical damage’ within the coverage of the policy.
The Court held that the exception to the corrosion exclusion for resulting physical damage includes physical damage, but not damage resulting from loss of use. While economic loss may result from physical damage, it is not physical damage.
This case is thought to be relevant to possible COVID claims as they too do not involve “physical damage” in the classical sense. To what extent the court are willing to take an expansive view of this requirement may demonstrate how COVID claims will also be handled.
MDS is in the process of seeking leave to appeal this decision to the Supreme Court of Canada.