FM Global appeals $25-million BI award arising from reactor shutdown

Factory Mutual is appealing an Ontario court ruling that included a finding that “resulting physical damage” can mean loss of use.

David Liblong, a partner with Liblong Digambar Professional Corporation, told Canadian Underwriter Wednesday that the insurer is appealing MDS Inc. v. Factory Mutual Insurance Company, released Mar. 30 by the Ontario Superior Court of Justice.

Liblong is representing FM Global. Liblong said FM Global is also retaining Paul Pape, partner with Pape Chaudhury LLP, to work on its appeal.

MDS did not arise from the COVID-19 pandemic, but was considered significant because some businesses that were forced to shut down because of COVID-19 are arguing their loss of use of their properties amount to physical damage for the purpose of their policies.

In the case of FM Global, its client MDS was purchasing medical radioisotopes produced by Atomic Energy of Canada Ltd.’s reactor at Chalk River, Ont. That reactor was shut down in 2009-10 by the Canadian Nuclear Safety Commission so that AECL could inspect and repair a leak.

Related: Insurer ordered to pay $21 million in interest on a $25-million court award

Because of the specific facts of that case, and by reading the FM Global policy as a whole, Justice Janet Wilson concluded that loss of use constituted physical damage. MDS was awarded $25 million for its loss of income.

“I am sure everyone is going to be looking to that decision as a pretty landmark decision as far as the insurance industry goes,” Tim Zimmerman, a partner with RSM Canada’s valuation and litigation accounting services, said in an interview last week about business interruption claims during the pandemic.

The Chalk River reactor from which MDS was buying material for nuclear medical use has a calandria, where the radioactive activity takes place. The J-rod annulus is a 10-centimetre compartmentalized space running the entire height and circumference of the calandria. There is also an outer layer known as a reflector.

The J-rod annulus is not supposed to contain water. Nonetheless, water was leaking from the reflector into the J-rod annulus before the reactor was ordered shut down.

MDS filed a claim, saying that during the shutdown, it could not buy radioisotopes from AECL.

FM Global denied the claim based on policy exclusions related to corrosion and nuclear material. Justice Wilson ruled that neither of those exclusions applied.

Specifically, the corrosion exclusion contains an exception for resulting damage. Even if the corrosion exclusion did apply, the exception for resulting damage also applied, Justice Wilson wrote.

FM Global argues that 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, and this was not disputed.

But reading the policy language as a whole and due to the specific facts of the MDS case, Justice Wilson said a broad definition of physical damage – to include impairment of function or use of tangible property caused by the unexpected leak of heavy water – should apply.

The leak of heavy water rendered the nuclear reactor at Chalk River unusable because it was ordered shut down by the CNSC, Justice Wilson wrote. One of the cases cited as was the 1968 Colorado court decision in Western Fire Ins. Co. v. First Presbyterian Church. In that case, the Colorado court ruled that when a building is declared uninhabitable, this amounts to direct physical loss.

Physical damage was not defined in the policy FM Global wrote for MDS.

“There are conflicting lines of cases on how to interpret the meaning of resulting physical damage,” Justice Wilson wrote. “There is no definitive decision defining the meaning of resulting physical damage in all-risks policies in Canada. The meaning of the term is considered in light of the specific wording in each policy as well as legal and factual context.”

She added that “resulting damage,” “physical damage,” “resulting physical damage,” or “resultant physical damage” are not defined in either Black’s Law Dictionary or Halsbury’s Laws of Canada.

Feature image via iStock.com/Nikada