Canadian Underwriter

How Canada’s top court just bolstered pandemic BI exclusions

April 1, 2022   by David Gambrill

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Canada’s top court has dismissed the appeal in a nuclear reactor case that trial lawyers might have used as a precedent to challenge the physical damage policy exclusions found in many pandemic-related business interruption insurance cases.

As is customary, the Supreme Court of Canada does not issue reasons for why it dismisses leaves to appeal.

Lawyers crafting the appeal for MDS Inc. v. Factory Mutual Insurance Company (FM Global) believed the case fit within the top court’s national interest mandate, because it was relevant to the physical damage exclusions contained in many of the insurers’ business interruption policies for businesses forced to shut down during the pandemic.

According to Blaney McMurtry LLP’s Anthony Gatensby and Dominic Clarke, MDS lawyers submitted to the Supreme Court in their leave application that their case was “relevant to issues affecting the Canadian public, including whether the shutdown of a business due to COVID-19 could constitute resulting ‘physical damage’ within the meaning of an ‘all-risk” policy.

“It is well-accepted by both policyholder and insurer counsel that the MDS decision is likely to influence the judicial approach to losses arising from the COVID-19 pandemic,” the Blaney McMurtry lawyers wrote.

As it stands now, the Ontario Court for Appeal’s verdict in MDS is that loss of use of a property is not the same as physical damage to a property, thus it is excluded from coverage. Equating ‘loss of use’ with ‘physical damage’ has been a main line of argument made by trial lawyers in several pandemic BI class action lawsuits.

MDS Inc. v. Factory Mutual Insurance Company centered on whether a policy exclusion for “corrosion,” which went undefined in policy, was ambiguous. It also examined whether “loss of use” of equipment or property is the same as “physical damage” to the property; and hence, is not excluded by the policy.

On Feb. 21, 2006, MDS, a global health science company, agreed to buy radioisotopes from Atomic Energy of Canada Limited to be produced at the Nuclear Research Universal (NRU) reactor located in Chalk River, Ont. They were to be sold worldwide for cardiac imaging, cancer treatments, and sterilization of medical products.

FM Global issued MDS a standard-form, all-risk insurance policy that covers all risks of physical loss or damage to property and contingent time element coverage resulting from a supplier’s business interruption. The policy excluded losses due to “corrosion.” It exempted from the corrosion exclusion any “physical damage not excluded by this policy” at specified locations. The policy limit was US$25 million.

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, which was caused by corrosion. As a result of the shutdown, MDS lost its supplier of radioisotopes and lost profits of approximately CAD$121.2 million.

MDS submitted a claim for lost profits. FM Global denied coverage on Aug. 4, 2009, on the basis that this claim was excluded under the policy because of “corrosion.” Also, the loss of use of the reactor didn’t constitute “physical damage,” which was exempted from the corrosion exclusion.

Ontario’s Appeal Court overturned the trial judge’s decision. The Appeal Court found the meaning of the term “corrosion” in the policy exemption, although not defined, was not ambiguous. More importantly, for legal observers following the pandemic-related business interruption cases, the Appeal Court found in favour of the insurer.

“Read in the context of the policy as a whole, the meaning of the word ‘corrosion’ is clear,” the Ontario Court of Appeal found. “The corrosion exclusion applies and MDS’ losses are not covered by the policy.

“Likewise, the term ‘physical damage’ in the exception to the exclusion clause is clear. It does not apply to economic losses caused by the inability to use the equipment during the shutdown.”


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