Prior to the COVID-19 outbreak, establishments with business interruption insurance may have purchased an “all-risks policy”. These are insurance policies that cover all perils except for ones that are explicitly mentioned in the contract. The perils that are covered typically amount to some sort of “physical damage” ie.) fire, flooding, unexpected repairs. For businesses who have suffered losses from COVID-19 and are looking to their insurance policy for coverage, we anticipate that one of the most challenging issues is whether a pandemic or disease amounts to physical damage.
In March 2020, the Ontario Superior Court delivered reasons for judgment for MDS Inc. v. Factory Mutual Insurance Company 1 (”MDS”). The circumstances in MDS did not involve COVID-19, but the issue of an all-risk policy and physical damage was a matter that the Court addressed.
MDS Inc. is a company that buys and sells radioisotopes. One of its suppliers produced these isotopes at a nuclear plant in Ontario. In May 2009, a power shutdown occurred at the plant, and a leak of radioactive heavy water was identified. This leak did not cause any physical damage and the nuclear plant was still feasibly operational.
As a matter of proper protocol, the leak was reported to the Canadian Nuclear Safety Commission, who then ordered the plant to be shutdown for investigation, inspection and possible repair. The closure lasted 15 months, and no radioisotopes were produced/supplied to MDS Inc. during that time.
MDS Inc. had purchased an all-risk commercial insurance policy from Factory Mutual. They stated that the closure of the plant caused an inability to supply radioisotopes which resulted in a loss of $121 million. MDS Inc. attempted to claim this loss but were denied by Factory Mutual.
In deciding whether MDS Inc.’s losses should be insured, the Court first looked at the principles of “all-risk” insurance policies. The Court reiterated that:
All-risks policies, such as the Policy in this case, are generally understood to protect against fortuitous losses, unless such losses are otherwise excluded.2
The language of the policy should also be reviewed for its clarity, meaning and reasonable expectations of the parties involved.
The Court then reviewed the wording in MDS Inc.’s policy which states that corrosion was one of the perils excluded; however, if there was physical damage, this exclusion would not apply, and coverage will be provided.
In analyzing this specific provision, the Court first looked at the meaning of “physical damage”. It was noted that this term was not specifically defined in the actual policy, nor is there a widely accepted legal definition.
The key issue became:
Should resulting physical damage be defined narrowly to require actual physical damage, or should it be defined broadly to include loss of use? 3
Factory Mutual argued that a narrow interpretation should be applied as the leakage did not cause any tangible physical damage. While MDS Inc. argued that the presence of the leak itself is physical damage as it led to the plant’s shutdown.
In deciding this issue, the Court looked at the purposes of an all-risk insurance policy, and analyzed the intent and expectations of the parties when entering into the agreement. The Court also looked at other provisions within the policy and how they relate to one another in determining “physical damage”.
Ultimately, the Court held that a broad interpretation should be applied and that the loss of use stemming from the shutdown was “physical damage”; thus, there was insurance coverage and MDS Inc. should be indemnified for their losses.
In the context of COVID-19, we anticipate that this narrow vs. broad interpretation of “physical damage” will arise in future business interruption claims. Insurers will state that COVID-19 did not cause any tangible damage; while businesses will argue that the disease caused an interruption that created a loss of use. This is a novel and ongoing issue and as the Court in MDS stated:
There are few Canadian cases that specifically discuss the interpretation of physical loss or physical damage in the contact of an all-risks policy. 4
The ruling in MDS does not mean that every all-risk insurance policy should be interpreted broadly. Each policy is different in terms of their scope, coverage and expectations. MDS demonstrates that when interpreting policies, not only is the wording analyzed, but also the parties’ intent as to what will be insured. Insurance policies can be complex and difficult to understand.
If you are unsure about your policy or have been denied coverage by your insurer, please feel free to contact one of our insurance lawyers for assistance.
Written by: Douglas Chiu