Canadian Lawyer

26 www.canadianlawyermag.com LEGAL REPORT INSURANCE Getting physical about pandemic business loss Challenges lie ahead for policyholders who want 'physical' damage to include the impact of COVID-19 on their business, writes Zena Olijnyk IN LATE March 2020, not long after the real- ization set in that the COVID-19 outbreak had become a global pandemic, an Ontario Superior Court of Justice decision involving the shutdown of a nuclear reactor was quietly released. Along with a follow-up ruling by the Ontario Court of Appeal, that decision provides a glimpse of how insurance compa- nies would, or would not, compensate busi- nesses for loss of business resulting from the pandemic. In MDS v. Factory Mutual Insurance, the superior court considered whether the defi- nition of "physical loss" or damage could be expanded to include "loss of use." For those businesses suffering through government-man- dated lockdowns because of COVID-19, the extension of that "physical loss" definition could be the salvation to their financial woes — a glimmer of hope in tough times. In 2006, MDS agreed to buy radioiso- topes from Atomic Energy of Canada. MDS planned to sell the radioisotopes worldwide for cardiac imaging, cancer treatments and sterilizing medical products. In 2009, heavy water containing radioac- tive tritium was discovered leaking through the wall of the reactor. The reactor was shut down for 15 months to repair the leak. The shutdown caused MDS to lose both its supplier of radioisotopes and profit of more than $121 million. It was later discovered that the leak was caused by unanticipated corrosion. MDS claimed that the loss of use of the Atomic Energy of Canada reactor to produce the radioisotopes was "property damage" and therefore fell into an exception to the Factory Mutual policy's corrosion exclusion. MDS's all-risks policy stated that if an excluded peril (such as corrosion) caused physical damage not excluded by the policy, the damage that resulted from the leak was not excluded and should be covered. Factory Mutual denied MDS's claim for lost profits, arguing it was excluded under the policy because it didn't involve a physical loss of property. The trial judge ruled in favour of MDS, saying the term "physical damage" was ambiguous. The court held that because physical damage was not defined and dictio- naries did not provide particular guidance, there was no definitive definition of what constituted "physical damage" in all-risk poli- cies in Canada. The superior court in the MDS case made clear that its interpretation of damage was largely dependent upon the specific wording of the policy. However, the insurance industry worried that the broader interpretation of physical damage could mean businesses might be entitled to business interruption coverage if their business was rendered unus- able due to a non-tangible pathogen such as COVID-19. The Canadian Insurance Bureau even ended up as an intervenor in the case. "I think that the trial court's willingness to allow a claim for economic loss from the physical damage scared [insurers]", says Robert Martz, a lawyer at Burnet Duckworth & Palmer LLP in Calgary. "If the trial court's views were adopted gener- ally, it would make it much easier to succeed on economic loss claims, which are typi- cally much more significant than physical damage claims." He notes it would likely be catastrophic for the industry, given the global nature of the pandemic. So, it's no surprise that the superior court ruling in MDS was appealed. And for many lawyers, it is also no surprise that the appeal court in September overturned the lower court's decision, concluding that it's clear whether there is "physical damage" or not. The Ontario Court of Appeal "dialled back the expansive approach the lower court took," says Martz. "It is not uncommon to see courts of appeal reigning in trial courts when it comes to insurance policies." He

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