COURT OF APPEAL FOR ONTARIO

DATE: 20210903 DOCKET: C68300

Feldman, Harvison Young and Thorburn JJ.A.

BETWEEN

MDS Inc. and MDS (Canada) Inc. c.o.b. MDS Nordion Plaintiffs (Respondents)

and

Factory Mutual Insurance Company c.o.b. FM Global Defendant (Appellant)

Counsel: Paul J. Pape, David E. Liblong, Shantona Chaudhury and Cristina Senese, for the appellant, Factory Mutual Insurance Company Brian J.E. Brock, Q.C., for the respondents, MDS Inc. and MDS (Canada) Inc. Glenn A. Smith and Nina Bombier, for the intervener, Insurance Bureau of Canada

Heard: April 15, 2021 by video conference

On appeal from the judgment of Justice Janet Wilson of the Superior Court of Justice, dated September 9, 2020, with reasons reported at 2020 ONSC 1924 (damages) and 2020 ONSC 4464 (interest and costs).

Thorburn J.A.:

OVERVIEW

[1] This appeal is about whether the insurer appellant, Factory Mutual Insurance Company (“FM Global”), is required to provide insurance coverage for losses arising from an unplanned shutdown of the Atomic Energy of Canada Limited (“AECL”) Nuclear Research Universal (“NRU”) reactor located in Chalk River, Ontario on May 14, 2009.

[2] The respondent MDS Inc. is a global health science company. The respondent MDS (Canada) Inc. is its Canadian subsidiary. They are together referred to as “MDS”.

[3] On February 21, 2006, MDS agreed to buy radioisotopes from AECL to be produced at the NRU reactor located in Chalk River, Ontario. They were to be sold worldwide for cardiac imaging, cancer treatments, and sterilization of medical products.

[4] FM Global issued MDS an all-risk insurance policy which covers all risks of physical loss or damage to property and contingent time element coverage resulting from a supplier’s business interruption (“the Policy”).

[5] This was a standard form policy and there was no negotiation of the terms of insurance.

[6] The Policy excludes coverage for losses caused by “corrosion”. The term “corrosion” is not defined. The Policy includes an exception from this exclusion for resulting “physical damage not excluded by this Policy” at specified locations. The parties agree that the NRU constitutes property of the type insured under the Policy’s extended coverage. The Policy limit for the relevant coverage (the Contingent Time Element Extended coverage) is US$25,000,000.

[7] 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 supplier of radioisotopes and lost profits of approximately CA$121,248,000.

[8] On May 21, 2009, MDS submitted a claim for lost profits. FM Global denied coverage on August 4, 2009, on the basis that this claim was excluded under the Policy.

[9] The central issues at trial were (i) the interpretation of the corrosion exclusion in the Policy and (ii) whether MDS’ business losses arising from the shutdown of the NRU reactor are payable pursuant to the exception to the exclusion for physical damage caused by corrosion. [1]

[10] The trial judge held that (i) the term “corrosion” is ambiguous and should be interpreted in light of the dictionary definition of the term as modified by the “reasonable expectations of the parties”, (ii) the exclusion does not apply to unanticipated and “fortuitous corrosion”; it only applies to “non-fortuitous anticipated corrosion”; and (iii) the exception to the “corrosion” exclusion for “physical damage” should be interpreted broadly to include not just physical damage caused by the corrosion but economic loss caused by the inability to use the insured property during the shutdown.

[11] She therefore concluded that MDS’ losses were covered under the Policy and, in addition to damages up to the Policy’s limit, MDS should be awarded prejudgment interest at the rate of the company’s actual cost of borrowing, including compound interest at 5.14 percent, as she held this was “just compensation”. Prejudgment interest was assessed at US$14,821,338. MDS was awarded US$39,821,338 (the US$25,000,000 allowable limit plus interest in the amount of US$14,821,338) which, at the date of the release of the decision, amounted to CA$56,406,911.

[12] For the reasons that follow, I find that the trial judge erred in finding that the term “corrosion” is ambiguous and in deciding that losses other than physical damages are covered. Read in the context of the Policy as a whole, the meaning of the word “corrosion” is clear. 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. I would therefore allow the appeal.

THE ISSUES

[13] The issues to be addressed on this appeal include:

1. The standard of review to be applied to the interpretation of this insurance Policy and the award of prejudgment interest;

2. The interpretation of the Policy and in particular: a. Whether the trial judge erred in concluding that the term “corrosion” was ambiguous and should be interpreted to mean “the anticipated and predictable process of corroding”; and b. Whether she erred in finding that the exception to the exclusion for “physical damage” caused by corrosion in the Policy was ambiguous and should be interpreted to include loss of use; and

3. Whether she erred in awarding compound prejudgment interest at the rate of actual borrowing costs although this was not contemplated in the Policy agreement.

THE FIRST ISSUE: STANDARD OF REVIEW

The standard of review when interpreting insurance agreements

[14] Typically, the interpretation of a contract attracts a deferential standard of appellate review. The trial judge’s interpretation of the agreement is reviewed for palpable and overriding error, as the contract is to be construed in light of the factual matrix and the trial judge is better placed to answer questions of mixed fact and law. Correctness review only applies to extricable errors of law in the trial court’s interpretation: see Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 50-55.

[15] However, standard form contracts, such as FM Global’s “Global Advantage” insurance policy, are an exception to the usual rule. As the Supreme Court explained in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23, at para. 24:

[W]here an appeal involves the interpretation of a standard form contract, the interpretation at issue is of precedential value, and there is no meaningful factual matrix that is specific to the parties to assist the interpretation process, this interpretation is better characterized as a question of law subject to correctness review.

[16] The factual matrix is less relevant in standard form contracts, such as insurance policies, because, as Wagner J. (as he then was) explained, “the parties do not negotiate terms and the contract is put to the receiving party as a take-it-or-leave-it proposition”: Ledcor, at para. 28, citing MacDonald v. Chicago Title Insurance Company of Canada, 2015 ONCA 842, 127 O.R. (3d) 663, at para. 33, leave to appeal refused, [2016] S.C.C.A. No. 39. Moreover, “factors such as the purpose of the contract, the nature of the relationship it creates, and the market or industry in which it operates” are usually the same for all parties to a particular standard form contract, which “underscores the need for standard form contracts to be interpreted consistently”: Ledcor, at para. 31.

[17] The interpretation of a contract may be a question of mixed fact and law, subject to deferential review on appeal, if the parties negotiated and modified what was initially a standard form contract. In these circumstances, the interpretation will likely be of little or no precedential value. The question is whether the dispute is over a general proposition or a particular set of circumstances of little or no precedential value: Ledcor, at para. 48.

[18] MDS concedes that the standard of review for the interpretation of a standard form policy that is not subject to negotiations is correctness, but argues that, as there are questions of mixed fact and law in dispute, the trial judge’s interpretation should be reviewed for palpable and overriding error. According to MDS’ written submissions, the trial judge’s interpretation was based on numerous findings of mixed fact and law, including:

[T]he structure of the policy, that the leak was fortuitous, that the corrosion exclusion was listed along with other gradual physical processes, that the insurer chose not to define the term “corrosion” and that the reasonable expectations of the insurer was that this exclusion would not exclude all corrosion. And finally and importantly, that the all risk policy covers all fortuitous events, unless clearly excluded. It would also include the fact that the appellant, at trial and on discovery, categorically stated that the “corrosion exclusion” did not apply to all corrosion. [Emphasis in original.]

[19] I disagree. The structure of the Policy, the fact that the leak was fortuitous, and the placement of the word corrosion with other gradual physical processes in the wording of the Policy are not in dispute. The only issues in dispute are the interpretation of (i) the “corrosion” exclusion, and (ii) the “physical damage” exception to the corrosion exclusion in the Policy.

[20] This is a standard form policy, there was no negotiation of the terms of the Policy by the parties, and the issues are of general importance to all insurers and insured parties who use this Policy. This court’s interpretation of the Policy is of precedential value given that it is issued to many both within and beyond Canada.

[21] As such, the standard of review is correctness.

The standard of review for the award of prejudgment interest

[22] The trial judge awarded prejudgment interest at MDS’ actual cost of borrowing, including compound interest, under ss. 128 and 130 of the Courts of Justice Act, R.S.O. 1990, c. C.43 (“CJA”).

[23] Provided that the exclusions to an award of interest set out in the CJA do not apply, the trial judge’s decision to award prejudgment interest at a rate higher or lower than provided for in ss. 128 and 129 is discretionary: see Tribute (Springwater) Limited v. Atif, 2021 ONCA 463, at paras. 26-27. In exercising discretion to award interest at a rate higher or lower than provided for in ss. 128 and 129, the trial judge must take into account changes in market interest rates, the circumstances of the case, the amount claimed and recovered, and other relevant considerations: CJA, s. 130(2).

[24] As this court held in Krieser v. Garber, 2020 ONCA 699, 70 C.C.L.T. (4th) 40, at para. 46:

The court will only interfere with the exercise of discretion if it was based on an error of law (determined on a correctness standard), a palpable and overriding error of fact, the consideration of irrelevant factors or the omission of factors that ought to have been considered, or if the decision was unreasonable in the sense that it is not compatible with the judicial exercise of discretion. [Citations omitted.]

In particular, the trial judge must consider the factors set out under s. 130(2) of the CJA.

[25] As such, the standard of review in respect of this issue is that of error of law or palpable and overriding error.

THE SECOND ISSUE: THE INTERPRETATION OF THE PROVISIONS IN THE INSURANCE POLICY

[26] I will first set out the relevant Policy provisions, review how contracts of insurance should be interpreted generally, and outline the cause of the damage and losses incurred.

[27] I will proceed to (i) articulate the trial judge’s interpretation of the corrosion exclusion, (ii) set out the interpretation of corrosion exclusions by the courts, and (iii) provide my analysis and conclusion regarding the interpretation of the corrosion exclusion.

[28] I will then set out (i) the trial judge’s interpretation of the exception to the exclusion for resulting physical damage, (ii) the interpretation of similar provisions by Canadian courts, (iii) the interpretation of similar provisions in other jurisdictions, and (iv) my analysis and conclusion regarding the interpretation of the exception to the exclusion.

THE CORROSION EXCLUSION AND EXCEPTION TO THE EXCLUSION IN THE POLICY

[29] FM Global has insured MDS since 1993. The Policy in place at the time of the shutdown covered MDS in 95 locations around the world for the period of November 1, 2008 to November 1, 2009.

[30] The Policy covers “property, as described in this Policy, against ALL RISKS OF PHYSICAL LOSS OR DAMAGE, except as hereinafter excluded”.

[31] Under Section B, “Property Damage”, the Policy contains the following exclusion to coverage:

5. EXCLUSIONS A. This Policy excludes:

3. loss of market or loss of use, except to the extent provided by this Policy. C. This Policy excludes the following, but, if physical damage not excluded by this Policy results, then only that resulting damage is insured:
4. deterioration, depletion, rust, corrosion or erosion, wear and tear, inherent vice or latent defect. [Emphasis added.]

[32] The Policy does not define corrosion.

[33] In essence, 5(C) states that if an excluded peril (such as corrosion) causes physical damage not excluded by the Policy, that resulting damage, and only that resulting damage, is insured.

[34] The Policy also provides for economic losses including loss of profits arising from physical damage to the property of a supplier, such as AECL’s NRU reactor, up to a maximum of US$25,000,000 on the following terms and conditions:

B. CONTINGENT TIME ELEMENT EXTENDED This Policy covers the Actual Loss Sustained and EXTRA EXPENSE incurred by the Insured during the PERIOD OF LIABILITY directly resulting from physical loss or damage of the type insured to property of the type insured at Contingent Time Element Locations located within the TERRITORY of this Policy. 3) References and Application. The following term(s) wherever used in this Policy means: a) Contingent Time Element Location: (i) Any Location: (a) of a direct customer, supplier, contract manufacturer or contract service provider to the Insured. (ii) Any Location of a company that is a direct or indirect customer, supplier, contract manufacturer or contract service provider to a Location described in a)(i) above. [Emphasis added.]

[35] However, to trigger the Contingent Time Element coverage, (a) the physical damage must be the type of physical damage covered by the Policy, (b) the damage must be to property that is insured by the Policy, and (c) the property that is damaged must be located on property that is insured under the Policy. 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.

HOW CONTRACTS OF INSURANCE SHOULD BE INTERPRETED GENERALLY

(a) The interpretation of contracts generally

[36] In Sattva, the Supreme Court addressed the interpretation of a commercial arbitration award concerning the construction of a finder’s fee agreement. Rothstein J. stated, at paras. 57-60, that:

While the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectively creates a new agreement.

The nature of the evidence that can be relied upon under the rubric of “surrounding circumstances”.… should consist only of objective evidence of the background facts at the time of the execution of the contract.… Subject to these requirements and the parol evidence rule discussed below, this includes, in the words of Lord Hoffmann, “absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man”.… Whether something was or reasonably ought to have been within the common knowledge of the parties at the time of execution of the contract is a question of fact.

The surrounding circumstances are facts known or facts that reasonably ought to have been known to both parties at or before the date of contracting; therefore, the concern of unreliability does not arise. [Citations omitted.]

[37] In Eli Lilly & Co. v. Novopharm Ltd., [1998] 2 S.C.R. 129, at para. 54, Iacobucci J. clarified that the focus in interpreting contracts is determining parties’ contractual intent “by reference to the words [the parties] used in drafting the document.… Evidence of one party’s subjective intention has no independent place in this determination.”

[38] Emphasis on the subjective intentions of the parties “denudes the contractual arrangement of the certainty that reducing an arrangement to writing was intended to achieve”: Dumbrell v. The Regional Group of Companies Inc., 2007 ONCA 59, 85 O.R. (3d) 616, at para. 50.

(b) The interpretation of standard form contracts of insurance

[39] Standard form contracts of insurance should be interpreted consistently: Ledcor, at paras. 28-31.

[40] Where the language of the disputed clause is unambiguous, effect should be given to the clear language of the policy read in the context of the policy as a whole: Sabean v. Portage La Prairie Mutual Insurance Co., 2017 SCC 7, [2017] 1 S.C.R. 121, at paras. 12-13; Ledcor, at para. 49; and Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245, at para. 22. It is unnecessary to consider extrinsic evidence in order to interpret its terms: Eli Lilly, at para. 55; Dunn v. Chubb Insurance Company of Canada, 2009 ONCA 538, 97 O.R. (3d) 701, at para. 33. However, like all contracts, the policy is examined in light of the surrounding circumstances: Jesuit Fathers of Upper Canada v. Guardian Insurance Co. of Canada, 2006 SCC 21, [2006] 1 S.C.R. 744, at para. 27; Dunn, at para. 33.

[41] As above, the surrounding circumstances include “anything which would have affected the way in which the language of the document would have been understood by a reasonable man” at the time the parties made their agreement: Sattva, at para. 58, citing Investors Compensation Scheme Ltd. v. West Bromwich Building Society, [1998] 1 All E.R. 98, [1998] 1 W.L.R 896, at p. 114. The identity and sophistication of the parties, the jurisdictions in which the contract is in effect, and the commercial context of the contract are all elements of the “surrounding circumstances”.

[42] The words of the contract are given their ordinary meaning, not the meaning they might be given by persons versed in insurance law: Co-operators Life Insurance Co. v. Gibbens, 2009 SCC 59, [2009] 3 S.C.R. 605, at para. 21; see also Ledcor, at para. 27.

[43] However, where a policy provision is ambiguous, the rules of contract construction may be employed to resolve the ambiguity. A contractual provision is ambiguous if it is reasonably susceptible of more than one meaning: Dunn, at para. 34; Hi-Tech Group Inc. v. Sears Canada Inc. (2001), 52 O.R. (3d) 97 (C.A.), at para. 18. The goal is to reach a sensible commercial result that reflects the intentions of the parties at the time the agreement was entered into. As explained by Estey J. in Consolidated-Bathurst v. Mutual Boiler, [1980] 1 S.C.R. 888, at pp. 901-2:

[L]iteral meaning should not be applied where to do so would bring about an unrealistic result or a result which would not be contemplated in the commercial atmosphere in which the insurance was contracted. Where words may bear two constructions, the more reasonable one, that which produces a fair result, must certainly be taken as the interpretation which would promote the intention of the parties. Similarly, an interpretation which defeats the intentions of the parties and their objective in entering into the commercial transaction in the first place should be discarded in favour of an interpretation of the policy which promotes a sensible commercial result. It is trite to observe that an interpretation of an ambiguous contractual provision which would render the endeavour on the part of the insured to obtain insurance protection nugatory, should be avoided. Said another way, the courts should be loath to support a construction which would either enable the insurer to pocket the premium without risk or the insured to achieve a recovery which could neither be sensibly sought nor anticipated at the time of the contract.

[44] Extrinsic or parol evidence may be admitted to resolve ambiguity: United Brotherhood of Carpenters and Joiners of America, Local 579 v. Bradco Construction Ltd., [1993] 2 S.C.R. 316, at p. 342; see also Eli Lilly, at para. 55; Canadian Premier Holdings Ltd. v. Winterthur Canada Financial Corp. (2000), 132 O.A.C. 172 (C.A.), at para. 15; and SimEx Inc. v. IMAX Corp. (2005), 206 O.A.C. 3 (C.A.), at para. 23.

[45] If the general rules of construction fail to resolve the ambiguity, courts will construe the contract contra proferentem, and interpret coverage provisions broadly and exclusion clauses narrowly: Sabean, at para. 12; Ledcor, at paras. 50-51. However, courts should not impute ambiguity where none exists, as noted in Consolidated-Bathurst, at p. 901, citing Cornish v. Accident Insurance Co. (1889), 23 Q.B. 453 (C.A.) at p. 456: “[T]his principle [of contra proferentem] ought only to be applied for the purpose of removing a doubt, not for the purpose of creating a doubt, or magnifying an ambiguity, when the circumstances of the case raise no real difficulty.”

THE CAUSE OF THE DAMAGE AND LOSSES

[46] The NRU reactor’s core is housed within a structure known as a calandria or large pressure vessel. Heavy water circulates within the calandria. The calandria is surrounded by a light water reflector. Both are housed within a concrete shielding structure. The calandria and the light water reflector are separated by a narrow, compartmentalized area, running the height of the calandria, known as the J-rod annulus.

[47] The J-rod annulus is pressurized with CO2 to purge ambient air from the space. The J-rod annulus is not supposed to contain water, whether light water from the reflector or heavy water from the calandria, but it is equipped with a sump pump system in case there is a leakage.

[48] For some time, AECL knew of light water leaking from the reflector into the J-rod annulus, causing generalized corrosion to the outer walls of the calandria and reflector. This was monitored over a 35-year period and resulted in a gradual reduction in the wall thickness of the calandria. This corrosion did not cause concern, as AECL did not believe it affected the safe use of the reactor.

[49] On May 14, 2009, there was a spontaneous leak of heavy water from the interior of the calandria into the surrounding J-rod annulus. This leak was caused by corrosion on the wall of the calandria. This corrosion was, in the words of an AECL research scientist, “surprising” and “not expected”. This unanticipated corrosion is the only subject of this appeal.

[50] The reactor was shut down from May 14, 2009 until August 2010 to investigate and fix the problem. For 15 months, AECL was unable to supply MDS with any radioisotopes which, at that time, were essential for MDS’ business. The radioisotopes from AECL accounted for 45 percent of MDS’ worldwide income. There was no alternative supplier, in Canada or elsewhere. As a result, MDS suffered substantial financial losses.

[51] According to the Agreed Statement of Fact, MDS sustained economic losses of approximately CA$121,248,000 as a result of the shutdown of the NRU.

WHETHER CORROSION IS EXCLUDED UNDER THE POLICY

(i) The trial judge’s interpretation of the corrosion exclusion

[52] As noted, the crucial issues at trial were (i) whether the damage to the reactor was caused by corrosion within the meaning of this exclusion, such that the time element coverage would not include the loss of profits resulting from this damage; and (ii) if the corrosion exclusion applied, whether there was damage not excluded by the policy for which MDS might be covered under the exception to the exclusion.

[53] At trial, both parties took the position that the meaning of “corrosion” was clear, although they did not agree on the interpretation to be given. FM Global argued that “corrosion” includes all forms of corrosion, both anticipated and unanticipated. MDS argued that “corrosion” means anticipated corrosion only; the corrosion that occurred in the NRU reactor was the type of unanticipated event that all-risk insurance is meant to cover.

[54] The trial judge held that the meaning of “corrosion” was ambiguous. Her reasons, as set out at para. 255 of the decision, were that:

The witnesses called on behalf of the Insurer conceded that the corrosion at J-41 is fortuitous, and that not all corrosion is excluded by the Policy. This evidence ends the argument that this exclusion can be determined based upon a definition alone, whatever that definition may be. These admissions confirm that the meaning of corrosion in the context of this Policy is ambiguous. [Emphasis in original.]

[55] She therefore defined the word “corrosion” in the Policy, at paras. 315-20, by:

1. taking the Canadian Oxford Dictionary definition of the term ‘corrosion’, i.e. “the process of corroding, esp. of a rusting metal.” ‘Corrode’ is defined as “wear away, esp., by chemical action”; and,
2. adding the words “anticipated and predictable” to, in her words, “make it clear that the exclusion is intended to cover non-fortuitous corrosion, not fortuitous corrosion.”

[56] She concluded that the definition of “corrosion,” in respect of this Policy, was: “The anticipated and predictable process of corroding, esp. of a rusting metal.”

[57] Her reasoning is as follows:

In the context of this Policy, the evidence in this case and the reasonable expectation of the parties, I find that the exclusion applies only to non-fortuitous anticipated corrosion.

[T]aking a narrow view of the exclusion clause, and applying the definition of corrosion outlined above, I conclude that it would be within the parties’ reasonable expectations, considered objectively, that the fortuitous, unanticipated unpredicted corrosion at J-41 causing the leak of heavy water into the J-rod annulus would be covered by the all-risks Policy unless another exclusion applies. [Emphasis added; footnotes omitted.]

[58] She therefore concluded that only “anticipated and predictable” corrosion is excluded from coverage.

(ii) Interpretation of the term “corrosion” by the courts

[59] No Canadian court has squarely addressed the interpretation of the term “corrosion” in similar standard form all-risk policies of insurance. In obiter, Myers J. in PLC Constructors Canada Inc. v. Allianz Global Risks US Insurance Company, 2014 ONSC 7480, 123 O.R. (3d) 549, at paras. 15-16, stated that:

[The corrosion exclusion] of this policy…. effectively excludes from coverage loss or damage caused by corrosion. The exclusion for rust and corrosion is generally understood in the law to relate to the normal risk of wear and tear of property left exposed to the elements. Such natural processes are not considered to be “fortuitous” events of the type encompassed by an all risks policy.

[60] Canadian courts have accepted that American authorities may assist in interpreting insurance contracts where there is little Canadian authority: see e.g., Zurich Insurance Co. v. 686234 Ontario Ltd. (2002), 62 O.R. (3d) 447 (C.A.), at para. 34, leave to appeal refused, [2003] S.C.C.A. No. 33.

[61] This is particularly true where the same contracts are used in multiple jurisdictions: Edmonton (City) v. Protection Mutual Insurance Co. (1997), 197 A.R. 81 (Q.B.), at para. 149, aff’d 1999 ABCA 6, 250 A.R. 93; Partners Investment Ltd. v. Etobicoke (City) (1981), 124 D.L.R. (3d) 125 (Ont. H.C.), at p. 3.

[62] American appellate courts have consistently held that the meaning of corrosion in standard form insurance policies includes corrosion, however brought about.

[63] In Bettigole v. American Employers Ins. Co., 30 Mass. App. Ct. 272, 567 N.E. 2d 1259 (App. Ct. 1991), at p. 274, the Massachusetts Appeals Court held that there was no reason “for confining the term corrosion … to a wearing away by ‘natural’ means”.

[64] Similarly, in Gilbane Bldg. Co. v. Altman Co., 2005 Ohio 984 (App. Ct.), at para. 18, the Ohio Court of Appeals held that, since the insurance policy did not “qualify [a corrosion] exclusion to cover only gradual-forming rust and corrosion”, the exclusion applied to preclude coverage for fast-forming corrosion.

[65] In Lantheus Medical Imaging, Inc. v. Zurich American Ins. Co., 255 F. Supp. 3d 443 (S.D.N.Y. Dist. Ct. 2015), at p. 459, aff’d 650 Fed. Appx. 70 (2nd Cir. 2016), a case which concerned the same facts as in this case, the District Court for the Southern District of New York held that, “[n]othing in the dictionary definition narrows the scope of ‘corrosion’ to that which occurs ‘inevitably’ over the life of a machine. Other courts have rejected analogous attempts to narrow the definition of ‘corrosion.’” The court determined that “rapid” corrosion fell within the exclusion: at p. 461.

[66] While the courts in these cases do not use the terms “anticipated” and “unanticipated” corrosion as the trial judge did in this case, all of these cases were about “natural” versus “unnatural” and “gradual” versus “non-gradual” corrosion. These are similar to the distinctions between “anticipated” and “unanticipated” corrosion made by the trial judge in this case.

(iii) Analysis of the interpretation of the corrosion exclusion in the Policy and conclusion

[67] The appellant, FM Global, and the intervener, Insurance Bureau of Canada, take the position that the exclusion for corrosion and the exception to the exclusion are unambiguous, the corrosion exclusion covers non-fortuitous corrosion, and the trial judge’s interpretation is inconsistent with prevailing authorities and is commercially unreasonable.

[68] The respondent MDS, submits that the “corrosion” exclusion applies only to non-fortuitous corrosion. Although corrosion is not defined in the Policy, it is listed along with depletion, deterioration, and wear-and-tear, all of which are gradual processes. MDS reasonably expected that some corrosion would be covered.

[69] MDS claims the losses it sustained during the NRU reactor shutdown were covered because: (i) the corrosion exclusion in 5(C)(3) only excluded coverage for anticipated or non-fortuitous corrosion; unanticipated or fortuitous corrosion was not excluded; and (ii) even if the corrosion exclusion does apply to unanticipated corrosion, the exception in 5(C) applies because the leak of heavy water and the reactor’s resulting shutdown were resulting physical damage. Thus, either the unanticipated corrosion or the resulting physical damage entitled MDS to the US$25,000,000 limit in the Contingent Time Element Extended section of the Policy.

[70] One of FM Global’s supervisors testified that the cause of corrosion matters in determining coverage. In discovery, when asked whether the Policy excluded coverage for all corrosion, he replied, “I don’t know that that’s accurate.… I’m trying to think of a situation where we would cover it.… I can’t blanketly [sic] characterize that all corrosion caused by any situation, like, would – always be excluded.” At trial, he added, as an example, that flash corrosion resulting from a sprinkler leak would be a situation where the Policy would cover corrosion as a direct result of an insured peril. Similarly, the May 27, 2009 email from an FM Global underwriter suggested that damages resulting from fortuitous corrosion might be covered in some circumstances.

[71] MDS therefore argues that the trial judge correctly concluded that the corrosion exclusion only applies to “non-fortuitous corrosion”.

[72] I do not agree.

[73] Although this is an all-risk policy that covers all claims save for those that are specifically excluded, this does not mean that the interpretation of clear terms should be changed. All-risk policies are, by their grant, limited to cover only fortuitous or unanticipated losses. The Supreme Court held in Canadian National Railway Co. v. Royal and Sun Alliance Insurance Co. of Canada, 2008 SCC 66, [2008] 3 S.C.R. 453, at para. 79, citing British and Foreign Marine Insurance Co. v. Gaunt, [1921] 2 A.C. 41 (H.L.), [1921] All E.R. Rep. 447, at pp. 46-47:

These words [“all-risk”] cannot, of course, be held to cover all damage however caused, for such damage as is inevitable from ordinary wear and tear and inevitable depreciation is not within the policies.… Damage, in other words, if it is to be covered by [all-risk] policies such as these, must be due to some fortuitous circumstance or casualty.

[74] In this case, contrary to the trial judge’s assertion, the fact that two employees of the insurer stated that there might be circumstances in which losses involving corrosion might be covered does not mean the term is ambiguous; rather, it means that while loss or damage caused by corrosion is not covered, there may be circumstances where corrosion may result from another cause and thereby be covered.

[75] Second, even if employees did believe there was coverage for damages caused by corrosion (and there is no evidence that they did), the subjective belief of a party long after the standard form policy was entered into, absent other circumstances, is not evidence of the reasonable intention of the parties at the time the contract was entered into.

[76] Third, unlike Hi-Tech, which was referred to by the trial judge, the term “corrosion”, while undefined in the Policy, has a plain and ordinary meaning. I therefore find that it is clear and unambiguous that physical loss or damage caused by corrosion is a loss that is specifically excluded from coverage in the Policy.

[77] Moreover, I find that the trial judge erred in concluding that fortuitous or unanticipated corrosion is covered by the Policy for the following reasons:

1. This was not a negotiated agreement and, in any event, no evidence was adduced as to the understanding of the parties at the time the Policy was entered into in 1985. There is therefore no evidence to assist in understanding the way in which the language of the Policy would have been understood by a reasonable person at the time the Policy was signed;
2. The Policy should therefore be interpreted in accordance with the terms of the Policy read in context;
3. The dictionary definition of corrosion includes “wear away, esp. by chemical action.” It is not limited to anticipated corrosion but includes any kind of wearing away;
4. The clear and unambiguous meaning of the term “corrosion” is not altered by other provisions in the Policy;
5. The fact that two FM Global employees believed there might be coverage for unanticipated corrosion at the time the corrosion was discovered does not render the term ambiguous. As noted above, there is no coverage where the loss was caused by corrosion, as it was in this case. By contrast, there may be coverage if the damage is caused by an insured peril such as a sprinkler leakage and that damage in turn results in corrosion, to use the example provided by one of FM Global’s witnesses. Moreover, opinions of employees many years after the agreement was signed, do not, of themselves, alter the reasonable expectations of the parties when the Policy agreement was entered into. (In any event, FM Global’s senior supervisor in Toronto simply said that “[s]ome causes can trigger coverage for some types of corrosion.” He was not cross-examined on the causes or “types of peril”. This statement is consistent with FM Global’s point that “the corrosion exclusion would not apply if the corrosion was itself precipitated by an insured peril”);
6. Defining “corrosion” to include both anticipated and unanticipated corrosion is consistent with commercial reality, the clear terms of the Policy, and the need to interpret standard form policies consistently and objectively because “the parties do not negotiate terms and the contract is put to the receiving party as a take-it-or-leave-it proposition”: Ledcor, at para. 28, citing MacDonald, at para. 33. To allow one party’s subjective intention of the meaning to alter the plain meaning of the term would enable one party to define terms in a standard form contract for many other insurers and insured: Ledcor, at para. 40;
7. Because the Policy is a standard form contract, used in many jurisdictions, consistency of interpretation is desirable;
8. As noted above, Canadian courts have long looked to other jurisdictions for guidance, particularly where the same contracts are used in multiple jurisdictions. This is in keeping with the desire for consistency and stability. American courts have consistently adopted a plain meaning approach to the term “corrosion” that includes both anticipated and unanticipated corrosion;
9. If the corrosion exclusion were interpreted to apply only to non-fortuitous or anticipated corrosion (as the trial judge held), the exclusion would be meaningless as non-fortuitous or anticipated corrosion is not covered in the first place. This is because all damage covered by all-risk policies must be fortuitous: Canadian National Railway Co., at para. 79; and
10. The trial judge’s interpretation may also create an incentive to avoid detection of corrosion as, if only non-fortuitous or anticipated corrosion is excluded from coverage, there would be little incentive to maintain equipment to avoid the risk of unanticipated corrosion.

[78] For these reasons, I conclude that the term “corrosion” is not ambiguous and should have been interpreted in a manner consistent with the Policy as a whole and the surrounding circumstances, including the purpose of the coverage, the nature of the relationship it creates, and the industry in which it operates: Ledcor, at paras. 28-29 and 31. Instead, the trial judge modified the term based on her interpretation of remarks made by two representatives of the appellant as to the possibility of coverage for corrosion, long after the Policy had been signed, which were misconstrued. In so doing, she erred.

WHETHER THE EXCEPTION TO THE EXCLUSION FROM COVERAGE APPLIES

(i) The trial judge’s interpretation of the exception to the exclusion from coverage for corrosion

[79] As noted above, the exception to the exclusion provides that, “[t]his Policy excludes [corrosion], but, if physical damage not excluded by this Policy results, then only that resulting damage is insured”. The Policy does not define resulting physical damage.

[80] The question on this appeal is, if the corrosion exclusion applies, was the damage suffered by MDS resulting physical damage within the meaning of the exception to the exclusion for corrosion in the Policy?

[81] The trial judge found that the leak did not damage the interior of the J-rod annulus and there was no physical damage beyond the corrosion in the calandria wall. She held, however, that loss of use should be considered “physical damage” because in her view, the term “physical damage” was ambiguous, an all-risks policy is designed to provide broad coverage, and the loss of use of insured property caused by the leak “would constitute resulting physical damage.”

[82] The trial judge relied on the Nova Scotia Small Claims Court decision in Jessy’s Pizza (Bedford) v. Economical Mutual Insurance Company, 2008 NSSM 38, and two American cases: MRI Healthcare Center of Glendale, Inc. v. State Farm General Ins. Co., 187 Cal. App. 4th 766, 115 Cal. 3d 27 (App. Ct. 2010) and Western Fire Ins. Co. v. First Presbyterian Church, 165 Colo. 34, 437 P (2d) 52 (Super. Ct. 1968). These cases considered whether loss of use was covered by a policy of insurance that insured against all risks of “direct physical loss”.

[83] Here, the losses resulted from the need to repair the corrosion, not from other property damage. The trial judge held, at paras. 516-519, that:

The Policy must be considered as a whole. The other provisions of the Policy including the loss of use exceptions, and the Contingent Time Coverage provisions, with specific regard to the period of liability when read with the resulting physical damage exception, all appear to confirm that loss of use of the NRU caused by the leak of heavy water would constitute resulting physical damage. The effect of the leak of heavy water rendered the NRU inoperable until the safety concerns and protocol imposed by the CNSC had been met.

In assessing the objective reasonable expectation of the parties as to the meaning of physical damage, it makes common sense that if the unanticipated leak of heavy water from the calandria precipitates the shutdown of the NRU ordered by the CNSC to study and rectify the problem causing the leak, that this circumstance rendering the NRU inoperable would constitute resulting physical damage.

Applying the principles of Ledcor to interpret the meaning of resulting physical damage, I conclude that a broad definition of resulting physical damage is appropriate in the factual context of this case to interpret the words in the Policy to include impairment of function or use of tangible property caused by the unexpected leak of heavy water.

This interpretation is in accordance with the purpose of all-risks property insurance, which is to provide broad coverage. To interpret physical damage as suggested by the Insurer would deprive the Insured of a significant aspect of the coverage for which they contracted, leading to an unfair result contrary to the commercial purpose of broad all-risks coverage. [Emphasis added.]

[84] At para. 501, she concluded that “[t]he leak of heavy water at J-41 was the tip of the iceberg that led to the shutdown of the NRU until the CNSC approved the repairs and design of the NRU as fit for its purpose” and should therefore be construed as resulting physical damage.

(ii) Canadian law respecting exceptions to policy exclusions

[85] The insured has the onus of proving that an exception to an exclusion clause applies: Ledcor, at para. 52. Exceptions to exclusion clauses should be interpreted broadly: Monk v. Farmers and Muskoka Ins., 2017 ONSC 3690, 70 C.C.L.I. (5th) 94, at para. 132, aff’d 2019 ONCA 616, 92 C.C.L.I. (5th) 84, leave to appeal to refused, [2019] S.C.C.A. No. 384.

[86] Canadian authorities, including those that pertain to all-risk policies, have long held that exclusions for physical damage do not include loss of use or pure economic loss, unless otherwise specifically provided for: Perry et al. v. General Security Insurance Co. of Canada et al. (1984), 11 D.L.R. (4th) 516 (Ont. C.A.) and Sterling Crane v. Penner Brothers Utilities Ltd., 12 C.C.L.I. 97 (B.C.S.C.), aff’d 14 C.C.L.I. 125.

[87] In Perry, at p. 9, this court considered coverage “for injury or damage to the person or property of another”. “Property” was defined to include profits, earnings and other pecuniary interests, and expenditures and charges, but only to the extent expressly provided in the contract. The court determined that the coverage could not “be interpreted to mean economic loss unrelated to physical damage to property”: at p. 13.

[88] In Sterling, at paras. 6 and 16, the Supreme Court of British Columbia considered an all-risks policy which covered “all risks of direct physical loss of, or damage to the insured property”. The plaintiff sought payment for loss of income from the insured property while it was being repaired. The court rejected this claim on the basis that it was not “direct physical loss”.

[89] Second, where a policy is intended to include not only physical but economic losses, insurance policies have specifically defined property damage to include “loss of use”: International Radiography & Inspection Services (1976) Ltd. v. General Accident Assurance Co. of Canada (1996), 193 A.R. 1 (C.A.), at para. 16. See also ARG Construction Corp v. Allstate Insurance Co. of Canada (2004), 73 O.R. (3d) 211 (S.C.), at para. 30; Canadian Equipment Sales & Service Co. Ltd. v. Continental Insurance Co. (1975), 59 D.L.R. (3d) 333 (Ont. C.A.), at p. 6; Fridel Limited v. Intact Insurance Co., 2018 ONSC 5923, at para. 6; Hamel Construction Inc. v. Lombard Canada Ltd., 2004 NSSC 42, 221 N.S.R. (2d) 191, at para. 13, aff’d 2005 NSCA 69, 232 N.S.R. (2d) 128, leave to appeal refused, [2005] S.C.C.A. No. 284; Progressive Homes, at paras. 10 and 30; Simcoe & Erie General Insurance Co. v. Royal Insurance Co. of Canada (1982), 36 A.R. 553 (Q.B.), at para. 38.

(iii) The interpretation of similar provisions by American and British courts

[90] Appellate courts in both the United States and the United Kingdom have also concluded that physical damage exceptions to exclusions do not include loss of use.

[91] For example, in Hamilton Die Cast, Inc. v. United States Fidelity & Guaranty Co., 508 F. (2d) 417 (7th Cir. Ct. App. 1975), at pp. 420, the Court of Appeals for the Seventh Circuit held, “[i]dled machinery is not injured or destroyed tangible property and, therefore, there is no ‘property damage’ within the coverage of the policy.” Similarly, in MRI Healthcare, the Court of Appeal of California held that a “physical” damage exception to exclusion does not cover claims where “the insured merely suffers a detrimental economic impact unaccompanied by a distinct, demonstrable, physical alteration of the property”: at p. 779, citing Couch on Insurance, loose-leaf, 3d ed. (Thomson Reuters, 2010) at s. 148:81 (footnotes omitted). Thus, the fact that a machine was turned off and could not be turned back on was not “direct physical loss”.

[92] In Pilkington United Kingdom Ltd. v. CGU Insurance Plc., [2004] E.W.C.A. Civ. 23, [2005] 2 All E.R. 283, at paras. 33-35, the Court of Appeal for England and Wales (Civil Division) agreed that coverage under a policy for “physical damage to physical property” “is confined to liability for the physical consequences and does not extend to ‘mere financial consequences’”.

(iv) Analysis of the interpretation of the exception to exclusion from coverage for corrosion and conclusion

[93] The Supreme Court held in Ledcor, at para. 52, citing Progressive Homes, at paras. 26-29 and 51, that: “the insured has the onus of first establishing that the damage or loss claimed falls within the initial grant of coverage. The onus then shifts to the insurer to establish that one of the exclusions to coverage applies. If the insurer is successful at this stage, the onus then shifts back to the insured to prove that an exception to the exclusion applies.” Although exceptions are interpreted broadly, particularly in all-risk policies, this does not mean that clear wording should be altered. For the reasons that follow, I find that the exception to the corrosion exclusion does not include coverage for economic loss:

1. 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.
2. A contextual analysis of the Policy does not lead to a broader interpretation of “resulting physical damage” because: (a) Damage for “loss of market or loss of use, except to the extent provided by this Policy” is specifically excluded from coverage; (b) The Contingent Time Element provision that allows for loss of profits only applies to insured claims; and (c) A reasonable interpretation of the exception to the corrosion exclusion in this all-risk Policy is that, while lost profits are not covered, the provision does cover all costs to repair physical damage.
3. The preponderance of cases in Canada, the United States and the United Kingdom have not interpreted resulting physical damage to extend beyond physical repairs to include loss of use. On the contrary, they have held that where loss of use is to be included as resulting physical damage, this must be made clear in the policy.

[94] The only resulting physical damage was the leak in the calandria wall caused by corrosion.

[95] The trial judge accepted 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”: at para. 447. The trial judge also held that “the J-rod annulus, with its sump pump, was not physically damaged by the leak of heavy water in the literal sense”: at para. 492.

[96] The trial judge relied on the American decision in MRI Healthcare to conclude that the resulting loss of use constituted resulting physical damage. That case, however, does not support the proposition that economic loss should be covered under an exception to an exclusion for resulting physical damage. On the contrary, the court concluded that there is no resulting physical damage to be covered where the detrimental impact is “unaccompanied by a distinct, demonstrable, physical alteration of the property”: at p. 779, citing Couch on Insurance. As such, although the leak resulted in the shutdown, the shutdown itself is not resulting physical damage. To read in coverage for “loss of use” distorts the plain language of the Policy and is out of step with the above case law.

[97] For these reasons, I find 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.

THE THIRD ISSUE: PREJUDGMENT INTEREST AT ACTUAL COST OF BORROWING

[98] Given my conclusion that I would deny coverage, there is no need to address this issue. However, had I decided otherwise, I would not have interfered with the trial judge’s exercise of her discretion to award compound prejudgment interest.

[99] Section 130 of the CJA gives the court broad discretion to award interest at a rate higher than that provided for in the CJA if it considers it just to do so, taking into account a number of factors set out in s. 130 of the CJA.

[100] The trial judge noted that there was no provision for compound interest in the Policy. However, she awarded MDS prejudgment interest based on her conclusion that MDS borrowed money at between 4.99 to 5.9 percent interest before judgment, there was a “documented average cost of borrowing” and that, had the policy amount been available at the time of loss, the policy funds could have been used by MDS to avoid borrowing.

[101] The trial judge awarded MDS US$14,821,338 interest on damages of US$25,000,000. If the CJA rate had been used, interest would have been US$1,668,368.

[102] MDS submits that the trial judge reasonably exercised her discretion under s. 130(1) of the CJA to award interest at a rate higher than that provided under s. 127. MDS adduced expert evidence regarding the cost of borrowing and the unavailability of the funds to which the insured was entitled, and much of that evidence was not contested.

[103] Courts of equity have always exercised the power to award compound interest whenever there is wrongful detention of money that ought to have been paid and which the company uses in its business: Enbridge Gas v. Michael Marinaccio et al., 2011 ONSC 4962, at para. 17, aff’d 2012 ONCA 650, 355 D.L.R. (4th) 333, at paras. 56-57, leave to appeal refused, [2012] S.C.C.A. No. 514 & [2012] S.C.C.A. No. 517; Brock v. Cole (1983), 142 D.L.R. (3d) 461 (Ont. C.A.). This is based on the theory that it is reasonable to assume that the wrongdoer made the most beneficial use of the money and is accountable for the profits. A reasonable use of money implies compounding interest at some appropriate interval.

[104] The trial judge concluded that it was reasonable to award prejudgment interest at the actual cost of borrowing as:

To order otherwise means that the Insurer, though losing the lawsuit on all fronts, has won. It breached the Policy with the Plaintiffs, has had the benefit of the use of the Plaintiffs' funds totaling millions of dollars over the years. To order otherwise allows the Insurer to make a considerable profit on the amounts withheld in breach of the Policy, at their client's expense.

[105] I see no error in principle in the exercise of her discretion on this issue and, had I decided there was coverage for these losses, I would not have interfered with the trial judge’s exercise of her discretion in respect of prejudgment interest.

CONCLUSION

[106] For the reasons set out above, I would allow the appeal and deny coverage. In keeping with this court’s decision in St. Jean v. Cheung, 2009 ONCA 9, at para. 4, and Hunt v. TD Securities Inc. (2003), 229 D.L.R. (4th) 609 (Ont. C.A.), at para. 188, since the appeal is allowed, I would set aside the trial judge’s decision with costs. In accordance with the agreement between the parties, costs of this appeal to the appellant in the amount of $35,000 inclusive of disbursements and HST.

Released: September 3, 2021 “K.F.” “J.A. Thorburn J.A.” “I agree. K. Feldman J.A.” “I agree. Harvison Young J.A.”

[1] FM Global also relied on an “idle period exclusion” and a “nuclear exclusion” to deny coverage. The trial judge found that these exclusions did not apply. The appellant is not pursuing these grounds of appeal.