Case information

Insurance — Property insurance — All risks policy — Exclusions clauses and exceptions —Interpretation — How should Canadian courts interpret physical damage exclusions and resulting damage exceptions in a standard form property and casualty insurance policy — Does the loss of an insured property’s functionality or use constitute resulting “physical damage” within the meaning of an “all risk” policy.

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The applicants are a global health science company and its Canadian subsidiary. In February 2006, they contracted to buy radioisotopes from Atomic Energy of Canada Limited, to be produced at its Nuclear Research Universal (NRU) reactor located in Chalk River, Ontario. The radioisotopes would be sold worldwide for cardiac imaging, cancer treatments, and sterilization of medical products. On May 14, 2009, heavy water containing radioactive tritium was found to be leaking through the calandria wall of the NRU reactor. The leak was caused by corrosion. The reactor was shut down for 15 months for repairs, and the applicants lost profits of approximately CA$121,248,000 from the loss of their supplier. The applicants submitted a claim for lost profits to the respondent insurer under their all-risk insurance policy. The policy was a standard form covering all risks of physical loss or damage to property and contingent time element coverage resulting from a supplier’s business interruption. It excluded coverage for losses caused by corrosion, and the corrosion exclusion included an exception for resulting physical damage not excluded by the policy. The respondent denied coverage on the basis that the claim was excluded under the policy.
The Ontario Superior Court of Justice held that the applicant’s losses were covered under the policy. It found that the corrosion exclusion did not apply to unanticipated and fortuitous corrosion and that, had it applied, the exception for physical damage should be interpreted to include economic loss caused by the inability to use insured property, such as in this case. Therefore the applicants were entitled to recover to the limits of the Contingent Time Element coverage under its policy to the amount of US$25,000,000, plus prejudgment interest at the actual cost of borrowing. The Ontario Court of Appeal allowed the appeal, set aside the lower court judgment and denied coverage.