



COURT OF APPEAL FOR ONTARIO

CITATION: MDS Inc. v. Factory Mutual Insurance Company, 2021
    ONCA 594

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)

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 suppliers 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 Policys 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 Policys limit, MDS
    should be awarded prejudgment interest at the rate of the companys 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 judges 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 courts 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
    Globals 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 judges interpretation should be reviewed for palpable and
    overriding error. According to MDS written submissions, the trial judges
    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
    courts 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 judges 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 judges
    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 judges
    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
:



3) 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 AECLs 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 insureds 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 finders 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
    partys 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 reactors 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 CO
2
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 judges 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, affd 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, affd 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 judges 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 reactors
    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 Globals 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 dont
    know that thats accurate. Im trying to think of a situation where we would
    cover it. I cant 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 judges
    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 Globals 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 Globals 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 Globals 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
    partys 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 judges 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 judges 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
Jessys 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, affd 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.), affd 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, affd 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 judges 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, affd 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 judges 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 courts 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 judges 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.


