Terms in standard form all-risk policies should be interpreted and read in context
The Court of Appeal for Ontario held that the term “corrosion” in a standard all-risk insurance policy covers both fortuitous and non-fortuitous corrosion and an insurer’s liability for resulting physical damage does not extend to economic loss.
In MDS Inc. v. Factory Mutual Insurance Company, 2021 ONCA 594, the appellant denied the respondent’s claim for lost profits resulting from a leak caused by corrosion, stating that the claim was excluded under the insurance policy. The policy was a standard form all-risk insurance policy, which excludes coverage for losses caused by corrosion, but, as an exception, covers the physical damage resulting from corrosion.
The trial judge held the appellant liable under the policy, interpreting the term “corrosion” to refer only to “non-fortuitous corrosion” and not “fortuitous corrosion,” which she stated was what happened in this case. She also held that “physical damage” should be interpreted broadly to include not just physical damage caused by the corrosion, but also economic loss caused by the inability to use the insured property.
Contrary to the decision of the trial judge, the appeal court held that the term “corrosion” should be interpreted to include both fortuitous and non-fortuitous corrosion, and not only non-fortuitous corrosion. This interpretation is not only consistent with commercial reality but also the clear terms of the insurance policy. 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, said Justice Julie Thorburn, who wrote the reasons for the appeal court panel.
The Court also ruled that restricting the policy to cover only resulting physical damage does not include coverage of economic loss since the plain meaning of physical damage does not include economic loss. 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, said Thorburn.