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Insurance - Exclusions

. MDS Inc. v. Factory Mutual Insurance Company

In MDS Inc. v. Factory Mutual Insurance Company (Ont CA, 2021) the Court of Appeal considered the law applicable to exclusions from an insurance policy:
(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), 1984 CanLII 2146 (ON CA), 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), 1996 ABCA 363 (CanLII), 193 A.R. 1 (C.A.), at para. 16. See also ARG Construction Corp v. Allstate Insurance Co. of Canada (2004), 2004 CanLII 34997 (ON SC), 73 O.R. (3d) 211 (S.C.), at para. 30; Canadian Equipment Sales & Service Co. Ltd. v. Continental Insurance Co. (1975), 1975 CanLII 670 (ON CA), 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), 1982 CanLII 1099 (AB QB), 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.


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Last modified: 07-09-21
By: admin