“Physical Damage” Means “Physical Damage”: Who knew?

  • January 05, 2022
  • Dennis Ong

With late 2021’s release of MDS Inc. v. Factory Mutual Insurance Company[1] from the Ontario Court of Appeal, this rounds out the year with yet another major insurance-related appellate decision primarily authored by Justice Julie Thorburn, who was also responsible for crafting the written reasons in the seminal multi-insurer coverage decision, Markham (City) v. AIG[2] released in mid-2020.

This article intends to be a plain language summary of why the MDS v. Factory Mutual decision is important for any insurance-related and contractual interpretation dispute.  


There have been numerous articles drafted since the release of both decisions.  To avoid losing the reader with the technicalities of what a “J-Rod annulus” is, and how or why the nuclear reactor leaked, I will explain the relevant facts in the simplest of terms.   There are no reproductions of the trial or appellate decisions here.  There are no cut/pastes of complicated insurance policy wordings.

MDS Inc. (“MDS”) is a high-tech health science company.  On February 21, 2006, MDS contracted to buy radioactive isotopes being manufactured by their third-party supplier “AECL” at a nuclear reactor in Chalk River, Ontario.  On May 14, 2009, the reactor unexpectedly shutdown for 15 months.   Factory Mutual Insurance (“FM Global”) was the insurer of MDS.  FM Global had a $25 Million all-risks policy to cover MDS for physical loss or damage to property resulting from a supplier’s business interruption.   Because MDS lost its supplier of radioisotopes (and apparently, radioactive isotopes are very difficult to find) the lost profits of MDS were agreed upon by the Parties at trial to be $121 Million.   MDS made a claim to its insurer, FM Global, seeking payment of the $25 Million apparently available to MDS under the policy.  The cause of the shutdown was corrosion to a major component of the nuclear reactor.  

However, at the heart of the FM Global policy was a corrosion exclusion.   According to the policy, FM Global was to pay a maximum of $25 Million to its insured, MDS, for lost profits from the lost isotopes, unless the insurer could prove that the corrosion exclusion applied.