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By: I. Jamie Arabi, Litigation Associate |
The Court of Appeal for Ontario has issued the highly anticipated decision in MDS Inc v Factory Mutual Insurance Company. Last year, the Ontario Superior Court of Justice awarded prejudgment interest based on the insured’s actual cost of borrowing, and not the much lower rates under the Courts of Justice Act.[1] Although the Court of Appeal overturned the trial judge’s decision on the merits, it would not have interfered with the prejudgment interest award.[2]
In MDS, the insureds purchased radioisotopes produced at the Chalk River nuclear facility in Ontario. A federal regulator shut down the facility after the discovery of a heavy water leak, which interrupted the insureds’ supply. MDS sought indemnity under the business interruption coverage in its all-risks property policy, relying on a provision that covered a loss of profits flowing from physical damage to a supplier. The insurer, Factory Mutual, denied coverage because the reactor had not been harmed by the leak. The trial judge, Justice Wilson, adopted a broad definition of “resulting physical damage” to include loss of use and ruled for MDS.
Justice Wilson also ordered the insurer to pay prejudgment interest on the cost of borrowing, rather than the lower rates found in Ontario’s Courts of Justice Act. Since Factory Mutual had denied coverage, MDS borrowed money and sought its cost of borrowing from the date of loss to judgment. MDS argued that, to be fairly compensated for its loss, it was entitled to prejudgment interest based on the cost of borrowing, and that it would be unfair to reward the insurer for failing to pay the claim. Justice Wilson awarded about $12.5 million in compound prejudgment interest. A payment based on simple interest under the Courts of Justice Act would have been $1.6 million. Although there was no provision for compound interest in the policy, Justice Wilson made her award based on MDS’ borrowing at 4.99 to 5.9 percent interest before judgment. She also considered that there was a documented average cost of borrowing and, had the policy amount been available during the loss, MDS could have used those funds to avoid borrowing.
The appeal: compensation is key
Writing for the Court of Appeal for Ontario, Justice Thorburn overturned Justice Wilson’s decision on the merits. However, Justice Thorburn noted that, if there had been coverage, she would not have interfered with Justice Wilson’s exercise of discretion to award compound prejudgment interest at commercial rates.
Courts award compound interest where a wrongful detention of money ought to be paid to a company, which would use the money in its business. The underlying theory is that the wrongdoer will make the most beneficial use of the money while it is detained. Compounding interest is a reasonable use of money. Accordingly, Justice Wilson said that not ordering compound prejudgment interest would allow the insurer to win, despite losing the lawsuit, because Factory Mutual would have profited from millions of dollars at the plaintiff’s expense. Justice Thorburn saw no error in principle.
Commercial prejudgment interest: a powerful tool for insureds and resolution
Thus, although the MDS decision was overturned (which was not entirely unexpected), the Court of Appeal’s statement on awarding commercial prejudgment interest could become very significant. Insureds are advised to think about the factors that Justice Wilson considered when awarding commercial interest rates. Among other factors, she considered:
- the foreseeability of a claim for commercial interest;
- whether awarding commercial rates would be a pareto-efficient result given the profits made on the withheld funds;
- the relationship between the parties, including the insurer’s knowledge of its insured’s inability to mitigate damages in similar, unique losses; and
- the principle that prejudgment interest is compensatory and not punitive.
Although commercial interest rates will not always be awarded, MDS is a reminder to insureds and their counsel that, in the proper circumstances, insureds might be entitled to commercial interest, which can have significant impacts. The risk of paying commercial interest rates may lead insurers to resolve coverage disputes promptly.
Footnotes
[1] MDS Inc v Factory Mutual Insurance Company, 2020 ONSC 1924.
[2] MDS Inc v Factory Mutual Insurance Company, 2021 ONCA 594.
Jamie Arabi is an associate at Theall Group LLP and maintains a broad commercial litigation practice. Jamie is passionate about advocacy and has represented clients at the Superior Court of Justice, the Ontario Court of Justice, and provincial tribunals. Jamie articled at a prominent, full-service firm, assisting on both commercial litigation and transactional matters. Additionally, Jamie worked for an international law firm in Dubai, where he assisted on securities and regulatory matters. During law school, Jamie joined the TradeLab International Economic Legal Clinic. He was also recognized for his contributions to the Lebanese community and served as a director of a not-for-profit cultural organization. Currently, Jamie volunteers for Pro Bono Ontario. Jamie is conversant in Arabic.
For more information, visit https://theallgroup.com/
Photo courtesy of Micheile on Unsplash