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25 August 2020
The Ontario Superior Court of Justice recently held that an insurer which wrongfully denied a US$121 million claim must pay pre-judgment interest based on the actual cost of borrowing and not the rates stipulated in the Courts of Justice Act.
The case, MDS Inc v Factory Mutual Insurance Company, arose out of a leak at a nuclear reactor in Chalk River, Ontario. MDS purchased the radioisotopes produced at that reactor and processed them for eventual sale. When the reactor shut down for 15 months following the leak, MDS turned to its insurer to cover its business interruption losses. The court held in favour of the insured on all coverage issues, finding that all of the exclusions and exceptions at issue should be interpreted in MDS's favour. While a lot of digital ink has been spilled on the court's handling of those coverage issues, its decision regarding pre-judgment interest has received relatively little attention.
MDS argued that, to be fairly compensated for its loss, it should be entitled to pre-judgment interest based on the actual cost of borrowing from the date of loss to judgment (around 5% to 6%), not the simple interest rate contained in the Courts of Justice Act. MDS maintained that had the insurer paid the loss promptly, it would not have had to borrow the funds in the amount of the policy limits. Further, it argued that it would be unfair for the insurer to realise a profit from its refusal to pay. On the other hand, the insurer's position was that the court should not award the actual cost of borrowing because "there is not a single insurance case in Canada" where this has occurred.
Finding for the insured, the court took into account the following points in support:
Counsel and adjusters would be wise to carefully consider this case in any future insurance coverage dispute, as it sets out a number of factors that a court could consider in deciding whether to award commercial interest rates. In particular, the court focused on the insurer's conduct in coming to its decision, such as early denials, pleading-like adjusters' letters and refusals to change a coverage position, which are not uncommon. An insured seeking commercial interest must ensure that it can present evidence on its cost of borrowing and the insurer's profit on the unpaid funds, which will allow the court to weigh the benefits to both sides if commercial interest is awarded.
For further information on this topic please contact Callum Micucci at Theall Group LLP by telephone (+1 416 304 0115) or email (firstname.lastname@example.org). The Theall Group LLP website can be accessed at www.theallgroup.com.
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