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:
- the history of the concept of pre-judgment interest and case law on the issue, such as the concept that pre-judgment interest is compensatory, not punitive;
- the discretion conferred on judges by the Courts of Justice Act to award higher interest rates;
- the relationship between the insurer and its insured, particularly given that the insurer was MDS's long-time insurer and so had known that the supply of isotopes from the reactor constituted a substantial proportion of MDS's income and thus that MDS was vulnerable and could not mitigate its damages;
- the insurer's conduct, including its decision to deny the claim before the parties had known all of the facts and its refusal to change its coverage position in light of the developing evidence. While the insurer's denial letter stated that it would consider any additional information that might affect coverage, the court held that this assertion rang "hollow in light of the history. The battle lines were drawn early before the facts were known". According to the court, the denial letter read more like a pleading than an adjuster's letter;
- the claim for commercial interest was reasonably foreseeable because MDS had put the insurer on notice from the date on which the proof of loss was filed that MDS was seeking "all losses, damages and expenses flowing from the Insurer's refusal to pay in accordance with the Policy", as well as pre and post-judgment interest "as appropriate". Moreover, it had been reasonably foreseeable that MDS would have to borrow at market rates to compensate for its losses;
- MDS had filed undisputed expert evidence that estimated the insured's actual cost to borrow the funds that it would have received but for the insurer's denial and the insurer's profits that it had earned because it had failed to pay MDS;
- the court stated that paying commercial rates was a Pareto-efficient result where both parties benefited, because the insured's $12 million pre-judgment interest award was less than the $17 million in profits that the insurer had realised from its delayed payment; and
- that the risk of being liable to pay commercial interest would prompt insurers to work quickly to resolve claims, which supports the public policy consideration of encouraging early and fair settlement by insurers.
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.