Courts Weigh New Precedents on Policy Language as Residual BI Litigation Reshapes Commercial Coverage Terms

LONDON — Courts in the United Kingdom, the United States and other jurisdictions are setting new legal boundaries for commercial property insurance after a wave of pandemic-era business interruption (BI) disputes, as judges parse policy wording on causation, “physical loss,” exclusions and deductibility of government aid — developments that are reshaping how insurers underwrite and price cover for future systemic risks. The latest rulings — including a 2025 Court of Appeal decision in England on whether furlough payments reduce indemnities and a 2024 Pennsylvania Supreme Court ruling limiting recovery to losses tied to physical alteration of property — have left both policyholders and carriers recalibrating claims strategies, reserves and policy language. (cov.com)

What happened

• Who: courts, major insurers (including Liberty Mutual, Aviva, Allianz and market participants), policyholders and regulators such as the U.K. Financial Conduct Authority (FCA).
• What: judicial interpretation of core coverage triggers (disease/damage clauses, denial/prevention-of-access endorsements), the reach of virus and contamination exclusions, and whether government relief (notably furlough/CJRS payments in the U.K.) must be credited against BI claims.
• When: litigation and appeals have unfolded from 2020 through 2025 and into 2026; a swathe of UK litigation remains live ahead of a claims limitation window due in March 2026. (fca.org.uk)
• Where: principal battlegrounds include English courts and appellate panels, U.S. state supreme courts (notably Pennsylvania and California), and numerous U.S. federal and state trial courts hearing mass-filed BI suits. (cov.com)
• Why: pandemic shutdowns produced unprecedented, mostly non‑physical business losses that exposed contractual ambiguities and prompted regulators and courts to clarify whether traditional property policies were ever intended to cover economic interruption from a biological hazard. The outcomes reverberate through insurer reserving, reinsurance, and future policy design. (fca.org.uk)

Key recent rulings and their import
England — aggregated limits and furlough deductions
In Liberty Mutual Insurance Europe SE v. Bath Racecourse Co. Ltd. and related appeals, the Court of Appeal in February 2025 affirmed that composite insurance documents that cover multiple legal entities ordinarily operate as separate contracts with per‑entity limits unless the policy plainly provides an aggregate cap. The court also held that payments made under the U.K. Coronavirus Job Retention Scheme (CJRS, commonly called “furlough”) reduced the insureds’ claimed BI losses under “savings” clauses that require insureds to account for expenses that cease or are reduced in consequence of the insured peril. The ruling has been described by counsel for policyholders as “an important one” for groups operating multiple premises. (estatesgazette.co.uk)

Why it matters: the per‑entity limits point potentially unlocks larger recoveries for corporate groups with many sites insured under a single policy, while the furlough ruling narrows net recovery by treating government wage subsidies as reductions in the loss amount insurers must pay. The Court of Appeal’s conclusion on furlough has been allowed for further appeal to the Supreme Court, meaning the issue may yet be revisited at the highest U.K. level. (cov.com)

Pennsylvania — “physical alteration” threshold
In Ungarean v. CNA (Sept. 26, 2024), the Pennsylvania Supreme Court reversed earlier rulings and concluded that the policy language requiring “direct physical loss of or damage to” property unambiguously demands some form of physical alteration — a “physical disappearance, partial or complete deterioration, or absence of a physical capability or function” — that would ordinarily require repair, rebuilding or replacement. The court reasoned that without such a requirement, other policy clauses (like the “period of restoration”) would be rendered meaningless. The decision disposed of a high‑profile class action and aligned Pennsylvania law with the majority of U.S. jurisdictions that have denied pandemic BI claims where the insured property was not physically altered. (case-law.vlex.com)

Why it matters: U.S. businesses that sought recovery under standard business‑income or civil‑authority endorsements face a narrower path to recovery in many states; courts have repeatedly held that economic disruption alone — without tangible damage to covered property — does not trigger coverage under traditional “physical loss or damage” formulations. The Pennsylvania ruling has already influenced litigation strategy and settlement calculus for both national carriers and policyholders. (goodwinlaw.com)

California — the limits of “limited virus” coverage
In John’s Grill, Inc. v. The Hartford (Aug. 8, 2024), the California Supreme Court reversed a Court of Appeal decision and held that a “limited fungi, bacteria or virus” endorsement that extends virus coverage only where the virus results from enumerated causes (such as windstorm, water damage or explosion) was clear and enforceable. The high court concluded, by majority opinion authored by Chief Justice Guerrero, that the specification of causative events did not render the endorsement “illusory” as a matter of law. The decision narrowed a path policyholders had pursued — arguing that narrow limited‑cause endorsements were effectively meaningless for ordinary businesses facing a global pandemic. (law.justia.com)

Why it matters: John’s Grill underscores judicial unwillingness, in some courts, to expand coverage by invoking doctrines of reasonable expectation or illusory promise where policy text is explicit, even if the explicit language proves of limited practical value to most buyers. The ruling has prompted practitioners to urge careful drafting of any virus‑related optional endorsements. (law.justia.com)

Broader U.S. pattern: mixed outcomes but insurer advantage
Across the U.S., the bulk of appellate courts and state high courts have ruled for insurers when policies require “direct physical loss or damage,” particularly where policies include express virus exclusions or other limitations. Scholars and coverage counsel note a strong trend of dismissals at trial and appellate levels, even as some district courts and isolated state decisions found ambiguities for policyholders. The litigation remains active — plaintiffs continue to file suits asserting civil‑authority coverage, alternate causation theories, and challenges to exclusions — but the prevailing jurisprudence has tilted toward insurers. (goodwinlaw.com)

What remains unresolved and why litigation persists

• Scope of disease‑type clauses and “at the premises” language: many disputes turn on clause drafting: does a “disease” or “notifiable disease” insuring clause require proof of disease present “at the premises,” and what methodologies suffice to prove presence? The FCA’s 2021 test‑case and subsequent guidance attempted to help policyholders prove local presence, but not all wordings were included in the test sample and issues remain. (fca.org.uk)
• Aggregation, limits and composite policies: whether a policy that lists multiple insureds or premises is to be read as a single aggregate pot or as separate contracts per entity continues to be litigated; the Bath Racecourse ruling favored per‑entity access but left factual determination of “how many losses” to later stages. (estatesgazette.co.uk)
• Interaction between government relief and indemnity: the Court of Appeal’s endorsement of deduction for furlough aid has critical financial consequences; claimants and their counsel argue such public support should not produce an insurer “windfall,” while insurers say the savings clauses and commercial reality require reduction. The Supreme Court of the U.K. has granted permission to appeal the furlough issue, so a final ruling may still change the law. (cov.com)
• Timetable and time bars: in the U.K., many Covid‑era BI claims face running limitation periods; campaigners and trade groups are urging the FCA and government to extend claim windows to avoid a wave of time‑barred disputes while legal uncertainty persists. Industry counsel and trade bodies differ on the need for extensions; the FCA has been urged to provide clarity and guidance. (thetimes.com)

Numbers and stakes

• The FCA’s expedited test case in 2020–21, and the Supreme Court’s January 2021 rulings, addressed a representative sample of policy wordings affecting an estimated 370,000 U.K. policyholders with roughly £1.2 billion of claims in contention at the time — a figure that initially shaped expectations for industry exposure in Britain. (fca.org.uk)
• Insurer balance sheets and reinsurers: carriers and reinsurers increased reserves and tightened underwriting following early uncertainty. Reinsurers and market analytics predicted a long‑tail of disputed exposures and have pressed for clearer risk boundaries and higher prices in certain lines. Market analysts reported shifts in casualty and P&C premium expectations into 2025 and beyond as volatility and social‑inflation dynamics changed loss assumptions. (beinsure.com)

Voices in the courtroom, the boardroom and the market

• “This is an important decision for corporate groups with multiple insured entities,” said James Breese, counsel for Bath Racecourse, after the Court of Appeal ruling, praising the clarification that composite policies often lead to individual insureds’ access to sub‑limits. (iclg.com)
• Insurer statements have generally been cautious. In briefs and public comment, carriers have emphasized adherence to contractual language and the need for clear drafting to allocate pandemic risk — a shifting posture insurers say is necessary to make pandemic‑risk transfer insurable in the future. (Insurers named in the Bath Racecourse litigation did not offer expansive press statements beyond procedural filings in the judgments.) (estatesgazette.co.uk)
• On market response, Aon’s 2026 P&C outlook stressed that volatility is reshaping underwriting decisions and noted opportunities for companies that strengthen resilience and transparently disclose exposures. “Volatility is reshaping how P&C risk decisions are made,” an Aon report observed in summarizing market trends. (aon.com)

Practical consequences for insurers, reinsurers and policyholders

• Underwriting discipline and new exclusions: insurers are re‑examining communicable disease endorsements and the use of explicit virus exclusions, and many have re‑priced or narrowed cover for contagion risk, while expanding capacity in other lines that present lower systemic accumulation risk. Reinsurers have pushed for stricter terms and higher rates on casualty and other lines affected by social‑inflation concerns. (scor.com)
• Litigation and claim handling: carriers face a two‑track reality — many claims were resolved after the FCA test case, but a sizable residue of disputes remains, driven by differing policy wordings, high‑value corporate group structures, and divergent national precedents. Insurers must balance litigation posture, reserving, and reputational risk while regulators press for fair outcomes on consumer‑facing policies. (fca.org.uk)
• Policy drafting and purchasing: brokers and risk managers are advising clients to secure clearer, bespoke extensions where possible (e.g., contingent BI, supply‑chain triggers, non‑physical loss language tied to specific perils), and to test contract wording against recent case law. Many firms are also investing in enterprise resilience to reduce reliance on contentious insurance coverage for pandemic‑style systemic events. (aon.com)

Looking ahead: litigation, regulation and market design
Legal watchers say there are at least three axes to watch:

1. appellate refinement of “savings” clauses and government‑aid deductibility (U.K. Supreme Court appeal on furlough); (cov.com)
2. further state high‑court decisions in the U.S. resolving whether any non‑physical loss triggers coverage in particular policy texts and how virus exclusions interact with limited virus endorsements; (case-law.vlex.com)
3. regulatory and market responses to preserve future pandemic risk transfer — whether through layered private reinsurance, government backstops, or new public–private schemes. Industry advisers emphasize that without clearer, standardized wording and appropriate risk‑sharing mechanisms, pandemic risk will remain difficult to insure affordably in traditional markets. (aon.com)

Industry and policy proposals
Post‑pandemic reviews by insurers and international industry groups have pushed several proposals that would reduce future legal friction:

• clearer standardization of coverage triggers and exclusions so courts and parties can apply predictable rules; (fca.org.uk)
• the use of parametric or index‑based pandemic products that pay on objectively measurable triggers rather than disputed causal chains; and (pmc.ncbi.nlm.nih.gov)
• public backstops or layered government reinsurance for systemic biological perils, an idea that UK and U.S. commentators have raised repeatedly since 2020 to prevent financial market dislocation while preserving insurer solvency. (artemis.bm)

What the courts have found — in brief

• The U.K. Supreme Court’s 2021 FCA test case produced major wins for some policyholders but did not resolve all issues; many disputes have migrated into coordinated litigation; and the Court of Appeal’s 2025 rulings refined how limits and government subsidies operate in group settings. (fca.org.uk)
• The Pennsylvania Supreme Court (Sept. 26, 2024) required a showing of physical alteration for typical “direct physical loss of or damage to” clauses, tightening recovery lines in that jurisdiction. (case-law.vlex.com)
• The California Supreme Court (Aug. 8, 2024) enforced a limited virus‑coverage endorsement with enumerated causes, rejecting a broad illusory‑coverage argument for that policy form. (law.justia.com)

Voices pressing for more time and clarity
Industry groups and claimant lawyers are locked in a race against limitation periods. In the U.K., hospitality trade groups, law firms representing policyholders, and legal advisers urged the Financial Conduct Authority to extend the time for COVID‑related BI claims by two years in late 2025 and early 2026, warning that many small businesses lack resources to litigate and risk losing claims due to deadlines. Regulators face pressure to balance legal finality with ensuring access to remedies. (thetimes.com)

Conclusion
The pandemic’s insurance aftershocks have produced a complex mosaic of precedents rather than a single rule. English courts have clarified aggregation and the treatment of government support, while many U.S. courts have narrowed the meaning of “physical loss,” and state high courts have delivered split results that depend heavily on policy text. For insurers, reinsurers and corporate risk managers, the lesson is transactional and doctrinal: explicit, carefully drafted wording matters, regulators will remain an active intervenor where mass markets and small business consumers are implicated, and without novel risk‑sharing architectures, pandemic‑scale business interruption will remain a contested, and potentially uninsurable, exposure. (cov.com)

Reporting and sources
This article synthesizes court opinions, judgments and commentary from primary court publications and legal reporting, including the U.K. Court of Appeal and Supreme Court materials, the Pennsylvania Supreme Court opinion in Ungarean v. CNA, the California Supreme Court’s John’s Grill opinion, FCA guidance and contemporaneous reporting and legal analysis assessing how policy wording and market dynamics are changing post‑pandemic. Key sources consulted include the U.K. judiciary and FCA materials; court opinions and case summaries (Pennsylvania and California); law‑firm and market analyses (Covington & Burling, Aon, SCOR); and reporting from major financial and legal outlets. (fca.org.uk)

Selected primary and contemporaneous references:

• U.K. Financial Conduct Authority, business interruption test case materials and guidance. (fca.org.uk)
• Liberty Mutual Insurance Europe SE v. Bath Racecourse Co. Ltd. (Court of Appeal) and legal briefings. (cov.com)
• Ungarean v. CNA & Valley Forge Ins. Co., Supreme Court of Pennsylvania (Sept. 26, 2024). (case-law.vlex.com)
• John’s Grill, Inc. v. The Hartford Financial Services Group, Inc., Supreme Court of California (Aug. 8, 2024). (law.justia.com)
• Ongoing U.S. filings and practice updates (Crowell & Moring, Goodwin Law, American Bar Association coverage notes). (crowell.com)
• Market analyses and outlooks from Aon, SCOR and reinsurance market commentary. (aon.com)

(Reporting contributed from London, Philadelphia and legal dockets.)