Have you ever wondered if your policy covers a shutdown when there’s no visible damage?
How do recent court decisions change what’s covered when cyber-failures or government orders halt your operations?
In this guide, you’ll gain:
- Clear explanations of the latest judicial rulings and their real-world impact
- An overview of New York’s pioneering stand-alone coverage law
- Actionable steps to shore up your insurance program against non-physical threats
If your business interruption policy excludes non-physical events—like cyberattacks or supply-chain breakdowns—you may face millions in uninsured losses. Our team has over a decade of experience helping technology manufacturers navigate complex insurance disputes. Below, we break down pivotal court rulings, highlight emerging legislative solutions, and offer concrete recommendations to keep your coverage as cutting-edge as your products.
1. Landmark Court Decisions
Pennsylvania’s Strict Physical-Damage Requirement
In Ungarean v. CNA Insurance Co. (PA, Sept. 2024), the Pennsylvania Supreme Court held that “direct physical loss or damage” requires actual, visible harm—erosion, destruction, or disappearance of property. Under this view, government-mandated shutdowns or safety retrofits (e.g., installing partitions or hand-sanitizer stations) don’t qualify for business interruption (BI) coverage unless there’s tangible damage.
- Key Point: Policies triggering on “physical damage” alone won’t cover forced closures or precautionary upgrades.
North Carolina’s Broader “Loss of Use” Approach
By contrast, in North State Deli v. Cincinnati Ins. Co. (NC, Dec. 2024), the North Carolina Supreme Court ruled that if property can’t be used for its insured purpose, that functional loss counts as “physical loss.” This decision underscores the principle that ambiguities in insurance contracts should favor the policyholder.
- Key Point: Mandated closures can trigger BI coverage if the policy doesn’t expressly exclude virus- or closure-related losses.
Navigating the Jurisdictional Split
Technology manufacturers operating across multiple states face a patchwork of interpretations.
- Consider: Reviewing your policy’s governing-law clause to align with jurisdictions that recognize functional loss.
- Tip: When negotiating renewals, ask insurers to clarify how “physical loss” is defined or to remove restrictive language altogether.
2. New York’s Stand-Alone Business Interruption Law
What the New Law Covers
Effective October 27, 2024, New York’s Bill A10342 authorizes stand-alone BI policies that do not require physical loss or damage. Covered triggers include:
- Loss or damage to your property or neighboring property
- Acts of violence on the premises
- Government orders
Why It Matters for Tech Manufacturers
- Expanded Protection: Shutdowns for safety inspections, regulatory orders, or public health measures now qualify.
- Neighboring Impact: A fire or flood at an adjacent facility can trigger your BI coverage, even if your own assets remain intact.
Practical Next Steps
- Monitor insurer participation—offering is optional, and pricing may reflect higher perceived cyber or supply-chain risks.
- Scrutinize any waiting periods, sublimits, or carve-outs for cyber events before committing.
3. Modern BI Risks Beyond Physical Damage
“Silent Cyber” Exposures
Today’s factories run on integrated software, IoT sensors, and automated controls. A single software bug or cyber-intrusion can halt production without a scratch on any machinery.
- Exposure: Routine updates gone wrong, system glitches, or non-malicious errors can trigger significant downtime.
The CrowdStrike Case Study
On July 19, 2024, a flawed CrowdStrike update affected 8.5 million devices, grounding flights, delaying surgeries, and stalling transactions—yet no physical damage occurred.
- Lesson: Non-malicious system failures can cause enormous losses that may fall outside traditional cyber BI policies, which often cover only “malicious” attacks.
Supply-Chain Cascades
Semiconductor shortages, factory shutdowns abroad, or transportation disruptions can ripple through your just-in-time processes, stopping your lines with zero physical damage to your facility.
- Strategy: Map multi-tier dependencies and consider contingent BI coverage that extends beyond direct suppliers.
4. Cyber & Contingent Business Interruption Coverage
First-Party Cyber Business Interruption
- Covers: Lost revenue, extra expenses, and system restoration costs.
- Watch Out: Many policies exclude non-malicious failures—negotiate inclusion of software errors and vendor mistakes.
Contingent Cyber Business Interruption
- Covers: Disruptions at suppliers, customers, or service providers.
- Watch Out: Standard forms often limit you to direct counterparties; multi-tier coverage requires thorough scheduling and underwriting.
Parametric & Industry-Specific Solutions
- Parametric Products: Predefined payouts when objective triggers (e.g., data-center outage) occur—speeding up claims.
- Specialized Policies: New offerings tailored for semiconductor fabs and high-tech manufacturers may include broader BI coverage for digital risks.
5. Five Strategic Steps to Strengthen Your Program
- Conduct a Digital-Age Risk Assessment
Map critical software systems, IoT dependencies, and single points of failure. Quantify potential losses—both direct and cascading. - Layer Your Coverage
Combine traditional BI, standalone cyber BI, contingent BI, and, where available, stand-alone BI under laws like New York’s. - Negotiate Key Policy Terms
Shorten waiting periods, secure broad “covered cause” definitions, clarify “physical loss,” and choose policy law favorably. - Explore Alternative Risk Transfers
Consider parametric solutions, captive insurers, or risk retention groups for customized coverage and potential cost advantages. - Prepare for Claims
Keep detailed system diagrams, process flows, financial models, and incident-response protocols on hand to support any BI claim.
By understanding how courts are defining “physical loss,” leveraging new legislative options, and structuring a modern, layered insurance program, technology manufacturers can protect themselves against today’s non-physical threats. Update your policies, engage with specialized brokers, and ensure that your business interruption coverage truly matches the digital realities of modern manufacturing.
