Split PA and NC COVID-19 Business Interruption Rulings

If you’ve ever read a commercial property insurance policy, you already know it was written by someone who thinks “clear communication” is a dangerous hobby. And yet, during COVID-19 shutdowns, thousands of businesses opened their policies and thought: Surely this is what business interruption coverage is for.

Then the courts got involvedand the results looked less like a tidy rule and more like a split-screen movie: Pennsylvania largely shut the door on coverage for shutdown-order losses, while North Carolina cracked it open for certain policyholders (and then immediately reminded everyone that exclusions are still the bouncer).

This article breaks down what happened, why it happened, and what these decisions teach businesses, insurers, and anyone who has ever yelled “WHAT DOES ‘DIRECT PHYSICAL LOSS’ MEAN?!” into the void.

The Short Version: Business Interruption Insurance Was Built for Fires, Not Friday Press Conferences

Traditional business interruption (BI) coverage is usually part of a commercial property policy. It’s designed to replace lost income (and sometimes extra expenses) when operations are suspended because of a covered property loss. The catch: many policies require “direct physical loss of or damage to” property to trigger coverage.

COVID-19 brought a new kind of interruption: dining rooms closed, offices limited, “non-essential” became a life label, and businesses lost revenue fast. Policyholders argued that losing use of their premises due to government orders should count as a “physical loss.” Insurers argued that “physical” means what it sounds likesomething that alters or harms property in a material way.

Courts across the country mostly sided with insurers. But two state supreme court decisionsone in Pennsylvania, one in North Carolinabecame a neat case study in how different legal approaches can lead to very different outcomes.

Pennsylvania: The “No Physical Change, No Coverage” Approach

Ungarean v. CNA: The Pennsylvania Supreme Court Says Shutdown Orders Aren’t “Physical Loss”

In Ungarean v. CNA & Valley Forge, a dental practice sought coverage for business income losses tied to pandemic-related closure orders. The policyholder’s theory was straightforward: the practice couldn’t use its offices for normal operations, so it suffered a “direct physical loss.” The insurer said there was no physical loss or damagejust economic loss from external restrictions.

The Pennsylvania Supreme Court ultimately sided with the insurer, concluding that the policy’s language required something more concrete than “we couldn’t operate like normal.” In other words, a government order may stop business activity, but it doesn’t necessarily do anything to the building itself.

How Pennsylvania Framed “Direct Physical Loss”

The court’s reasoning focused on the “physical” part of the coverage trigger. While policyholders emphasized “loss of use,” the decision treated “direct physical loss” as requiring a tangible, property-based problemsuch as a physical disappearance, deterioration, or loss of a property’s physical capability or function, or an actual physical harm or injury to property.

That framing matters because it separates business conditions (customers can’t come in; services are restricted) from property conditions (the premises are unsafe or unusable because something physically affected them). Under the Pennsylvania approach, COVID-era shutdowns typically lived in the first bucket.

What Pennsylvania Left Open (and Why That’s Not Just Legal Trivia)

Importantly, Pennsylvania’s ruling did not necessarily declare that the coronavirus can never cause a direct physical loss. A practical takeaway from commentary on the decision is that cases resting only on shutdown orderswithout allegations about actual virus presence affecting the propertywere especially vulnerable.

Translation: if your claim story begins and ends with “the governor said close,” Pennsylvania isn’t impressed. But if a future claimant alleges and proves that a property condition (like contamination rendering the premises unsafe without remediation) destroyed the building’s physical functionality, the debate could look different. (Not easy, but different.)

North Carolina: “Loss” Can Mean Loss of UseIf the Policy Leaves the Door Open

North State Deli v. Cincinnati Insurance: A Rare Policyholder Win at the Summary Judgment Stage

In North State Deli, LLC v. Cincinnati Insurance, restaurants and bars argued their “all-risk” property policies covered business income losses caused by COVID-era government orders restricting access and use of their premises.

The North Carolina Supreme Court disagreed with the intermediate appellate court and held that a reasonable policyholder could understand “direct physical loss” to include the effects of government orders that deprived the businesses of the use and access to their physical propertyespecially because the policy did not define “direct physical loss” and contained no virus exclusion.

North Carolina’s Big Moves: Ambiguity + Reasonable Expectations

North Carolina leaned heavily on insurance contract interpretation principles: if policy language is ambiguous and reasonably supports more than one meaning, courts resolve that ambiguity in favor of the policyholder. The court treated “loss” and “damage” as potentially different concepts, and it emphasized that “loss” can reasonably include dispossession, deprivation, or impairment of use or functioneven if the building is still standing there, minding its own business.

The court also acknowledged that other courts had reached the opposite conclusion nationwide, but it refused to follow the crowd simply because the crowd was large. The message was basically: We’re not grading on a curve.

But Wait: North Carolina Also Showed How Exclusions Can Slam the Door Shut

On the same day, the North Carolina Supreme Court decided Cato Corp. v. Zurich American, involving a clothing retailer. The court indicated that, under the reasoning of North State Deli, the retailer sufficiently alleged “direct physical loss” in conceptyet the claim still failed because the policy contained a viral contamination exclusion that the court found barred coverage.

That pairing is the North Carolina court’s not-so-subtle reminder: even if you win the “what does physical loss mean” argument, you can still lose the “what did your exclusions say” argument. Policies are like onionsthere are layers, and some make you cry.

PA vs. NC: A Side-by-Side Comparison of the Split

Why the Split Happened: It’s Not Just PoliticsIt’s Policy Text + Legal Method

1) “Physical” Is Doing Work (Or Not), Depending on the Court

Pennsylvania treated “physical” like a gatekeeper: it screens out claims that are purely about lost revenue from external restrictions. North Carolina treated “loss” as broad enough to include loss of use if the policy language doesn’t pin it downand then used pro-policyholder interpretation rules when ambiguity appeared.

2) The Presence (or Absence) of a Virus Exclusion Changes the Conversation

Many insurers added virus exclusions after earlier outbreaks, and COVID litigation repeatedly turned on whether the policy had a virus exclusion, a contamination exclusion, or other limiting endorsements. North Carolina’s pairing of North State Deli and Cato is the clearest example: one group wins without the exclusion; another loses with it.

3) Litigation Posture Matters: Pleading Stage vs. Summary Judgment

Courts are often more cautious at early stages (when they only assess whether a claim is plausibly stated) than at summary judgment (when the record is developed and the court decides whether a party is entitled to judgment as a matter of law). North Carolina’s decision was especially notable because it was not merely “you can try”it was a real coverage win at the summary judgment stage for those policyholders.

Practical Takeaways for Businesses, Brokers, and Risk Managers

Read the Endorsements Like They’re the Plot TwistBecause They Are

If you’re shopping for coverage going forward, endorsements matter as much as the headline promise of “all-risk.” A virus exclusion, contamination exclusion, or specific communicable disease endorsement can reshape (or eliminate) the argument before it even starts.

Document the “Property Story,” Not Just the “Revenue Story”

Courts are more receptive when a claim is tied to a concrete property condition: contamination that requires remediation, dangerous conditions that make occupancy unsafe, or situations where the premises’ physical functionality is nearly eliminated. A spreadsheet of lost sales helps damages, but it doesn’t always help trigger coverage.

Be Realistic About What Courts Have Been Doing Nationwide

Even with North Carolina’s decision, most jurisdictions have rejected COVID-19 business interruption claims under standard “direct physical loss” language. So if you’re evaluating a claim or a potential dispute, assume you will need a crisp argument, a policy-specific hook, and a clear explanation of why your facts are not “just another shutdown case.”

Future-Proofing: If You Want Pandemic Protection, You May Need Pandemic-Specific Products

The broader policy lessonhighlighted in regulatory and government analysesis that standard BI forms were not priced or designed to cover economy-wide, highly correlated pandemic losses. If businesses want meaningful protection for the next widespread event, they may need specialty coverage, parametric products, or new public-private backstops rather than hoping courts stretch old language to fit new catastrophes.

What These Rulings Mean Going Forward

For ongoing litigation, the PA/NC split is a reminder that insurance law is state law, and state supreme courts can interpret similar language differently. For insurers, North Carolina is a warning that undefined terms and missing exclusions can create real exposure in certain jurisdictions. For policyholders, Pennsylvania is a reminder that courts may insist on a property-centered interpretation even when the economic harm is undeniable.

The most realistic “next chapter” is not a nationwide flip, but a narrower trend: coverage outcomes will increasingly depend on precise wording, exclusions, and state-specific interpretation rules. In other words, your policy is not “what insurance does.” Your policy is what your policy saysplus whatever your state’s high court thinks those words mean.

Real-World Experiences and Lessons from the Split Rulings (Extra Detail)

Here’s what these split rulings have looked like in real-world, on-the-ground termsbased on patterns businesses and coverage teams repeatedly faced during COVID-19 BI disputes.

Experience #1: The Pennsylvania “We Paid for BISo Why Isn’t This It?” Moment. Many Pennsylvania businesses (dentists, salons, small retailers, professional offices) approached claims with a common-sense storyline: “We had to close. We lost income. Business interruption should cover interrupted business.” The first shock was learning that courts often treat BI as “time-element coverage” that only turns on when there is a covered property event. The second shock was discovering how heavily judges weigh the word “physical.” In practice, claim teams found themselves rewriting their narratives away from “orders caused losses” and toward “something happened to the premises.” If they couldn’t point to a property condition that destroyed functionality or required restoration, the argument stalledbecause the policy wasn’t being read as “income insurance,” but as “income insurance when property is physically impacted.”

Experience #2: The North Carolina “Policy Wording Is Destiny” Reality Check. In North Carolina, some restaurants and bars discovered that their policies didn’t define “direct physical loss,” andcriticallydidn’t include an express virus exclusion. That combination became a lever. The best-prepared policyholders didn’t just hand over monthly profit-and-loss statements; they also documented how orders physically restricted access and function: dining rooms closed, customer flow blocked, staff unable to occupy spaces as intended, and business operations tied to the premises’ physical layout (tables, bar seating, service lines). They framed the loss as deprivation of the property’s functional use as a restaurant, not merely a drop in demand. That framing aligned with the court’s view that “loss” can reasonably include deprivation of use and accessif the policy language permits it.

Experience #3: The Exclusion TrapWhen You “Win” Physical Loss but Still Lose the Case. Retailers and larger chains often had more complex manuscript policies or layered programs that included contamination or virus-related exclusions. Those exclusions became the “record scratch” moment: even if a business could argue that COVID-19 caused a direct physical loss (or at least plausibly alleged it), the exclusion could bar coverage outright. In the field, risk managers learned a painful but useful lesson: claim success isn’t just about the coverage grant. It’s about the entire coverage architecturedefinitions, exclusions, limitations, waiting periods, and conditions. If you’re negotiating renewals now, this is where brokers can add enormous value by walking line-by-line through communicable disease language and contamination carve-outs.

Experience #4: The Litigation Cost RealityEven “Good” Cases Can Be Hard to Finance. Another repeat theme was the cost-benefit math. Small businesses often faced a choice: spend significant resources litigating a disputed BI claim with uncertain odds, or redirect energy to surviving (and later rebuilding) operations. Some pursued group actions; others negotiated partial resolutions tied to discrete coverage pieces like “extra expense” or limited “civil authority” provisions (when those existed and the facts fit). The split rulings underline why strategy matters: in a state leaning insurer-friendly, a business might focus on settlement leverage, alternative coverages, or future policy improvements; in a state with a more policyholder-friendly interpretation, the same business might invest more confidently in litigation.

The biggest lived-in lesson: during COVID, the phrase “read your policy” stopped being advice and started being a survival skill. The PA and NC rulings show that courts can reasonably disagreeand that the smartest approach is policy-specific, fact-specific, and jurisdiction-aware. In plain terms: don’t assume your friend’s business in another state had the same coverage outcome you will. Insurance is not a vibe. It’s a contractwith footnotes.

Conclusion

The “split” between Pennsylvania and North Carolina isn’t a random contradictionit’s a lesson in how insurance disputes turn on (1) the words on the page, (2) the exclusions in the shadows, and (3) the interpretation rules of the state. Pennsylvania’s ruling reinforces a property-centered meaning of “direct physical loss,” while North Carolina’s ruling shows how ambiguity and missing exclusions can create a narrow lane to coverage for loss-of-use claims.

If there’s a single, practical takeaway, it’s this: the next “once-in-a-generation” event won’t wait for us to settle semantics. Businesses that want resilience should treat insurance shopping as risk engineeringchoosing policy language intentionally, understanding exclusions clearly, and building a coverage portfolio that matches modern disruption, not just classic disasters.