Hunton Insurance Recovery Blog

Happy 4^th and 250 years of freedom . . . to contract!

Many policyholders assume insurance policies are “standard” and must be accepted as-is. That assumption is often wrong—and dangerously limiting. Unlike many consumer insurance markets, the commercial insurance realm preserves a robust “freedom to contract,” allowing sophisticated policyholders to negotiate terms, exclusions, definitions, and limits before a policy is even issued. Particularly in recent years, high-profile disputes over cyber coverage, business interruption, and war/cyber exclusions have shown not just what happens when coverage is denied, but what could have been done up front to avoid those fights.

This post highlights the power policyholders still hold in the negotiation process and illustrates, with concrete examples from recent media-covered disputes, how that freedom can be strategically used.

Why “Freedom to Contract” Still Matters in Commercial Insurance

In the US and many other jurisdictions, commercial insurance is treated as a negotiated contract between sophisticated parties. Courts routinely emphasize that policyholders with the ability to understand and influence policy terms are not mere passive recipients of adhesion contracts. Instead, they are active participants who can shape the very scope of coverage.

That freedom is most evident in:

• Definitions (e.g., what counts as “physical loss or damage,” a privacy claim, or the definition of “computer system”);
• Exclusions and endorsements (e.g., adding or removing cyber, contamination, or civil authority exclusions);
• Limits and triggers (e.g., all-sums versus pro-rata allocation, occurrence versus claims-made triggers);
• Procedural conditions (e.g., notice periods, examination-under-oath requirements, cooperation clauses, vendor and counsel pre-approvals in cyber and D&O policies).

The cost of not negotiating is often revealed only after a loss, when an insurer points to a narrow definition or broad exclusion that the policyholder could have addressed during underwriting.

Real Disputes That Show What Negotiation Could Have Changed

1. Cyber Attacks and the “Warlike Action” Exclusion: The Merck Case

One of the most widely discussed coverage battles in recent years involved Merck’s claim stemming from the 2017 NotPetya cyberattack. Merck’s insurers argued that the attack fell under a “hostile or warlike action” exclusion, effectively treating the cyber incident as an act of war and denying coverage. New Jersey courts ultimately held that the war exclusion did not apply to the NotPetya attack, a result hailed as a major win for policyholders and an affirmation of the reasonable expectations doctrine.

What policyholders could negotiate:

• Explicitly carve out cyberattacks from war exclusions and insist on cyberterrorism exceptions to war exclusions where possible.
• While many cyber insurers have moved to more standardized war and state-actor exclusions, not all insurers have, and even those requiring certain Lloyd’s Market Association-approved exclusionary endorsements will still consider any of the many approved endorsements, not just the endorsement that may be first presented to the policyholder at the policy-procurement stage.

In markets where insurers push broad war exclusions, these negotiations can mean the difference between a broad exclusion that prevents all coverage and a narrower exclusion that will not apply where the insured client is the only impacted business or where the impacted computer system is not in a jurisdiction where war has been declared.

2.  Business Interruption and COVID-19: US Courts and Physical Damage Requirements

Across the United States, thousands of businesses sought business interruption (BI) coverage for losses tied to pandemic shutdowns. The consistent judicial outcome in US courts has been that, without specific pandemic-related or communicable-disease extensions, standard BI coverage does not apply. Notwithstanding that very different outcomes had been reached before the COVID-19 pandemic in myriad contexts, including outbreaks of disease, courts held in the context of COVID-19 that:

• The mere presence of SARS-CoV-2 does not constitute “physical loss or damage to property.”
• BI coverage typically requires tangible damage; functional impairment, loss of use, or revenue declines from government orders or customer avoidance are not covered.
• Many “civil authority” triggers still require physical damage on the insured’s premises or nearby property.

These rulings mean that policyholders who never negotiated for pandemic-specific coverage were left to argue over whether viruses qualify as “physical damage,” often for years, with denials as the typical result.

What policyholders could negotiate:

• Pandemic or communicable disease extensions that explicitly cover revenue losses due to government orders, voluntary closures, or customer avoidance tied to a disease outbreak.
• Expanded definitions of “physical loss or damage” to include contamination that renders premises unusable, even if no structural damage occurs.
• Civil authority-trigger language that ties coverage to shutdown orders without requiring proof of “physical damage” on the insured’s premises.

These disputes illustrate how policyholders who did not negotiate for pandemic-specific coverage were left to argue that viruses qualify as “physical damage.” The post-pandemic judicial shift aside, a well-negotiated extension could have turned a coverage denial into a straightforward claim even under COVID-19-era case law.

How to Use Freedom to Contract in Practice

Policyholders with negotiating leverage—typically mid-to-large enterprises, sophisticated entities, or those with strong broker and coverage counsel relationships—can use freedom to contract in several concrete ways:

1. Treat the initial quote as a draft, not a final product.
   Request full policy wordings, including proposed endorsements, early and review them with counsel or a specialist broker. Ask specifically about:
   • Definitions that fit the insured’s industry and that align with the insured’s risk profile (e.g., cyber, contamination, supply chain).
   • Exclusions that could block coverage for your most likely losses or which might conflict with explicit coverage grants (e.g., a grant of coverage for communicable disease versus an exclusion that purports to bar coverage for viruses).
   • Endorsements that clarify triggers and extend coverage.
2. Negotiate definitions, not just limits.
   Insurers often focus negotiations on price and limits, but the real coverage battles are fought in definitions. For example:
   • Does the term “physical loss or damage” include contamination, loss of use, or functional impairment?
   • Does the covered cyber incident definition include only incidents that implicate confidential information (such as personal information), or would unauthorized access to the insured’s computer system suffice to trigger coverage for the resulting investigation costs?
3. Use endorsements to fill gaps created by case law.
   Rather than relying on courts to interpret ambiguous language, add endorsements that:
   • Explicitly cover pandemic-related business interruption denials.
   • Define “civil authority” closures in a way that triggers BI coverage without requiring physical damage.
4. Document your negotiations.
   Keep written records of:
   • Requested changes to definitions and exclusions.
   • Insurer responses and agreed-upon modifications.
   • Broker confirmations of what was negotiated.

This documentation can be critical if a dispute arises and an insurer argues that the policy should be interpreted narrowly.

The Bottom Line for Policyholders

Recent media-covered disputes—Merck’s cyberattack case and pandemic business interruption denials across US courts—show a clear pattern: coverage fights are often about language that was never negotiated. Insurers benefit from the policyholder’s assumption that “this is just how the policy works.” But in commercial insurance, that assumption is rarely true.

The freedom to contract remains a powerful, often overlooked tool. Policyholders who treat insurance as a negotiable contract, rather than a fixed product, can:

• Avoid coverage gaps that only become visible after a loss.
• Reduce the risk of costly litigation by clarifying language up front.
• Align their coverage more closely with their actual risk exposures.

For commercial policyholders, the most effective coverage protection may not be found in a courtroom—it may be found in the negotiation room before the policy is ever signed.