Insured Losses Reduced by Furlough Payments, Supreme Court Rules

The Supreme Court has dismissed an appeal by a number of hospitality companies against a decision that furlough payments they received during the COVID-19 pandemic served to reduce the amounts payable to them under their business interruption cover.

The appeal involved six companies that operated hotels, and a group of companies that operated racecourses, greyhound racing tracks, golf clubs, hotels and a pub. Their insurance policies provided cover against business interruption, including denial of access. At issue was whether the effect of 'savings' clauses in the policies was to require furlough payments the companies had received under the Coronavirus Job Retention Scheme (CJRS) to be deducted from the amounts payable under their business interruption cover. The policies contained two slightly different forms of savings clause, but both clauses stated that any charges of the business that ceased or reduced in consequence of the risk covered by the policy (the 'insured peril') would be deducted from the amounts payable.

The High Court decided that the furlough payments had reduced the charges of the business, and had done so in consequence of the insured peril. Accordingly, they fell to be deducted from the amounts payable under the policies. After the Court of Appeal rejected the companies' appeal against that decision, they made a further appeal to the Supreme Court.

The companies argued that, as wages and other employment costs had to be paid before being reimbursed under the CJRS, those charges were not 'reduced'. Charges were only 'reduced' if the legal liability to pay them was lessened. The insurers contended that the clauses referred to the economic burden of the charges rather than the legal liability for them. Preferring the insurers' interpretation of the clauses, the Court observed that the economic effect of paying a charge and being reimbursed for that payment is the same as if the charge is paid by another party or the obligation to pay it is waived. The purpose of the savings clauses was to prevent over-indemnification, and that purpose would be defeated if savings actually made were ignored because they did not reflect a reduced legal liability.

The companies also contended that, as a matter of law, the furlough payments were not caused by the insured peril and so were not 'in consequence' of it. However, the Court found that there was a straightforward causal connection between the losses falling under the business interruption cover and the savings from the furlough payments. The predictable and direct consequence of the insured peril was that the companies instructed employees to stop working but continued to employ them while claiming reimbursement of a large proportion of the costs of doing so. Those costs had thereby been reduced, just as they would have been if the employees had been made redundant. The effect of the savings clauses was to require the sums saved in this way to be deducted in calculating the business interruption losses recoverable under the policy. The appeal was dismissed.