Summary

The UK Supreme Court (UKSC) recently handed down a judgment of critical importance to business interruption insurers and policyholders.  It affirmed Commercial Court and Court of Appeal decisions to hold that furlough payments to policyholders by the UK Government under the Coronavirus Job Retention Scheme (CJRS) are deductible from business interruption claims under standard savings clauses.

This resolves one of the last major questions raised by the Covid-19 business interruption disputes.  The UKSC’s ruling could also apply to other policy types, in circumstances where third-party payments are made to policyholders in connection with the subject matter of the insured loss (subject, as always, to the specific policy wording).

Background

The savings clauses in issue were: (i) “If any of the charges or expenses of The Business payable cease or reduce in consequence of the Damage such savings during the Indemnity Period shall be deducted from the amount payable”; and (ii) the indemnity payable shall be “less any sum saved during the Indemnity Period in respect of such of the charges of the Business payable out of Gross Revenue as may cease or be reduced in consequence of the incident”.

As mentioned above, the lower courts held that these clauses rendered furlough payments deductible from the insurers’ indemnities.  The policyholders appealed on two grounds, both of which were dismissed by the UKSC.

The Decision

First, the policyholders said that their employee costs had not “ceased” or been “reduced” by the furlough payments, as those costs had been incurred and paid before reimbursement under the CJRS.  While the UKSC acknowledged that the savings clauses could be read in this way, it preferred the insurers’ construction because:

1. The economic effect of being reimbursed by another party for an expense is the same as that party paying the expense, and the policies were concerned with the economic effects of insured perils on the policyholders’ businesses.
2. The obvious purpose of the savings clauses was to prevent over-indemnification of policyholders, which would be the result were the furlough payments not deducted from the amounts payable.
3. The Government’s own description of the CJRS made clear that it was paying employees’ wages, and the artificiality of the policyholders’ contrary contention was further highlighted by the fact that payments could be made to employers under the scheme before the amounts were paid to employees.

Secondly, the policyholders argued that the CJRS payments were not received “in consequence of” the insured peril because: (i) proof of the peril was irrelevant to their entitlement to furlough payments; and/or (ii) the payments were gratuitous third-party benefits, so that they were not properly regarded in law as caused by the peril.  The UKSC rejected both arguments, for the following reasons:

1. The irrelevancy argument was patently flawed. There was a “straightforward” causal connection between the claimed losses and the CJRS payments.  Moreover, the policyholders’ position was internally inconsistent: they were relying on proximate causation to establish their losses, but effectively applying the ‘but for’ test to assert that the payments should not be deducted, despite having (correctly) accepted that the same test of causation should apply.
2. As for the legal argument, after examining the authorities, the UKSC summarised the relevant principle as follows: “any payment made by a third party to the insured in respect of the subject matter of the insured loss, even if made voluntarily or gratuitously, will diminish the loss and enure to the benefit of the insurer except where the intention of the third party in making the payment, expressly stated or inferred from the circumstances, was to benefit only the insured to the exclusion of the insurer”.  That was not the case here; rather, it was “improbable that the Government would have intended the employer to enjoy the benefit of being reimbursed twice for the same expense”.

Implications

Most obviously, this is a welcome decision for insurers.  With respect to thousands of business interruption claims, it resolves a longstanding issue and vindicates the c. £1 billion in furlough payments that insurers have already deducted from indemnities.

The judgment is also likely to have broader application (i.e., beyond business interruption cases), in that the UKSC’s ruling on gratuitous third-party benefits (see above) could cover many other different types of policy and/or payment.