In its first Covid-19 Business Interruption (BI) decision since FCA v Arch in 2021, the Supreme Court has confirmed that insurers are entitled to make deductions from business interruption indemnities in respect of amounts received by policyholders under the UK government furlough scheme.

The case

The decision marks the conclusion of a six-year cycle of BI coverage litigation, initiated with the FCA test case in 2020 shortly after the emergence of the global pandemic.

In the present case, the policyholders sought coverage of their losses under a ‘denial of access’ clauses. The issues in dispute fell into three categories: (i) whether the clause provided cover at all; (ii) whether the £2.5 million limit of liability applied in the aggregate or to each insured facility; and (iii) whether the insurers were entitled to make deductions from any indemnity due under the policy in respect of amounts received by the policyholders under the furlough scheme.

Having succeeded on the first two issues at first instance and in the Court of Appeal, but having lost the third, the policyholders were granted permission by the Supreme Court to appeal the furlough issue on two grounds.

Ground one

The policyholders first argued that wage costs did not cease or reduce as a result of furlough receipts, and there was therefore no permissible saving to be deducted by insurers pursuant to the terms of the savings clause within the policy. The policyholders remained liable to pay the employees’ wages, and it was not relevant that they had received funds from the government, which was not to be treated as turnover or revenue within the meaning of the defined policy terms.

The Supreme Court framed the parties’ cases on this ground by recognising that the language used in the savings clauses could be understood as referring either to: (i) whether as a matter of fact the charge or expense is reduced (the insurers’ case); or (ii) whether liability for the charge or expense is reduced as a matter of law (the policyholders’ case).

Upholding the Court of Appeal decision, the court found that the insurers’ construction of the clause was to be preferred for eight reasons, focusing heavily on the commercial purpose of the clause to avoid over-indemnification, and including the fact that the reasonable person would not differentiate between the incurring of an expense and the bearing of an expense. The furlough payments did therefore cause the policyholders’ wage costs to ‘cease’ or ‘reduce’.

Ground two

The policyholders further argued that, even if wage costs had ceased or reduced as a result of Coronavirus Job Retention Scheme (CJRS) payments, those payments were not legally caused by the insured peril and so were not “in consequence of” it because: (a) proof of the insured peril was irrelevant to the entitlement to claim CJRS payments; and/or (b) the payments were of a gratuitous, benevolent or voluntary nature and should for that reason be treated as collateral benefits.

Concurrent causation applies equally to losses and savings

In relation to the first limb, the Supreme Court found that the policyholders’ case essentially amounted to an argument that “but for” causation should apply to the savings clause, even though it did not apply to the insuring clause. That was firmly rejected by the court, which found that if the policyholders needed to rely on concurrent causation to establish coverage, then the same causation approach must logically apply to the savings clause. If the policyholders’ losses were proximately caused by the insured peril, then so too were the savings made as a result of the CJRS. In reaching that conclusion, the Supreme Court departed from the reasoning of the lower courts in one respect, in finding that it was not necessary to consider whether the CJRS itself had been caused by the insured peril. The question was whether payments made under the scheme were caused by the insured peril, and the answer to that question would be the same even if the CJRS had been a pre-existing scheme rather than being implemented in response to the pandemic.

In relation to the second limb, the insurers argued, and the Court of Appeal had agreed, that the argument was not open to the policyholders if the first limb regarding irrelevance had failed. The Supreme Court disagreed and found that the argument on collaterality was an analytically distinct ground that had to be considered separately.

Were furlough payments collateral benefits?

In order to consider the case on collaterality, the court conducted a detailed review of the authorities on subrogation stretching back to Randal v Cockran in 1748, and summarised the principles illustrated by these cases:

“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.”

Applying those principles to the facts, the court concluded even if they could be characterised as voluntary, there was nothing in the terms of the CJRS or the surrounding circumstances to suggest that payments made under the scheme were intended to benefit only the employer who made the claim for reimbursement to the exclusion of any insurer who was liable to indemnify the employer for its business interruption loss. That was because:

1. Payments made under the CJRS were not expressed to be limited to uninsured losses. Nor was there any term of the scheme or statement by the government suggesting that the intention was to benefit employers to the exclusion of insurers
2. It was improbable that the government would have intended the employer to enjoy the benefit of being reimbursed twice for the same expense
3. It was doubtful that the letter from Mr Glen on behalf of the government relied upon by the policyholders amounted to more than a statement of subjective expectation or belief, to which no weight could be attached in determining the objective intention behind the schemes in question
4. The exception recognised in Burnand did not apply to the facts of this case, because there was no express stipulation or other clear indication that the government intended the furlough payments to enure solely for the benefit of the insured and not the insurers.

The court also considered the policyholders’ argument that even in the absence of an express or implied intention to benefit the policyholder to the exclusion of the insurer, the furlough payments ought not to be regarded as proximately caused by the insured peril because they were voluntary, gratuitous or benevolent and were therefore collateral benefits.

Furlough payments were statutory entitlements, not ‘gifts’

This also failed on the basis that it was untenable to characterise furlough payments as voluntary donations. Furlough payments made were made pursuant to such a legal obligation. In this, the court distinguished between the CJRS itself, and payments made under its auspices. It did not matter that the CJRS was implemented voluntarily by the UK Government. What mattered was that the policyholder had a legal entitlement to demand payment under the scheme once enacted. Absence of consideration was not relevant in the context of a statutory, rather than contractual, obligation.

The court did not therefore accept that the CJRS itself, let alone payments made under it, could properly be characterised as gratuitous or voluntary or benevolent in nature. On no view could furlough payments be likened to gifts or philanthropic donations for which it may be said that the sole cause in law is the donor’s voluntary decision to confer the benefit.

Alternative causation arguments also rejected

The policyholders’ alternative causation case based on collateral benefits also therefore failed. The savings were legally caused by the insured peril and were therefore deductible pursuant to the savings clause in the Policy.

What this means for policyholders and insurers

Aside from the obvious conclusion that insurers are entitled to take the benefit of furlough payments received by policyholders in the Covid-19 BI context, the Supreme Court decision delivers a number of more general findings that may find further application both in the Covid-19 BI context and more widely:

1. Payments made under a legal obligation will not be treated as collateral benefits, and state payments will almost always amount to savings in the insurance context
2. The indemnity principle remains applicable in the insurance context, but the terms of the policy are determinative, and there will be no room for the indemnity principle to apply if the policy language clearly requires otherwise
3. In circumstances where a clause relating to the quantification of loss has more than one possible meaning, it is appropriate to have regard to the purpose of indemnification and to adopt the construction which is more consistent with that purpose
4. The Supreme Court took care to further explain the “travel agent” example given in the FCA test case of a business that might not be able to benefit from the concurrent causation analysis, which has exercised practitioners seeking to apply the Supreme Court’s analysis over the past five years. The distinction was said to be in relation to the underlying fortuity:
   

   “The reasoning underpinning the travel agency example was not spelt out in the FCA test case judgment as fully as it might have been. But the aim was to illustrate loss of business which, arguably at least, would not be covered because it was not caused by the same underlying fortuity as the insured peril. The reason would be that it was not naturally to be expected, or inherently likely, that an outbreak of disease which included cases of illness occurring within a mile of the insured’s premises and led to Government action which prevented or hindered use of or access to the premises would also result in restrictions on international travel. On this view, consequences of the travel restrictions should not be disregarded in deciding whether business interruption losses (or savings) were caused by the insured peril. This might lead the court to conclude that, even though the insured peril had arisen (because government restrictions imposed in response to cases of Covid-19, including cases within the radius, had prevented or hindered use of or access to the business premises), part if not all of the loss of revenue suffered by the business was not proximately caused by the insured peril.”

5. The correct approach to construction is as summarised in the FCA test case, at paragraph 47. Paragraph 77 of the FCA test case judgment, which referred to the “ordinary policyholder” was not seeking to alter or refine the “core principle” set out in para 47. In particular, it was not seeking to suggest that the objective approach to construction involves focusing on one party, the “ordinary policyholder”, rather than the construct of a reasonable person in the position of the parties
6. Caution is needed in extrapolating from the law on damages for torts and breach of contract to the analysis of proximate causation in insurance cases because there are potentially significant contextual differences. One important example is that in the law of tort and contract, damages are calculated as if the claimant had taken any steps which the claimant would reasonably be expected to take to mitigate its loss and costs incurred in taking such steps can in principle be recovered as damages. No such mitigation rule applies in the context of non-marine insurance unless the policy provides for it.