The UK Supreme Court has delivered a significant ruling concerning business interruption (BI) insurance claims related to the COVID-19 pandemic. The court has determined that furlough payments made under the Coronavirus Job Retention Scheme (CJRS) must be deducted from sums payable by insurers. This decision is expected to impact approximately £1 billion in claims, settling a long-standing dispute between policyholders and insurers.
Key Takeaways
- Furlough payments must be deducted from business interruption insurance claims.
- The Supreme Court sided with insurers on the interpretation of ‘savings clauses’ in policies.
- The ruling clarifies the impact of government support schemes on insurance payouts.
The Core of the Dispute
The central issue revolved around ‘savings clauses’ within BI policies. These clauses typically stipulate that if business expenses decrease due to an insured event, the savings should be deducted from the insurer’s payout. Insurers argued that furlough payments reduced wage bills, thus qualifying as savings. Policyholders contended that wages were paid in full and that furlough reimbursements were separate income, unrelated to the insured peril.
Supreme Court’s Decision
The Supreme Court unanimously ruled in favour of the insurers. The court found the insurers’ interpretation of the savings clauses to be more commercially sound. It reasoned that the government, through the CJRS, was bearing a portion of the wage costs, and to not deduct these payments would lead to an unintended over-indemnification for policyholders.
Causation and Government Support
Policyholders’ arguments regarding causation were also dismissed. The court noted an inconsistency in their reliance on the FCA Test Case for establishing losses while simultaneously attempting to use a different causation test to exclude furlough savings. Furthermore, the court clarified that CJRS payments were not gratuitous benefits but were made as a matter of legal obligation, distinguishing them from certain other government grants that were explicitly intended not to be deducted from claims.
Implications for the Insurance Market
This ruling provides much-needed clarity for insurers, loss adjusters, and brokers handling COVID-era BI claims. It confirms that the standard ABI savings clause wording functions as the market has been applying it, and that furlough payments do indeed reduce the insured loss. The £1 billion in deductions already made by insurers now stands on a firm legal footing.
Sources
- Supreme Court upholds £1bn in furlough deductions from BI claims, Insurance Business.
- Supreme Court rules on the impact of furlough payments on COVID-19 business interruption insurance claims, Mishcon de Reya LLP.
- Simmons & Simmons, Simmons & Simmons.
