Business interruption insurance: furlough payments & savings clauses

Summary

In Bath Racecourse Co Ltd & Others v Liberty Mutual Insurance Europe SE & Others the Supreme Court held that furlough payments from the UK Government during the Covid pandemic reduced the costs to insured businesses and fell within the natural meaning of savings clauses within business interruption (BI) cover, thus reducing the amounts due from insurers.

Background and policy wording

These proceedings arose from five conjoined Covid BI actions in which the courts had been asked to decide a number of coverage issues by reference to a suite of wordings within policies which provided BI cover. We have summarised the background and the policy wordings in play when considering a number of these earlier decisions, for example in our review of insurance law in 2024 and our analysis of the Court of Appeal decision in this action.

The insurers in the present cases had accepted that they were, in principle, liable to indemnify the policyholders under the cover for "Gross Revenue". The questions remaining for the Supreme Court centred on the proper interpretation and application of savings clauses, and in particular how they should respond to furlough payments received by the policyholders.  Under the UK Government's Coronavirus Job Retention Scheme (CJRS), employers had been reimbursed a proportion of the wages and related costs of employing furloughed staff during the pandemic.

For the purposes of the Supreme Court hearing, therefore, the key policy terms were:

Bath Racecourse (Bluefin) wording (in what is referred to as the "Arena proceedings"):

• Denial of Access (DOA) cover including a savings clause providing that "...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."

Liberty Mutual wording (in the "Gatwick proceedings"):

• BI cover extended to Prevention of Access under Commercial Combined policies written as "... a) Loss of Gross Revenue and b) Increase in Cost of Working ...less any sum saved ... 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."

Furlough payments - savings?

The Supreme Court was asked to construe the above savings provisions, and to resolve a dispute over the treatment of furlough payments thereunder. Insurers argued that the policyholders should give credit for the payments, which was contested by the policyholders. It was an agreed fact that, had it not been for the receipt of payments under the CJRS, the appellants would have made some employees redundant, thereby saving on the various costs of employment.  

As outlined in our analysis of the Court of Appeal decision, the courts below had held that the natural meaning of the savings clauses was that they referred to costs to the business, and that the effect of the furlough payments under the CJRS was to reduce those costs, so that CJRS payments constituted savings. 

In short, the Supreme Court agreed with the courts below.

Construction of the wording

On the proper approach to construction of the savings clauses, the Supreme Court applied the (by now) well established principles of policy interpretation set out in the FCA Test Case, namely that: "The core principle is that an insurance policy, like any other contract, must be interpreted objectively by asking what a reasonable person, with all the background knowledge which would reasonably have been available to the parties when they entered into the contract, would have understood the language of the contract to mean".

There was no dispute that wages and related costs are "charges" or "expenses" under the relevant savings clauses, that they were "payable", and that "reduce" means "lower, diminish or lessen". Insurers argued that the saving clauses are concerned with the economic burden of the charges or expenses in question, which are "reduced" if the amount of the charge or expense that the insured has to bear is lowered, diminished or lessened in fact. They contended that a reasonable person wouldn't distinguish between legal liabilities and a third party (here, the UK Government) providing funding for those legal liabilities. Against this, the appellant policyholders contended that, on the natural and ordinary meaning of their words, the savings clauses are only triggered where a liability of the insured ceases, or is incurred in a lesser amount ("reduced").

The Supreme Court accepted that, as a matter of language, either party's interpretation of "reduced" was possible, but the court preferred insurers' construction for a number of reasons. In particular:

• It wasn't clear why a reasonable person in the position of the parties would differentiate between being funded or reimbursed for a charge paid, as against a third party paying or waiving the charge or expense. Whilst the mechanics differ, the economic effect is the same.

• In context, business interruption insurance is concerned with the economic effects of insured perils on the policyholder's business, and the specific context is a clause concerned with savings. The "evident purpose" of the savings clause is to prevent over-indemnification.

• On the policyholders'  construction they would get both the furlough payments and full insurance recovery (without regard to the savings) as though those payments had not been made, which would "be a perverse and wholly uncommercial bargain to make".

• Insurers' "patently more commercial" construction had been "unequivocally preferred" by five experienced former and current judges of the Commercial Court.

The court rejected the policyholders' contention that the indemnity principle "illegitimately introduces a presumptive rule of interpretation when the primary focus should always be on the words used". As made clear in authorities such as Synergy and Mobis, the indemnity principle should be taken into account in interpreting the terms of an insurance policy, unless the policy language clearly requires otherwise.

Causation

The Supreme Court was also asked to consider whether any savings occurred "in consequence of" the insured peril. The words "in consequence of" clearly import a proximate causation requirement, and the court accepted that although the savings clauses deal with gains received (the furlough payments) rather than losses, logically the same proximate cause test of causation applies to both (as was common ground between the parties).

The policyholders advanced two arguments against the contention that the furlough payments had been proximately caused by the insured peril. First, that the existence of the insured peril was irrelevant to payments under the CJRS scheme; furlough payments would be made whether or not use of or access to the premises had been prevented or hindered or there had been any case of Covid-19 within the radius of the premises. Secondly, that the payments were a collateral benefit - a gratuitous, benevolent or voluntary conferral of a benefit by a third party.

The Supreme Court rejected both arguments. Considering the irrelevance argument to contain "patent" flaws, the court made clear that the same test of causation applies both to the link between the insured peril and loss under the insuring clause and to the link between the insured peril and the reduction of expenses under the savings clause. In seeking to argue, effectively, for "but for" causation for the savings while relying on proximate cause for the losses, the policyholders' position was both internally inconsistent and inconsistent with the decision in the FCA Test Case. The savings arise from the same underlying fortuity as the BI losses. It was the occurrence of the insured peril that caused the policyholders to furlough employees and receive payments under the CJRS. The Supreme Court observed that the policyholders could not "have it both ways" on causation.

Similarly, the Supreme Court rejected the collateral benefit argument. Not least, the CJRS was "not an exercise of charity or benevolence" - this was a scheme set up by the UK Government to protect the economy, and payments were made pursuant to a legal obligation. The court emphasised that a payment made by a third party to the insured in respect of the subject matter of the insured loss will diminish the loss and enure to the benefit of the insurer unless the third party's intention (express or implied) was that it should only benefit the insured.

Commentary

Insurers will doubtless welcome this decision, both on the discrete point in relation to furlough payments, and in the court's overall approach to construction of policy wording.

The Supreme Court took an entirely conventional approach to construction of insurance policies, and arrived at a sensible view of what a reasonable person would take the savings clauses to mean, in context. In rejecting the policyholders' arguments on construction, the Supreme Court made clear that where there are two possible meanings of a clause in an insurance contract, it is appropriate to adopt the construction which is more consistent with the purpose of indemnification.