(Article from Insurance Law Alert, May 2026)
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Holding
The UK Supreme Court held that furlough payments received under the Coronavirus Job Retention Scheme (“CJRS”) may be deducted when calculating sums payable under business interruption policies’ savings clauses because the payments reduced the policyholders’ employment costs and did so “in consequence of” the insured peril. Gatwick Inv. Ltd and others v Liberty Mut. Ins. Eur. SE; Bath Racecourse Co. Ltd and others v Liberty Mut. Ins. Eur. SE and others [2026] UKSC 14 (22 April 2026).
Background
The appeals arose from business interruption claims brought by hotel, racecourse, and other leisure-sector policyholders for losses suffered during Covid-19. The relevant policies contained savings clauses (based on the Association of British Insurers’ standard wording) requiring deductions from payments under the policies for charges or expenses that ceased or were reduced “in consequence of” the insured peril. The policyholders received CJRS payments after furloughing employees, and it was agreed that absent those payments, the policyholders would have made some employees redundant, thereby saving on employment costs. The insurers argued that the CJRS payments reduced the employment costs recoverable under the policies.
The High Court and Court of Appeal both held that the insurers were entitled to credit for the CJRS payments. The policyholders appealed, arguing that the savings clauses did not apply because (1) employment costs had not been “reduced” where employers remained obliged to pay employees before reimbursement, and (2) the CJRS payments were not received “in consequence of” the insured peril because CJRS eligibility did not depend on proof of the insured peril, and, in any event, the payments were collateral benefits of a gratuitous, benevolent, or voluntary character.
Decision
The Supreme Court dismissed the appeals. Interpreting the policy as a reasonable person in the position of the parties would (and who, the court observed would not in most cases be a “pedantic lawyer”), the court held that the savings clauses were concerned with the economic outcome for the policyholders’ businesses and were engaged where employment expenses were incurred and then reimbursed. The court explained that the evident purpose of the clauses was to prevent over-indemnification and rejected the policyholders’ argument that no “saving” occurred merely because the businesses remained legally liable to pay wages before reimbursement. The court described the policyholders’ interpretation, which would have allowed them both to obtain the benefit of the CJRS payments and recover full unreduced employment costs from insurers, as both “perverse” and “wholly uncommercial.”
The court further rejected the policyholders’ causation argument. Relying on its earlier decision in Financial Conduct Authority v Arch Insurance (UK) Ltd [2021] UKSC 1; [2021] AC 649, the court held that the same causation principles governing coverage applied equally in the context of the savings clauses. Finally, the court rejected the argument that CJRS payments constituted collateral or gratuitous benefits that should not be deducted from recoveries. The court held that the payments were a legal entitlement created by the Government and that there was no indication that the Government intended the payments to benefit policyholders to the exclusion of insurers.
Comments
In addition to being another significant UK Covid-19 business interruption decision, the decision confirms key principles relating to loss quantification in insurance policies which will be relevant in future cases across all areas of insurance. The court confirmed that “it is both permissible and correct to take into account the indemnity nature of a contract of insurance when construing it” where “a clause relating to the quantification of loss has more than one possible meaning” and that as a general matter, any payments made to an insured by a party “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” unless the intention of the third party making the payment was to benefit only the insured.