Supreme Court rules on the impact of furlough payments on COVID-19 business interruption insurance claims

In brief

In the latest COVID-19 business interruption insurance decision, the Supreme Court considered whether furlough payments made by the UK Government under the Coronavirus Job Retention Scheme (CJRS) should reduce sums payable by insurers for losses claimed under particular types of business interruption cover. The Supreme Court upheld the lower courts' decisions that CJRS payments should reduce sums payable by insurers and dismissed the appeals.

The decision in Gatwick Investment Ltd & Ors v Liberty Mutual Insurance Europe SE; Bath Racecourse Company Ltd & Ors v Liberty Mutual Insurance Europe SE & Ors [2026] UKSC 14 will come as a disappointment to many policyholders who considered it unfair that the Government's decision to extend support to them has effectively resulted in a windfall for their insurers, the ultimate beneficiaries of the payments.

Background

CJRS payments were introduced by a series of Treasury Directions in April 2020. Their purpose was "to provide for payments to be made to employers on a claim made in respect of them incurring costs of employment in respect of furloughed employees arising from the health, social and economic emergency in the United Kingdom resulting from coronavirus and coronavirus disease." The CJRS ended on 30 September 2021.

Those payments provided a lifeline for many employers. However, when, in due course, those employers made insurance claims for business interruption losses, they were faced with arguments that the furlough payments amounted to a saving of costs, and their claims were reduced accordingly. In two sets of proceedings, the Arena proceedings (which concerned claims brought by subsidiary companies within the Arena racing groups) and the Gatwick proceedings (in which the claimants each owned or operated hotels in England), the lower courts found that insurers were right to do so.

The appellant employers appealed those decisions on the basis that:

• wages and employment costs had to be paid before being reimbursed by CJRS payments; and
• payments were not received as a consequence of the insured peril, since
  • no proof of the insured peril was required to receive the CJRS payments and/or
  • the payments were "of a gratuitous character" and not caused by the insured peril.

Construction of the 'savings' clause

The Supreme Court agreed with the parties that, although the wording of the savings clauses differed slightly between them, nothing turned on the difference. Both wordings are set out below.

The first issue the Court had to decide was whether CJRS payments reduced business expenses. The appellants argued that the legal liability for wages and employment costs had not ceased and was not reduced and that CJRS payments were income received after payments had already been made.

The Court disagreed with that view on several bases, including that there is no difference between incurring a charge and bearing it; the purpose of the savings clause is to prevent over-indemnification of an insured loss; and that the appellants' construction could lead to arbitrary and uncommercial results as it would mean that appellants would be paid for retaining staff that would otherwise be made redundant and then also recover those monies from insurers. The arguments that payments were sometimes made to the employer before going to the employee, or that they were treated differently by tax authorities also did not sway the Court.

Causation issue

• Were CJRS payments in consequence of the insured peril?

The second issue was whether the reduction in expenses was "in consequence of" the "damage" or "incident" (i.e., the insured peril). Clauses in both sets of policies contained the phrase "in consequence of", and the Supreme Court agreed with the parties that this imported a causation requirement: one of proximate cause.

The appellants argued that CJRS payments did not depend on whether the insured peril (denial of access) had actually occurred, as payments were made generally for any furloughed employees due to COVID-19. The Supreme Court considered the position it had taken in the FCA test case [2021] UKSC 1 on disease clauses (see our article here) and noted that the policyholders benefited from its interpretation that each individual case of COVID-19 was an equally effective cause and that it would be uncommercial for the insurers to treat the cause of the insured peril as diminished by matters which are expected to occur.

Applying that principle here, the appellant employers agreed that, but for the CJRS payments, a proportion of employees would have been made redundant in order to save on employment costs. The CJRS altered the equation by making it more advantageous for employees to be retained and furloughed. The CJRS was therefore a direct and predictable consequence of the occurrence of the insured peril which led to policyholders instructing employees to cease work. Therefore, on the face of it, the expenses saved were a direct consequence of (or proximately caused by) the insured peril. As the Court set out: 

They cannot, on the one hand, assert in reliance on the decision in the FCA test case that their losses were proximately caused by the insured peril even though they would have been suffered in the absence of the insured peril and, on the other hand, maintain that their savings from a consequent reduction in expenses were, for that reason, not proximately caused by the insured peril.

• Were CJRS payments a collateral benefit?

The appellants further argued that the CJRS payments were a gratuitous benefit by a third party, and that therefore they were not to be regarded as caused by the insured peril. A long line of case law has developed to address whether a payment is gratuitous or not, which essentially requires consideration of whether the voluntary payment was intended to be a gratuitous benefit to the exclusion of the insurer. As set out above, the CJRS payments were made for the purpose of supporting businesses with employment costs during the indemnity period pursuant to a legal obligation, and not with any specific benefit to the employer to the exclusion of insurers. The Supreme Court therefore held that they reduced the losses insured against and that it was "improbable that the Government would have intended the employer to enjoy the benefit of being reimbursed twice for the same expense."

In reaching this conclusion, the Supreme Court distinguished CJRS payments from the grants provided to certain small businesses such as the Coronavirus Small Business Grant Fund and the Retail, Hospitality and Leisure Grant Fund. In a letter from Mr John Glen MP, Economic Secretary to the Treasury, to the Association of British Insurers on 25 September 2020, the Government expressed its expectation that such grants would not be deducted from business interruption insurance claims. The Supreme Court noted the absence of a similar letter relating to CJRS payments and therefore concluded that they were not the same.

The Supreme Court therefore dismissed the appeal and upheld the decision of the lower courts that CJRS payments should reduce sums payable by insurers in COVID-19 business interruption claims. This reflects the position that has been taken in the insurance market generally. It is estimated that a total of £1 billion has been deducted on this basis.