The English Commercial Court has delivered a number of notable decisions addressing questions concerning cover provided by business interruption (BI) insurance policies for losses arising as a result of COVID-19 which had remained unanswered following the FCA's 2020 test case, and its subsequent appeal to the Supreme Court.
In a series of cases which were heard separately but consecutively this summer (Stonegate Pub Company Limited v MS Amlin Corporate Member Limited and others [2022] EWHC 2548 (Comm), Various Eateries Trading Limited ((formerly known as Strada Trading Limited) v Allianz Insurance plc [2022] EWHC 2549 (Comm) and Greggs plc v Zurich Insurance plc [2022] EWHC 2545 (Comm)), the court considered various issues concerning aggregation and post-policy period losses. These issues, and the court's findings, are the subject of our recent article.
A further issue, which arose in Stonegate and Greggs, but not Various Eateries, concerned the effect of Government support payments, and whether it was necessary to take such payments into account when calculating sums recoverable under the relevant policies, either under the terms of the policies or the general law on subrogation.
Two forms of Government support fell to be considered: (i) the Coronavirus Job Retention Scheme (CJRS), which provided grants to employers to retain and pay staff furloughed during lockdowns; and (ii) Business Rates Relief (BRR), which granted relief for payment of business rates to businesses affected by COVID-19.
The savings clause
The basic indemnity provided under the policy included the amount by which turnover during the indemnity period fell short of standard turnover, less:
- Any costs normally payable out of turnover
- As may cease or be reduced during the indemnity period
- As a consequence of a covered event
Insurers contended that this meant that, as a result of the Government support, wages and business support received by the insureds fell to be deducted from the sums recoverable under the policies.
In relation to CJRS, the insureds accepted as an assumed fact that employment costs were normally paid out of turnover, and that the CJRS grants had been a consequence of the pandemic. The key issue was whether the grants had caused the relevant employment costs to "cease or be reduced".
The insureds argued that they had not, as it was integral to the scheme that the employer should continue to have a liability to meet those employment costs, which were not reduced. However, Mr Justice Butcher concluded that, insofar as they were defrayed by the Government, the employment costs were "reduced".
This conclusion was consistent with the relevant accounting standard used by the insured; the fact that the CJRS catered for payments to be made to the employer before payment to the employee; and the need to construe the provision consistently with the basic principle that the policy was a contract of indemnity and thus the insured was entitled to be fully indemnified, but should never be more than fully indemnified.
The position in relation to BRR was slightly different. There was no dispute that business rates were reduced during the indemnity period and, in the judge's view, it was quite clear that BRR was a consequence of the pandemic. However, in Stonegate there was no consensus (or assumption) as to whether business rates would have been paid out of turnover. If they had (as Greggs accepted), then BRR clearly fell within the savings clause in the policy, but if not, the savings clause would not be applicable.
The general law
Turning to the position under the general law, Mr Justice Butcher considered the relevant authorities on subrogation and concluded that the effect of a third party's payment on the relevant indemnity was as follows:
- If a third party has made a payment which has eliminated or reduced the loss to the insured against which it had insurance then, subject to the below, insurers will be entitled to the benefit of that payment.
- This will not be the case if it can be established that in making the payment the third party intended to benefit only the insured, to the exclusion of insurers (e.g., if the third party acts from benevolence towards the insured, or had paid money to retain the insured's goodwill and expected to be paid an equivalent amount by the insurer).
- In assessing the intentions of the third party, it does not matter whether they gave any thought to the position of insurers.
In this case, the CJRS payments diminished the loss which arose from the interruption to the insured's business, and the insured had not shown that the Government intended to benefit the insured alone, to the exclusion of insurers. Accordingly, the position under the general law mirrored the position under the contract: the Government support payments reduced the measure of indemnity.
If business rates were paid out of turnover, then the position was also the same in relation to BRR. The question was more difficult if business rates were not paid out of turnover, but since there was no detailed argument on the point, the judge considered that it should not be determined at this stage.
It is important to remember that this decision very much turns on the wording of the specific savings clause, with its focus on turnover. Policies which refer to "income" and "expenses" may well be interpreted differently. Alongside looming potential appeals, the saga of COVID-19 BI claims is clearly far from over.