On 22 April 2026, the Supreme Court released its judgment on the much awaited issue as to whether insurers are entitled to deduct furlough payments from COVID-19 business interruption insurance claims.
The short answer is that yes they can; a result of some significance in the market, with the Supreme Court saying that an estimated £1 billion has been deducted from COVID-19 business interruption insurance claims to account for furlough.
But, more than this, the judgment is of wider relevance to the insurance industry, in clarifying certain other aspects of the Supreme Court's decision in the FCA test case back in 2021.
Furlough
The furlough issue arose in the context of claims brought by policyholders for business interruption losses covered by certain prevention of access clauses. Those clauses covered policyholders for losses flowing from prevention of access to their premises due to a danger within a one mile radius.
Business interruption insurance policies will typically indemnify policyholders against loss of revenue or loss of gross profit, less any sums saved in respect of charges or expenses payable out of that revenue or profit, as may cease or be reduced as a consequence of the insured peril.
In the COVID-19 business interruption world, a key issue which arose was whether a policyholder's receipt of furlough grants gives rise to a saving in wage costs which should be deducted from the claim.
The furlough scheme needs little introduction. On 20 March 2020, the Government announced that all employers (regardless of whether they were affected by the impending national lockdown) would be entitled to claim a grant from the Government, effectively reimbursing 80% of that employer's wage bill. To be eligible for the grant, the employer had to furlough their employees, by instructing them to cease work, but the employer had to continue paying their employees' salaries (or at least 80% of them).
Policyholders have argued that insurers were not entitled to deduct furlough grants from the amounts payable under their policies. In particular, they argued that:
- The fact that they had received a grant from the Government did not mean that their wage costs had been "reduced". The policyholders still had to (and did in fact) pay their employees their full salaries (or at least 80% of them). There had, accordingly, been no reduction in wage costs;
- Alternatively, if there had been a reduction in wage costs, that saving was not caused by the insured peril (here the prevention of access to the policyholders' premises as a result of a danger within one mile). All businesses were entitled to claim furlough, whether or not they were subject to any prevention of access, and whether or not there were any cases of COVID-19 within one mile of their premises.
- Further, the policyholders argued that furlough payments were of a gratuitous, benevolent or voluntary nature; a collateral benefit which was not caused by the insured peril, and which should not be brought into account.
Receipt of furlough grants did reduce wage costs
The Supreme Court accepted that the savings clause could be read in one of two ways. The policyholders' reading was that it should apply only to those charges or expenses of the Insured's business which the policyholder (after the insured peril) no longer had a liability to meet (of course the Insured still had a liability to pay its employees their wages during lockdown). Insurers' reading was that the savings clause applied to any situation where the economic reality was that expenditure was being reduced (here via reimbursement of salaries through receipt of a Government grant).
The Supreme Court took the view that insurers' interpretation of the savings clause should be preferred for various reasons. Notably, a reasonable person in the position of the parties (when the insurance contract was entered into) would not have differentiated between savings made because the policyholder was no longer liable to pay a person's salary and savings made because the payment of that salary was effectively being discharged by the Government through a grant.
The whole point of business interruption insurance is that it is concerned with the economic effects of certain insured perils on the policyholder's business. Savings clauses are specifically contained within such insurance policies, to prevent the policyholder from recovering more than the economic loss they have suffered.
Where there are two possible meanings ascribed to an insurance contract term, it is preferable to adopt the meaning which better fits the indemnity principle. That is particularly the case, where the very purpose of the clause in question (here a savings clause), is to make sure that the policyholder is not over-compensated.
The causation issue
Having determined that the receipt of furlough grants did reduce the policyholders' expenses, the Supreme Court had no hesitation in finding that such savings were caused by the insured peril.
The policyholders did not have to prove that the furlough scheme was introduced as a result of a danger within one mile of their premises (or as a result of prevention of access due to that danger).
The "predictable and direct consequence" of the policyholder being locked down because of disease within the vicinity of its premises was that it would tell its employees to stop work and claim a furlough grant to reimburse the cost of doing so.
The collateral benefits argument
The Supreme Court said that any payment made by a third party (in this case the Government) to a policyholder, in respect of the subject matter of an insured loss, will go to reduce the indemnifiable loss, even if that payment is made voluntarily or gratuitously, except where it is clear from what the third party has said or from the circumstances, that the payment was only ever intended to benefit the policyholder, to the exclusion of the insurer.
The Government was aware that some companies had business interruption insurance, when the furlough scheme was introduced. There was, nevertheless, nothing within the scheme and no statement from the Government, which suggested that furlough grants were intended to benefit only employers, to the exclusion of their insurers.
If that had been the Government's intent, the scheme could have spelled out that furlough grants were not meant to benefit insurers. Alternatively, the scheme could have included a provision which required furlough payments to be refunded, if they were recoverable under any business interruption insurance. As such, the Court was satisfied that the furlough scheme was not intended to benefit only policyholders, to the exclusion of insurers.
In any event, furlough payments were not voluntary or gratuitous (in the sense that it might otherwise have been said that the insured peril was not the proximate cause of such voluntary payments). Any employer was legally entitled to make a claim for a furlough grant and, if the qualifying conditions were met, HMRC was legally obliged to advance the grant.
Thus, the Supreme Court was of the clear view that furlough grants could not be compared with gifts or philanthropic donations, where it might otherwise be said that the sole cause of the third party payment was the donor's voluntary decision to make a payment to the policyholder.
Other wider implications of the judgment
Aside from the welcome news for the insurance industry that furlough grants can be deducted from COVID-19 business interruption claims, the Supreme Court's judgment is of wider significance, beyond the furlough issue.
First, the Supreme Court said that policyholders had taken out of context comments which it had made, in the test case back in 2021, about interpreting policy wording as an "ordinary policyholder" would.
The Supreme Court clarified that the core principle for interpreting any insurance policy is to look at the wording 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". The Court clarified that that does not mean focusing only on how one party, the "ordinary policyholder", might have understood the policy, but rather looking at the wording objectively, as a reasonable person in the position of both parties (ie insurer and policyholder) would have.
This marks a welcome rebalancing of the approach to interpretation of insurance contracts generally, and will be of wider significance to insurance claims generally.
Finally, the Supreme Court also clarified what it had meant by an example given in the test case in 2021 of a putative claim brought by a travel agency. It explained that if a travel agent had the benefit of a prevention of access clause, it would not naturally have been expected that disease within one mile of its premises, which prevented access to those premises, would also result in restrictions on international travel.
Thus, part, if not all, of the travel agent's loss of revenue, could be said not to be proximately caused by the insured peril (prevention of access to its premises due to disease within one mile).
Many insurers were faced with claims from policyholders who received income from activities abroad, or whose businesses might have been affected by international travel restrictions or foreign COVID-19 restrictions. There is now greater clarity that losses associated with those international restrictions might well not be covered.
