Covid-19 business interruption claims: Court of Appeal clarifies composite policies and furlough payments
Posted: 17/03/2025
On 21 February 2025, the Court of Appeal judgment in Bath Racecourse & Others v (1) Liberty Mutual, (2) Allianz Insurance PLC and (3) Aviva Insurance Limited [2025] EWCA Civ 153 concluded the latest skirmish in the long-running battle between insurers and policyholders over unpaid Covid-19 business interruption claims.
Nearly five years on since the first national lockdown, and despite the narrowing of issues and provision of judicial guidance in multiple judgments, many business interruption claims remain unpaid with the parties still locked in dispute. This latest decision at least provides some further clarity on two of the ongoing issues:
- how limits of indemnity in composite policies of insurance (ie policies insuring more than one business under a single policy) ought to be treated. Specifically, whether each business is entitled to claim separately up to the policy limit, or whether the policy limit applies across all of the insured businesses in aggregate; and
- whether insurers are entitled to deduct furlough payments received by businesses from the indemnity calculation.
Factual background
The Court of Appeal proceedings concerned three sets of composite insurance policies: i) the Bath Racecourse policy insured twenty companies in the Arena Racing Group, which owned and operated racecourses and related facilities, such as greyhound tracks, golf courses, hotels and a pub, at 21 locations in England and Wales; ii) the Starboard Hotel policy insured 21 companies, each of which owned and operated a separate hotel in England; and iii) the Gatwick Investment policy insured six companies, each of which also owned and operated separate hotels.
Each of the policyholders were impacted by government-imposed Covid-19 restrictions which, amongst other things, prevented access to their premises. Like other businesses, many of the policyholders had furloughed some of their employees in response, under the ‘Coronavirus Job Retention Scheme’ (CJRS), which enabled them to be reimbursed up to 80% of the expenditure incurred in retaining those furloughed employees during the Covid-19 pandemic.
Each of the composite policies contained similarly worded prevention of access extensions to the business interruption cover under which each of the policyholders brought claims.
The issues before the Court of Appeal were whether the limits of indemnity in each policy applied to each policyholder separately or in aggregate, and secondly, whether payments received via the CJRS ought to be deducted from the policyholders’ loss of gross profit calculations, when calculating the indemnity to be paid.
Limits of indemnity in composite policies
The central competing arguments of the parties were clear:
- The policyholders argued that their composite policies of insurance effectively amounted to separate policies, each providing separate insurance, to each of the insured entities. Therefore, on that basis, they argued that the full limit of indemnity in the policies was available to each of the insured entities individually and separately.
- The insurers argued the opposite. They contended that it was effectively a single shared policy and that the limits of indemnity were therefore aggregate limits to be shared between all of the policyholders jointly.
The policyholders’ argument had succeeded at first instance, and did so again before the Court of Appeal. The Court of Appeal confirmed that a composite policy of insurance generally comprises a series of separate contracts of insurance. In that context, a reasonable policyholder would not normally expect that their rights under their policy would be eroded because another policyholder had also made a claim under a separate (albeit connected) policy. The Court of Appeal ruled, in this context, that if a policy limit is intended to apply in aggregate, there ought to be an express provision in the policy making that clear.
Its decision in this case was based upon the specific policies in question. However, the relevant factors which led to the decision are common in most composite business interruption policies. This means that the limits of indemnity in composite policies of insurance are likely to apply separately to each insured, unless the policy expressly provides otherwise. Where such policies do provide otherwise, they should also explain how such indemnity limits should be apportioned if more than one policyholder makes a claim against an aggregate limit of indemnity.
Furlough payments
Typically, business interruption policies provide, as in this case, that, from the policyholder’s loss of income or gross profit calculation (and any claim for their increased costs of working), should be deducted ‘any sum saved during the Indemnity Period 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’, or similar.
It is on that basis that the insurers had argued (and the High Court at first instance agreed) that they ought to be permitted to deduct furlough payments received by the policyholders from the sums claimed. The policyholders challenged this on three grounds:
Ground 1: Employee costs did not ‘cease’ or ‘reduce’ as a result of the CJRS payments, as the policyholders still had to pay their employees and CJRS payments came from a separate third party.
Ground 2: Failing that, any cessation or reduction in the charges or expenses of the business was not ‘in consequence’ of the insured peril as there was no correlation to the insured peril, ie they argued that the CJRS was an incentive to retain employees, not compensation for the prevention of access to the premises itself.
Ground 3: Furlough payments were what was termed a ‘collateral benefit’ and should be treated in the same way as if the policyholders had received a gift or charitable donation from a sympathetic customer.
The Court of Appeal found in favour of the insurers, dismissing all three grounds. Regarding the first ground, the Court of Appeal found that:
‘… the commercial and economic reality by reference to which these commercial insurance contracts should be construed, is that the effect of the CJRS payments reimbursing the insureds for 80% of their wages bill was indeed to reduce that bill by 80%, which constituted a saving within the savings clauses.’
The Court of Appeal went on to state that:
‘The bottom line at the end of the day is that the insureds did not have to bear the expense of the wages bill and to that extent, the charges or expenses of the business were reduced…’
What next?
At the time of writing, the Court of Appeal’s judgment remains subject to potential further appeals on both sides, albeit permission is likely to be a significant hurdle for either side, noting the Supreme Court’s refusal to grant permission to appeal in another recent business interruption matter, London International Exhibition Centre Plc v Allianz and Others.
On the assumption that there is to be no further appeal, it is hoped that this latest decision will allow many business interruption claims (against many insurers), held in abeyance on the basis of these issues, to finally be resolved.
However, in either case, this decision is unlikely to represent the final battle for Covid-19 business interruption litigation, with many insurers continuing to resist paying claims on various grounds. Important and related litigation is still proceeding through the courts. With limitation for policyholders likely to become an increasingly urgent issue over the next 12 months, it is inevitable that more claims are to come.
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