Insurers win landmark appeal on pandemic furlough deductions

By Ryan Hewlett

Feb 24 - (The Insurer) - London’s Court of Appeal has handed insurers victory in a crucial test case, ruling that UK government furlough funds received by businesses during the COVID-19 pandemic can be deducted from business interruption insurance payouts.

• Court of Appeal rules in latest COVID BI test case judgment

• Court found in favour of insurers on furlough deductions

• But policyholders victorious on composite policies appeal

• Lawyers say reach of decision extends beyond COVID BI disputes

Lord Justice Popplewell, Lord Justice Phillips and Chancellor of the High Court Julian Flaux said on Friday that insurers were permitted to make the deductions as the government support measures constituted a saving for the insureds under the savings clauses in their policies.

The trio of judges found that the Coronavirus Job Retention Scheme, which provided grants to employers to retain and pay staff furloughed during lockdowns, served to “save” insureds the expense of paying wages to staff during the pandemic, slashing cost which could then be deducted from insurance payouts.

“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,” the judgment said.

A cohort of policyholders, including Bath Racecourse Company, Starboard Hotels and Gatwick Investments, had argued that insurers should not be entitled to deduct the benefit of furlough payments received during the COVID pandemic.

In turn, insurers Liberty Mutual Insurance Europe, Allianz and Aviva argued that the wages and business support received by the insureds should be deducted from the sums recoverable under the policies.

The policyholders were seeking to overturn a first instance ruling handed down in January 2024 by Justice Jacobs.

The Court of Appeal on Friday dismissed all appeals brought by both insurers and policyholders and backed the January 2024 decision, handing insurers the right to deduct the value of government support from payouts.

The judgment, which followed an appeals hearing in January 2025, marked only a partial victory for insurers, which collectively lost their bid to limit the scope of composite policies.

The Court of Appeal was being asked to consider whether a composite insurance policy entitles multiple insured policyholders to their own separate indemnity limits and sub-limits under a single composite policy. The Commercial Court’s January 2024 ruling found that policyholders were entitled to a maximum amount of 1 million pounds for each premises owned by them.

At appeal, the court dismissed insurers' arguments that subsidiary businesses shared a single aggregate limit on payouts and found that composite policies have individual limits of indemnity available to each of the insured businesses separately – a decision which could open the door to higher claims.

James Breese, partner at Stewarts, which represented the policyholders, said the ruling is significant for both policyholders and insurers.

“The Court of Appeal’s decision on the composite policy issue is an important one for corporate groups with multiple insured entities under one policy document. The reach of this decision extends far beyond COVID-19 business interruption insurance disputes,” said Breese in a written statement.

“This decision confirms that, in principle, multiple limits of indemnity will be available to the individual subsidiaries in a corporate group with composite policies of insurance. This produces a commercially rationale outcome where substantial losses have been suffered by different businesses and premises within the same group. The Court of Appeal noted that such policyholders would reasonably expect this to be case with their composite policies of insurance.”

The English Commercial Court has delivered several notable decisions addressing insurers’ treatment of the government support received by policyholders, but this was the first to reach the Court of Appeal.

Most notable to date was the lower court finding in Stonegate’s 1.1 billion pound legal action against MS Amlin and others, along with Various Eateries’ claim against Allianz, both of which 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.

As previously reported, the court found in favour of insurers in the landmark Stonegate action, reasoning that payment of furlough to the policyholder engaged the savings provision in the policy wording. Permission to appeal was granted to Stonegate, but the case settled before reaching court.

In a statement to The Insurer, a spokesperson for Allianz said: "We welcome the Court of Appeal’s decision which provides much needed clarity. We appreciate the impact on some businesses during the pandemic was substantial and understand their frustration.

“Whilst litigation is never ideal, the application of cover in response to a pandemic can be very complex, so we welcome the judgment which should enable the resolution of the matter with our customer, subject to any appeals."

Aviva declined to comment. Liberty Mutual did not immediately respond to a request for comment.