Supreme Court Determines Furlough Payments Can Be Deducted By Insurers From Covid-19 Business Interruption Claims

The Supreme Court has handed down its much-awaited judgment in Gatwick Investment Ltd and others v Liberty Mutual Insurance Europe SE [2026] UKSC 14, deciding the question of whether furlough payments paid by the UK Government under the Coronavirus Job Retention Scheme (CJRS) to policyholders fall to be deducted from the amounts otherwise payable by insurers in claims for business interruption (BI) losses suffered because of the Covid-19 pandemic.

The Supreme Court, upholding the judgments of Jacobs J at first instance and the Court of Appeal, held that furlough payments were to be deducted from the amounts recoverable under the BI policies. The Court accepted the Insurers’ case that the payments engaged the savings clauses in the policies, that they did cause the Insureds’ charges and expenses to ‘cease’ or ‘reduce', and that they were made “in consequence of” the insured peril. The Supreme Court also took the opportunity to clarify the approach to the construction of contracts of insurance and the impact of the indemnity principle on construction, as well as providing authoritative guidance on the doctrine of collateral benefit and the circumstances in which third party payments will not be treated as reducing the recoverable loss.

BACKGROUND

As part of the Government's response to the Covid-19 pandemic, it established the CJRS, a scheme under which employers who had "furloughed" their employees by instructing them to cease work could claim payments reimbursing the employers for their expenditure on the employees' wages.

The appellants in the case were corporate policyholders (the Insureds) insured by the respondent insurers (the Insurers) who experienced trading losses due to the Covid-19 pandemic and ensuing government restrictions. Each Insured claimed payments under the CJRS after furloughing their employees by instructing them to cease work.

The Insureds sought to recover losses sustained during the Covid-19 pandemic under prevention of access (non-damage) or denial of access clauses in their respective BI policies. The relevant policies all contained savings clauses, which provide for a deduction from the amount payable by Insurers if "any of the charges or expenses" of the Insureds "cease or reduce in consequence of the Damage" (or words to similar effect). One example clause provided that "such savings during the Indemnity Period shall be deducted from the amount payable", while another referred to "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".

Insurers submitted that the payments received by the Insureds under the CJRS should be deducted from the total sum payable under such savings clauses.

While the first instance and Court of Appeal decisions (discussed below) also considered other issues (including causation and applicable limits), the appeal to the Supreme Court focused only on the savings clause issue and this article does the same.

FIRST INSTANCE DECISION

At first instance, Jacobs J concluded the savings clauses in the policies required the Insureds to account for payments received under the CJRS. These furlough payments reduced the Insureds' loss, approving the reasoning of Butcher J in Stonegate Pub Company v MS Amlin [2022] EWHC 2548 (Comm). 

COURT OF APPEAL DECISION

The decision of Jacobs J was appealed in Liberty Mutual Insurance Europe SE v Bath Racecourse Company Ltd [2025] EWCA Civ 153. The Court of Appeal dismissed all the appeals and upheld Jacobs J’s decision, finding that the Insureds’ entitlement to cover was reduced to the extent they received payments under the CJRS under the relevant savings clauses. The Court of Appeal held that the restrictions were a sufficient cause of the furlough scheme, and the prevention or hindrance of access to the Insureds’ premises flowed from the restrictions imposed by the Government.

The leading judgment was given by Sir Julian Flaux (Chancellor of the High Court), with whom Lord Justices Popplewell and Phillips agreed. Sir Julian Flaux C held that the effect of the CJRS payments was to reduce the Insureds' wages bill by 80%. He noted that it was necessary to look at substance over form and consider the commercial and economic reality when construing the policies. He also noted that whether the CJRS reduced the Insureds’ costs and expenses cannot depend on the timing of when they received those payments (i.e. before or after they incurred the wages costs).

The Court of Appeal held that savings clauses should be construed with the basic principle that insurance policies are contracts of indemnity. The policies were seeking to identify the "actual loss suffered by the insured" – an insured should not receive more than an indemnity for their actual loss, unless the policy wording suggests otherwise. The Court of Appeal also held that the furlough payments were not collateral payments or benevolent gifts.

ARGUMENTS BEFORE THE SUPREME COURT

The Insureds were granted leave to appeal to the Supreme Court and appealed the Court of Appeal decision on these grounds:

Ground 1: The relevant liabilities were not reduced (the Construction Issue)

This argument was based on contractual construction and the wording of the savings clause. The Insureds contended that the words should be given their natural and ordinary meaning: a liability must actually cease to be incurred, or be incurred in a lesser amount, in order for the savings clause to be triggered. The CJRS was not structured by way of payments from the state to employees, or by relieving employers of their wage liabilities, and so at no point in time did the wage and other liabilities "cease" to be incurred or "reduce" by reason of the CJRS payments.

Ground 2: The CJRS payments were not legally caused by the insured peril and so were not “in consequence of” it because: (a) proof of the insured peril was irrelevant to the entitlement to claim CJRS payments; and/or (b) the payments were of a gratuitous, benevolent or voluntary nature and should for that reason be treated as collateral benefits (the Causation Issue)

The Insureds submitted that receipts of CJRS payments were not legally caused by the insured peril but rather were analogous to a gratuitous, benevolent or voluntary conferral of a benefit by a third party (here, the state) and so should be treated as a collateral benefit. The Insureds relied on a letter from Mr John Glen MP, Economic Secretary to the Treasury, to the Association of British Insurers on 25 September 2020, in which he stated that:

“it is the Government's firm expectation that grant funds intended to provide emergency support to businesses at this time of crisis are not to be deducted from business interruption insurance claims”, and that such “deductions are quite clearly not in line with the intention of the support schemes”.

The Insureds also argued that, setting aside the collateral benefit point, the insured peril was not legally causative of the CJRS payments received by the Insureds because proof of the insured peril was entirely irrelevant to entitlement to the payments. Eligibility to claim reimbursement of employees' wages under the CJRS depended on whether an employee was furloughed because of circumstances arising from the health, social and economic emergency in the UK as a result of Covid-19, and it was neither necessary nor relevant that access to or use of the employer's premises had been prevented or hindered, nor that Covid-19 was present within one mile of the employer's premises. 

SUPREME COURT DECISION

The Supreme Court unanimously dismissed the appeal, holding that the savings clauses required furlough payments to be deducted from lost revenue in calculating the indemnity, because the payments both reduced charges or expenses of the Insureds' businesses and did so in consequence of the insured peril. The judgment was given by Lord Hamblen, Lord Leggatt and Lord Burrows with whom Lord Reed and Lord Briggs agreed.

The Construction Issue

The Court began by considering the construction of the insurance policy and the savings clauses, confirming that there is no unique approach to interpreting an insurance policy. As set out in the FCA Test Case, the policy terms had to be “interpreted 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 also considered the “indemnity principle”, holding that it was both permissible and correct to consider the indemnity nature of an insurance policy when interpreting its terms, provided the policy language does not require otherwise.

While the Court accepted that, as a matter of language, the savings clauses could be understood either as referring to whether a charge or expense is reduced as a matter of fact (as submitted by Insurers) or whether the liability for a charge or expense is reduced as a matter of law (as submitted by the Insureds), it held that Insurers’ position was to be preferred, and identified eight principal reasons for doing so:

• The Court noted that no reason had been put forward to explain why a reasonable person in the position of the parties would distinguish between incurring a charge and bearing it economically – the economic effect of paying and being reimbursed is the same as having the obligation waived or discharged by another, and this is a matter of mechanics rather than substance. 
• The general context of a BI policy is one concerned with the economic effects of insured perils on the Insured’s business, and one would therefore expect a savings clause to address the economic rather than legal effect of any saving.
• The specific purpose of the savings clause was to prevent over-indemnification (to prevent the Insured from recovering more than its actual loss) and that purpose is served only if all savings actually made are taken into account, irrespective of whether they reduced a legal liability. 
• The Court considered that where there are two possible meanings of a clause in an insurance contract, it was appropriate to prefer the meaning which better fits the purpose of indemnification.
• The Insureds' construction would produce perverse and uncommercial results: it was common ground that, absent the CJRS, the Insureds would have made employees redundant and thereby reduced their employment costs. On the Insureds’ argument, however, they could both retain the benefit of the furlough payments and recover a full insurance indemnity as though no saving had been made at all. 
• The Court considered that the Insurers’ interpretation was consistent with the reality reflected in UK Government statements that the Government was effectively paying the relevant employees’ wages and expenses.
• The Insurers’ construction had been unequivocally preferred by five experienced judges.
• The Insurers’ construction avoided the operation of the savings clauses being dependent upon the artificial distinction between whether the furlough payments were received before or after the payment to the employee. 

For all these reasons, the Court agreed with the courts below that, on the proper construction of the savings clauses, payments under the CJRS "reduced" the charges or expenses of the Insureds’ businesses.

The Causation Issue

The Court then turned to the question of whether the savings had been made “in consequence” of the insured peril. The Court noted that the same test of causation applies to gain as it does to loss, and therefore whether savings were made “in consequence of” the insured peril turned on whether the insured peril was a proximate cause of the gain. Rejecting the Insureds’ irrelevance and collateral benefits arguments, the Court held that there was a straightforward causal connection between the BI losses falling within the insurance cover and the savings from the furlough payments.

The Irrelevance Ground

The Court addressed the “irrelevance” ground first, rejecting the Insureds’ arguments that the insured peril was irrelevant and not a proximate cause of the CJRS payments. This argument assumed that establishing the required causal connection between the furlough payments and the insured peril required demonstrating that the payments would not have been received but for the occurrence of the insured peril. The Court rejected this argument for two reasons.

First, it was inconsistent with the Supreme Court's decision in the FCA Test Case, where the Court had held that in order to show that BI losses were caused by the insured peril in connection with Covid-19, it was not necessary to satisfy a “but for” test. The same test of causation must apply to the causation of savings as applies to the causation of losses. Secondly, the Insureds’ case was internally inconsistent, as in order to recover their BI losses under the policies, they themselves needed to rely on the rejection of the “but for” test and on the analysis of causation adopted in the FCA Test Case. The Court said that the Insureds “cannot have it both ways”.

The Collateral Benefit Argument

The Court then discussed the collateral benefit argument, rejecting the Insureds’ argument that the savings were “collateral” to the insured peril and did not reduce the loss. However, unlike the High Court and the Court of Appeal, the Court did consider that this ground was “analytically distinct” from the contention that such payments are not to be regarded in law as caused by the insured peril.

The Court carefully considered the leading authorities on collateral benefit and the line of “subrogation” cases relied on by the Insureds (which the Court noted were “not cases of subrogation in the strict sense” but rather "cases in which the insured person had no right of action against a third party to which the insurer could have been subrogated but where the third party nevertheless made a payment to the insured relating to the subject matter of the loss”). The Court concluded that the principles illustrated by those cases had been correctly summarised by Butcher J in Stonegate, and were as follows:

“any payment made by a third party to the insured in respect of the subject matter of the insured loss, even if made voluntarily or gratuitously, will diminish the loss and enure to the benefit of the insurer except where the intention of the third party in making the payment, expressly stated or inferred from the circumstances, was to benefit only the insured to the exclusion of the insurer.”

Applying this principle, the Court considered that furlough payments plainly fell within the general rule rather than the exception: the payments reduced costs which the Insureds would otherwise have borne, and there was nothing in the terms of the CJRS or the surrounding circumstances to suggest that payments were intended to benefit only the employer to the exclusion of any insurer liable to indemnify that employer for its BI loss, noting that “[s]uch an intention is in any case an improbable one to impute to the Government.”

In any event, the Court considered that the collateral benefit doctrine could not apply as the CJRS payments were not voluntary or gratuitous: they were made pursuant to a legal obligation, and an employer whose claim met the qualifying conditions was entitled as of right to reimbursement from HMRC. The aims of the CJRS, including minimising the economic impact of pandemic restrictions, maintaining the UK economy's productive capacity and incentivising businesses to follow Government guidelines, meant the scheme was not an exercise of gratuitous or benevolent giving, and CJRS payments could not properly be likened to gifts or philanthropic donations.

COMMENT

Six years after the pandemic began, this Supreme Court decision marks the final chapter in the series of claims which have worked their way through the English courts since the pandemic, all sparked by the FCA Test Case back in 2020, although further cases cannot be ruled out. For many policyholders and insurers, this was one of the last remaining key battlegrounds in this series of BI claims. The decision will be disappointing for impacted policyholders, who will have their pandemic BI claims reduced to reflect furlough payments received from the UK Government, effectively marking the end of the road for this litigation. Nonetheless, the overall body of case law, not least the FCA Test Case outcome, remains overwhelmingly positive from a policyholder perspective.

The judgment also establishes a leading precedent for the treatment of state support – including grants, subsidies, and other payments – in BI claims, both related to Covid-19 and more broadly. This decision will likely influence the handling of future catastrophe-related BI claims where government intervention constitutes part of the loss landscape.

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