UK Supreme Court Clarifies The Treatment Of Furlough Payments In Business Interruption Insurance

Introduction

During the Covid-19 pandemic, the UK Government introduced the Coronavirus Job Retention Scheme (“CJRS”), which reimbursed employers for up to 80% of furloughed employees’ wages. Many businesses that received CJRS payments also held business interruption insurance policies containing “savings clauses”. These clauses required that any charges or expenses of the insured business that ceased or reduced “in consequence of” the insured peril be deducted from the insurer’s indemnity payment. The insurers contended that CJRS payments reduced the policyholders’ employment costs and therefore fell to be deducted under these savings clauses. The policyholders disagreed, and the dispute reached the UK Supreme Court.

In a recent decision of the UK Supreme Court, the court unanimously held that furlough payments must be deducted, confirming an estimated £1 billion in deductions already applied across the UK insurance market.

First issue before court: did CJRS payments “reduce” business charges or expenses?

The policyholders argued that their wages bills were not “reduced” because the legal liability to pay employees’ wages remained fully incurred and discharged. The CJRS reimbursement, they submitted, was merely “other income” that did not alter the underlying obligation. The insurers countered that a reasonable businessperson would look at the economic substance: the Government was bearing a specified share of the wage cost, and the charges were therefore reduced pro tanto (“to that extent”).

The court found that both constructions were linguistically possible but preferred the insurers’ interpretation for several reasons. First, there was no reason to distinguish between incurring a charge and bearing it; the economic effect of reimbursement is the same as the obligation being waived. Second, business interruption insurance is concerned with economic effects, so the savings clause should be construed accordingly. Third, the evident purpose of the savings clause is to prevent over-indemnification, which is served only if all savings actually made are taken into account. Fourth, the policyholders’ construction produced arbitrary results: absent furlough payments, the policyholders would have made employees redundant and saved on employment costs, reducing their claims; yet their interpretation allowed them to keep both the furlough payments and a full insurance recovery. Fifth, the Government itself described the CJRS as “step[ping] in and help[ing] to pay people’s wages.” The court concluded that the CJRS payments “reduced” the charges or expenses of the business within the savings clauses.

Second issue: were the savings made “in consequence of” the insured peril?

The policyholders advanced two sub-arguments. The first, the “irrelevance argument,” relied on the fact that eligibility for CJRS payments did not require proof of the insured peril (namely, prevention of access to premises following government action in response to Covid-19 cases within a one-mile radius). Since the payments would have been received regardless of whether the insured peril occurred, the policyholders argued that the peril was not a proximate cause of the savings.

The court rejected this argument as fundamentally flawed. It amounted to a “but for” test of causation — the very test this court had rejected in the earlier FCA test case [2021] UKSC 1. Critically, if the “but for” logic were correct, it would equally apply to the policyholders’ revenue losses, meaning they would have no cover at all. The policyholders could not rely on the rejection of the “but for” test to establish their cover while simultaneously deploying that same test to exclude savings from the calculation.

The second sub-argument, the “collateral benefits argument,” contended that CJRS payments were gratuitous or benevolent benefits conferred by a third party and should therefore be treated as collateral benefits not legally caused by the insured peril. The court held that the governing principle, drawn from the line of authority from Burnand v Rodocanachi and Castellain v Preston, is that any third-party payment in respect of the insured loss will diminish that loss and inure to the benefit of the insurer, unless the third party intended the payment to benefit only the insured to the exclusion of the insurer. Nothing in the terms of the CJRS or surrounding circumstances indicated such an intention. Moreover, the court held that CJRS payments were made pursuant to a legal obligation under the Treasury Directions and could not properly be characterised as voluntary, gratuitous, or benevolent. The scheme obtained reciprocal benefits, including the preservation of employer-employee relationships and public health objectives.

Conclusion: relevance for the South African insurance industry

Although this judgment is not binding in South Africa, it carries significant persuasive authority for the local insurance industry. South African business interruption policies commonly contain savings clauses modelled on or similar to the standard Association of British Insurers wording considered in this case. The principles articulated by the UK Supreme Court are therefore directly relevant to the construction of such clauses in the South African context.

The judgment reinforces the principle that savings clauses are concerned with economic substance rather than legal form. Where government relief measures — such as the COVID-19 Temporary Employer/Employee Relief Scheme (TERS) administered by the Unemployment Insurance Fund in South Africa — effectively defray employment costs, insurers may argue that those payments constitute “savings” deductible under the policy. The court’s reasoning that reimbursement of a cost has the same economic effect as the cost not being incurred is a principle of general application.

Furthermore, the judgment’s insistence on consistency in causation — that the same test must apply to both losses and savings — is a principled approach likely to resonate with South African courts, which apply similar proximate cause analysis in insurance disputes. The decision also provides authoritative guidance on the treatment of government relief payments under the indemnity principle, an area of increasing importance given the likelihood of future public health or economic crises prompting similar state interventions. South African insurers, policyholders, and their advisers would be well served to take careful note of this judgment when negotiating, drafting, and litigating business interruption claims.