Insurers win landmark appeal on COVID pandemic furlough deductions

In a significant legal development, the UK’s Court of Appeal has ruled in favor of insurers, allowing them to deduct furlough payments from business interruption insurance claims made during the Covid-19 pandemic. 

This ruling has wide-reaching implications for policyholders seeking compensation for losses suffered during the pandemic, especially in terms of the government’s furlough scheme.

The court's decision effectively means that businesses covered under pandemic-related insurance policies will see their payouts reduced due to the government support received through the furlough program.

According to three senior judges, the furlough scheme mitigated the need for businesses to bear the expense of employee wages, allowing insurers to make deductions from their claims.

Legal Battle Between Policyholders and Insurers

The case revolved around several major insurers, including Liberty Mutual, Allianz, and Aviva, who were sued by companies seeking full compensation for business interruption losses caused by Covid-19 lockdowns. Among the claimants were prominent businesses like Starboard Hotels and Arena Racing, who argued that they should be entitled to the full insurance payout, excluding any government furlough aid they received.

The insurers, on the other hand, contended that since the government furlough scheme alleviated the financial burden of paying wages, businesses should not receive the full amount of their business interruption claims. The ruling, however, sides with the insurers, allowing them to deduct furlough payments from the total payout.

A “Windfall” for Insurers?

Lawyers representing policyholders expressed their disappointment with the Court of Appeal's judgment, claiming that insurers were effectively receiving a “windfall” from the government’s taxpayer-funded furlough program. Roger Franklin, partner at Edwin Coe (representing Starboard Hotels), emphasized that the furlough scheme's primary purpose was to preserve jobs and support the workforce, not to benefit insurance companies.

While the decision was a blow to policyholders, there is still a silver lining for businesses. The Court of Appeal ruled that limits on insurance payouts must apply separately to each individual business covered under a policy, rather than being shared across all subsidiaries. This could lead to significantly higher payout limits for businesses that operate multiple subsidiaries under a single policy.

For example, Arena Racing had argued that its £2.5 million insurance limit should apply to each of its 22 businesses, which would potentially increase the total payout to £55 million. This was seen as a partial victory for businesses, as it suggests that insurers may be liable for larger payouts than initially anticipated.

The Bigger Picture: Implications for Other Insurance Policies

This ruling on business interruption insurance is likely to have a wider impact on other types of insurance policies, such as property or cyber insurance, where multiple subsidiaries might be covered under one policy. Insurers will need to carefully consider how the ruling affects their approach to claims for businesses with multiple subsidiaries, particularly in relation to pandemic-related losses.