Earlier this year, the Court of Appeal handed down its judgment in the latest significant test case concerning business interruption arising from the COVID-19 pandemic. The Bath Racecourse judgment provides important guidance on the interpretation of composite insurance policies and the treatment of government support schemes in the context of business interruption claims.
In this article, we provide a background to the case, explore the key issues on appeal and provide a brief analysis of the Court of Appeal's decision. We also set out next steps for policyholders in light of the impending limitation deadline for COVID-related business interruption claims.
The case involved five appeals concerning business interruption insurance claims arising from the COVID-19 pandemic. The claims were brought by various hospitality and leisure businesses against insurers Liberty Mutual, Allianz and Aviva. The appeals followed a High Court judgment that addressed preliminary issues, including the interpretation of policy limits and the treatment of furlough payments under the UK government’s Coronavirus Job Retention Scheme (CJRS).
The issues on appeal can be divided into two broad categories:
1. Composite policies and policy limits
A composite insurance policy insures multiple entities under a single policy document, but each insured entity has a separate contract of insurance. This structure is common in group or corporate insurance arrangements where different entities within a group are covered under one policy.
The key issue for the Court of Appeal was whether the policy limits applied:
The insurers argued that the limits were in aggregate, applying across all insureds. They contended that the wording of the policies didn't support multiple limits and that the composite nature of the policy did not automatically imply separate limits.
To the contrary, the policyholders argued that the policies were composite and therefore each insured entity had a separate contract with its own limit. They relied on earlier case law, including the New Hampshire v MGN and Corbin & King v AXA cases, which supported the view that composite policies imply separate limits unless expressly stated otherwise.
The Court of Appeal held as follows:
The court made clear that it was not applying a presumption that composite policies provide separate limits. Instead, it interpreted the actual wording of the policies in question, concluding that there was no express language indicating an aggregate limit. If the parties had intended a shared limit, they should have said so clearly.
Nevertheless, in light of the Court of Appeal's decision it appears that composite policies will in practice be treated as providing separate limits per insured entity unless:
The court noted that in the absence of such provisions, it would be commercially unreasonable to assume that one insured entity’s claim could exhaust the limit available to others.
2. Deduction of furlough payments under the savings clause
The CJRS provided government grants to employers to cover 80% of wages for furloughed employees during the pandemic. The issue to be determined by the Court of Appeal was whether these payments should be deducted from the indemnity payable under business interruption insurance policies pursuant to a savings clause, which typically states that:
“If any of the charges or expenses of the Business payable cease or reduce in consequence of the Damage, such savings during the Indemnity Period shall be deducted from the amount payable.”
The key questions for the court were as follows:
On the policyholders' case:
(1) The CJRS payments did not cause employment costs to 'cease or reduce'.
(2) The payments were not 'in consequence of' the insured peril, e.g. government-mandated closure due to COVID-19.
(3) The payments were collateral and should not be deducted.
The insurers argued that the CJRS payments reduced employment costs in substance. They were made in consequence of the insured peril, i.e. government restrictions due to COVID-19, and were not collateral but part of the insured’s economic reality.
The court held that the policyholders' argument embraced form over substance and that the court must instead look to the commercial and economic reality by reference to which these commercial insurance contracts should be construed. The CJRS payments reimbursed 80% of wages, thus reducing the policyholders' costs. Further, the payments were not gifts or collateral - they were statutory entitlements.
On causation, the court applied the concurrent causation principle from the Financial Conduct Authority test case. The CJRS was introduced in response to the same government restrictions that triggered the insured peril. Therefore, the payments were in consequence of the insured peril.
Fundamentally, the policyholders did not have to bear the expenses of the wages bill and to that extent, the charges or expenses of the business were reduced. The Court of Appeal therefore held that the CJRS payments must be deducted under the savings clause
At present, we await a decision on the policyholders' application for permission to appeal to the Supreme Court. The subject of the intimated appeal is the second limb of the Court of Appeal's judgment, namely that insurers can deduct furlough payments from the indemnity calculation.
In the meantime, policyholders must note that the limitation deadline for claims in respect of COVID-19 business interruption losses that began accruing in March 2020 will expire in March 2026. Prompt action must therefore be taken to avoid claims being lost.
Our commercial disputes team work closely with accountants and brokers to support clients with insurance recoveries and policy disputes. In particular, we can:
If you or your clients are unsure where they stand, particularly in respect of COVID-19 business interruption claims that remain unresolved, please do get in touch with a member of the team.
The full Bath Racecourse judgment can be found here.
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