UK court rules for insurers on Covid furlough payments

Furlough payments can be taken into account when assessing the insured loss of a business, the Commercial Court has ruled in an important Covid-19 business interruption case.

The ruling, part of the case brought by pubchain Stonegate against its insurers, means insurers can reduce their policy holder’s loss by the amount of furlough payments they received.

But in a mixed ruling for insurers, the court also found that individual lockdowns should be treated as separate occurrences. 

The judgement was welcomed by MS Amlin, the lead insurer in the case, however Stonegate has said it would seek to appeal the ruling.

Stonegate, which operates more than 700 pubs across the UK, brought claims of £845m ($1.2bn) against the three insurers – MS Amlin, Liberty Mutual Insurance Europe and Zurich Insurance – arguing they had downplayed their liability for the company’s coronavirus losses.

The pub chain has argued that it was entitled to an pay out for business interruption loss for three different perils: diseases; mandated closures; and government decisions that prohibit access to the insured locations.

Importantly, it argued that every new lockdown was a new occurrence under the policy with its own limit of indemnity – whereas the insurers had argued the pandemic was just one occurrence of connected events with a single limit of indemnity.

Stonegate also argued that it was entitled to indemnity for tail losses caused by covid-related business interruption up to 36 months after the initial occurrence.

And it argued that furlough payments should not be taken into account when calculating losses from a business interruption.

In its judgement, the first of a multi-stage process, the Commercial Court – part of the high court – gave a mixed ruling that was at times in favour of the insurer, and at others in favour of the policy holder.

The court ruled individual decisions by the government, such as its decision in March 2020 to advise the public avoid pubs restaurants and clubs, could be considered as occurrences, and that subsequent changes to guidance or regulations could also be seen as individual occurrences – adding that potentially the decisions by each devolved nation could also be seen as an occurrence.

With regard to the legacy losses caused by Covid, the court said the policy holder was entitled to claim for increased cost of working up to the sublimit included in the policy.

And finally, the judge ruled that any payments received by the policy holder under the furlough scheme or business rates relief could be taken into account when calculating the loss recoverable under the policy.

Johan Slabbert, chief executive of MS Amlin Underwriting, said: “We welcome the judgment of the High Court, and believe this brings some genuine clarity to a very complex business interruption case.

“This is a positive outcome for us and is of significance to the entire insurance industry, who I’m sure will be keen to read the full details of the judgment, as issues around furlough payments and aggregation in particular have the potential to have an enormous financial impact for insurers throughout the UK.”

However, in a statement, Stonegate said the outcome was “far from conclusive”.

“We believe that the Court’s interpretation on a number of issues which are generally applicable to policyholders is out of step with the approach taken by the Supreme Court in the Test Case and with the approach of Courts in other jurisdictions (such as on furlough),” the statement said.

It added: “We intend to appeal those elements of the decision.”

Liberty Specialty Markets said it does not publicly discuss litigation. Zurich Insurance did not immediately respond to a request for comment.