Covid-19 business interruption claims, savings and government assistance (UK)

Donald Dinnie, Norton Rose Fulbright

In these October 2022 judgments (judgment 1 and judgment 2), the court held that government furlough payments were to be deducted from loss calculations as savings. The insured’s argument that the payments were simply a reimbursement of employment costs was rejected.

The courts had regard to the basic rules of a contract of indemnity and said that where a third party has made a payment which eliminated or reduced the loss to the insured, against which it had insurance, the insurers are entitled to the benefit of that payment in reducing any payment they might have to make under the policy, or claiming an amount already paid from the insured.

The insurers would not be entitled to the benefit of such a payment where it is established that the third party only intended and was only obliged to benefit the insured to the exclusion of the insurers. 

The court said however that in assessing the intentions of a third party payor it does not matter whether the payor gave any thought to the position of the insurers.  A payment can still diminish the loss even if no such thought was given.

The court referenced a judgment with a South African connection.  In Sterns v Village Main Reef Gold Mining Co (1905) 10 Com Cas 89, the government of the South African Republic had, immediately before the outbreak of the second Boer War, seized a quantity of gold belonging to the defendants who recovered the loss from their insurers.  The government had then at the request of the defendants and as a matter of grace, returned a large portion of the gold to the defendants.  The appeal court said that the insurers were entitled to the value of the restored gold.

An truly ex gratia payment will not have the same consequence.   In Merritt v Capitol Indemnity [1991] 1 Lloyds Rep 169 the broker made an ex gratia payment to a reinsured to cover part of the reinsured’s loss.  The broker had made the payment to retain the goodwill of the reinsured and expected to be reimbursed by the reinsurer.  The court said:

“It follows inexorably that the payment was made solely for the benefit of the assured and not for the benefit of the reinsurer”.

In making the furlough payments, there were no statement from the UK government which indicated that the payment was made only in respect of uninsured losses.  So even if insurers did not have the benefit of the savings clause in the policy, they would have been subrogated to the furlough payments as a matter of general principles.

The Stonegate Pub Company judgment contains a useful review of English law relating to the doctrine of subrogation in contracts of indemnity particularly insurance, which the court said were of direct relevance.  The court said that cases from other areas involving the “rather less precise principle of res inter alios acta appear to be of much less relevance”.

First published by: Financial Institutions Legal Snapshot