The COVID-19 saga continues: Stalemate in the Court of Appeal

The Court of Appeal has recently issued a judgment in Bath Racecourse¹ that will be of interest to policyholders and the entire insurance market. It considers the treatment of furlough receipts when considering business interruption losses, and provides clarifications on the operation and construction of limits in the context of composite insurance policies.

Background

The case considered the claims of several policyholders with business interruption insurance policies containing “Non-Damage Prevention of Access” (NDPOA) extension for losses suffered as a consequence of the COVID-19 pandemic. With several exceptions, the policies considered were “composite policies” whereby a number of different insured group companies were insured under the same policy.

By way of general summary, NDPOA extensions provide cover for reductions in a policyholder’s revenue or profits where it has suffered a prevention or hindrance of access to, or use of, its premises, caused by the action of a defined authority in response to a danger in the locale of premises. Previous decisions have held that these clauses respond in principle to COVID-19 where there has been a case of COVID-19 within the defined radius of the premises.

In a detailed first instance judgment, Mr Justice Jacobs addressed several important issues concerning NDPOA extensions in the COVID-19 context. However, most important for the eventual appeals and this article were the following questions:

• Was each insured under a composite policy entitled to its own limit of indemnity for its own NDPOA claim on the proper construction of the relevant insurance policies?
• Should Coronavirus Job Retention Scheme (CJRS) payments, commonly known as furlough payments, be considered as savings when adjusting business interruption insurance claims for reduction in a business’ gross revenue?

The judge found that each composite insured was entitled to its own limit under the policies and that credit should be given for furlough receipts.

The Court of Appeal decision

Mr Justice Jacobs’ decision on these issues has been unanimously upheld by the Court of Appeal, with a clarification on the starting point for the test on limits in a composite policy.

Sir Julian Flaux, with whom Lord Justices Popplewell and Phillips agreed, explained that there is no “expectation” or “presumption” in the context of a composite insurance policy as to how the limits operate. Instead, “the conclusion that the limits are ones applicable to each insured and not aggregate limits is a matter of the proper construction of the respective policies”.

On the proper construction of these policies, the Court agreed with Mr Justice Jacobs that nothing in the policy would suggest, to a reasonable policyholder, that these limits were intended to be in the aggregate. Without a provision to this effect, Sir Julian stated that “the reasonable policyholder would not expect its own limits to be eroded by someone else’s claim”.

Some other significant clarifications on points of principle in the Court of Appeal judgment are:

• Insurance policies are contracts of indemnity and on a basic level, they should only pay out for the actual loss suffered by the insured. Therefore, on the question of furlough, an insured’s wage bill did reduce due to furlough payments. This was a “a matter of commercial and economic reality” and arguments to the contrary ignored that reality.
• The Court of Appeal confirmed that the same causation test used for the insured peril should be applied for any related provisions, such as a savings clause. As set out by the Supreme Court in the FCA Test Case, cases of COVID-19 at or in the vicinity of an insured’s premises were a concurrent effective cause of the nationwide lockdown and restrictions. It must follow from this that those cases are also effective causes of both the furlough scheme and any subsequent payments to the claimant policyholder, which were “designed to mitigate the effects of the restrictions imposed by the Government”.

What next?

We await confirmation as to whether permission to appeal these points to the Supreme Court will be sought.  However, the Court of Appeal’s unanimous decision provides further clarity on the status of furlough payments and the relevant tests for savings clauses in business interruption insurance policies.

It also provides clear guidance on the construction of limits for insurers, policyholders and brokers to takeaway and consider for any new business or renewals:

• If an insurer wants to impose an aggregate limit in a composite policy, wording to that effect must be included in the contract.  Many contracts available in the market already contain such wording.
• Policyholders that need separate limits available for different members of a group company should raise this point with their broker/insurers and check the wording of any policy carefully to ensure they are procuring the level of cover required.

Footnotes

1. Liberty Mutual v Bath Racecourse, Liberty Mutual v Starboard Hotels, Gatwick Investment Ltd v Liberty Mutual [2025] EWCA Civ 153