Gatwick Investment Ltd and others v Liberty Mutual Insurance Europe SE; Bath Racecourse Company Ltd and others v Liberty Mutual Insurance Europe SE and others [2026] UKSC 14

Hotel and racecourse operators claimed Covid-19 business interruption losses. The Supreme Court held that furlough payments under the Coronavirus Job Retention Scheme ‘reduced’ their employment costs in consequence of the insured peril, so must be deducted under the policies’ savings clauses.

Background

These conjoined appeals concerned the effect of payments made under the Coronavirus Job Retention Scheme (CJRS) on business interruption insurance claims arising from the Covid-19 pandemic. They raised issues not decided in Financial Conduct Authority v Arch Insurance (UK) Ltd [2021] UKSC 1 (the FCA test case).

In the Arena proceedings, 22 subsidiary companies within the Arena Racing group, operating racecourses, greyhound tracks, golf clubs, hotels and a pub, held a composite policy with a ‘Denial of Access’ extension. In the Gatwick proceedings, six hotel owners or operators each held a Commercial Combined Policy with Liberty Mutual containing a ‘Prevention of Access (Non Damage)’ extension. Liability in principle under these clauses was admitted or established. Liberty Mutual’s argument that Government action was not action by a ‘Statutory Authority’ had been rejected by Jacobs J and was not pursued.

Both policies contained savings clauses derived from a standard Association of British Insurers wording. The Arena clause provided:

“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 Gatwick clause required deduction of:

“any sum saved during the Indemnity Period in respect of such of the charges of the Business payable out of Gross Revenue as may cease or be reduced in consequence of the incident.”

It was agreed that nothing turned on the differences between them. Under the CJRS, implemented by Treasury Directions under sections 71 and 76 of the Coronavirus Act 2020, employers could claim reimbursement of (initially) 80% of furloughed employees’ wages (up to £2,500 per month), plus employer national insurance and pension contributions. To make a valid claim the employer had to pay the full wages and costs claimed. It was an agreed fact that, but for the CJRS payments, the appellants would have made some employees redundant, thereby saving employment costs.

Jacobs J ([2024] EWHC 124 (Comm)) and the Court of Appeal ([2025] EWCA Civ 153) held that furlough payments were to be deducted. The Supreme Court was told that this reflected the market’s general position and that an estimated £1 billion had been deducted on this basis.

The issues

• The construction issue: whether employment costs were ‘reduced’ within the savings clauses by CJRS payments, given that the wages were paid and only later reimbursed.
• The causation issue: whether any reduction occurred ‘in consequence of’ the insured peril, because (a) proof of the insured peril was irrelevant to CJRS entitlement (the ‘irrelevance argument’); and/or (b) the payments were gratuitous, benevolent or voluntary collateral benefits (the ‘collateral benefits argument’).

The construction issue

The parties’ arguments

The appellants argued that the clauses bite only where a legal liability (‘payable’) is not incurred or is incurred in a lesser amount. The wages liability was incurred and discharged, and later reimbursement did not alter it. Furlough payments were ‘other income’, as reflected in their tax and FRS 102 accounting treatment, and were not ‘Gross Revenue’. Deduction would produce arbitrary results depending on the timing of reimbursement. They also argued that the courts below had relied too heavily on the indemnity principle, citing Polikoff Ltd v North British & Mercantile Insurance Co Ltd, Mobis Parts Australia Pty Ltd v XL Insurance Co SE and the Victorian decision in Princess Theatre Pty Ltd v Ansvar Insurance Ltd concerning JobKeeper payments.

The respondents argued for a pragmatic, commonsense reading directed to economic substance. They stressed that CJRS payments were hypothecated to wages, so that the Government was bearing a specified share of that cost.

Approach to construction and the indemnity principle

The court reaffirmed the core principle in the FCA test case at para 47. It explained that the ‘ordinary policyholder’ passage at para 77 of that judgment did not alter or refine that principle, nor shift the focus onto one party. On the indemnity principle, it held that Flaux J in Synergy Health (UK) Ltd v CGU Insurance plc was not applying a special presumptive rule but was having regard to the contract’s commercial purpose. The court considered that the differences between Synergy and Mobis had been overstated, and concluded:

“In our view, it is both permissible and correct to take into account the indemnity nature of a contract of insurance when construing it. Indemnification is the purpose of most types of insurance policy, including business interruption policies. Such policies may contain a formula by which the indemnity is to be calculated but this does not detract from that underlying purpose.”

The court’s reasoning

The court accepted that both constructions were linguistically possible. The word ‘payable’ lent the appellants some support, but the clauses did not refer to liability or incurral. It nevertheless preferred the respondents’ construction, which looks to the economic burden of the charge, for eight reasons:

1. No reason had been put forward for differentiating between incurring a charge and bearing it. Reimbursement has the same economic effect as payment by another or waiver: “That, however, is a matter of mechanics. It does not alter the economic outcome.”
2. Business interruption cover is concerned with economic effects on the business.
3. The evident purpose of a savings clause is to prevent over-indemnification. That purpose “is defeated if savings actually made are ignored because they did not reflect a reduced legal liability.”
4. Where there are two possible meanings, the one better fitting the purpose of indemnification is to be preferred, all the more so where that is also the purpose of the specific clause.
5. The appellants’ construction led to arbitrary results. Given the agreed fact that they would otherwise have made redundancies, it would be “a perverse and wholly uncommercial bargain to make.”
6. The Government itself described the scheme as one under which it would “step in and help to pay people’s wages”.
7. The construction had been unequivocally preferred by five experienced Commercial Court judges and by McDonald J in Hyper Trust, whose view the court endorsed.
8. CJRS payments could be made before wages were paid to employees. The outcome could not depend on whether reimbursement preceded or followed payment.

The court rejected reliance on tax and accounting treatment as “beside the point”, since what matters is what the parties agreed. It accepted that timing anomalies are simply a reflection of a finite policy period. To the extent that Princess Theatre differed, the court disagreed with it.

The causation issue

It was common ground that ‘in consequence of’ imports proximate causation, and that the same test applies to the link between the insured peril and loss and to the link between the insured peril and savings. In the court’s view, logically “the same test of causation applies to gain as it does to loss.”

The FCA test case framework

The court restated the FCA test case analysis. That case rejected the ‘but for’ test and held that each case of Covid-19 was a separate and equally effective cause of Government action. It also established the ‘same underlying fortuity’ principle, under which other consequences of the same event that are inherently likely to arise do not restrict the scope of the indemnity. Applied here, the closure of insured premises predictably led employers to furlough staff, whose expenses were thereby reduced “just as they would have been if the employees had been made redundant.” The court observed that, had it not been for the skill of the appellants’ counsel, it “would have thought this conclusion indisputable.”

The irrelevance argument

The appellants argued that CJRS eligibility did not depend on the elements of the insured peril, such as a case of Covid-19 within one mile or prevention of access. They relied on the example of a rural hotel with no local case, and on LCA Marrickville Pty Ltd v Swiss Re International SE. The court held that this was “just another way of saying that a ‘but for’ test is not satisfied” and that the argument’s flaws were “patent”:

“The appellants’ case is inconsistent with the decision in the FCA test case because, to avoid giving credit for furlough payments, they are seeking to rely on the very ‘but for’ test of causation rejected by this court. Their case is also internally inconsistent because they need to rely on this court’s analysis of causation in the FCA test case, including the rejection of the ‘but for’ test of causation for which the insurers contended, to establish that they have cover for their business interruption losses.”

If the argument were good, it would equally defeat their claim for lost revenue: “they cannot have it both ways.” The court approved the Chancellor’s statement at para 187 below. It also held that the courts below had added unnecessary complication by asking whether the CJRS itself was caused by the insured peril. All that matters is whether the payments to the policyholders were so caused.

The travel agency example from the FCA test case did not help the appellants. If their position were analogous, they would have no indemnity at all. LCA Marrickville was distinguishable. There, the dominant cause of Meridian’s turnover fall, which triggered JobKeeper eligibility, was the international travel ban. That ban did not arise from the same underlying fortuity as the local outbreak. Here, by contrast, it was common ground that the appellants’ losses were proximately caused by the insured peril.

The collateral benefits argument

Departing from the courts below, the court held that this argument was analytically distinct from the irrelevance argument and had to be considered separately. It agreed that the policy’s quantification provisions were “a complete code” displacing the general law as such. However, the general legal principles of proximate causation, including when voluntary conduct negatives causal connection, are imported by the words ‘in consequence of’.

The court reviewed the so-called ‘subrogation’ cases. It noted that these were properly cases of the first and second types it had identified, not subrogation in the strict sense. The cases reviewed included Randal v Cockran, Blaauwpot v Da Costa, Burnand v Rodocanachi, Castellain v Preston, Stearns v Village Main Reef, Merrett v Capitol Indemnity, Colonia Versicherung v Amoco, The Jascon 5 and The B Atlantic. It noted Lord Blackburn’s statement in Burnand that “the question is not whether the money was voluntarily paid or not voluntarily paid, but whether de facto the money which was paid did reduce the loss.” It endorsed Butcher J’s summary in Stonegate: any third-party payment in respect of the subject matter of the insured loss, even if voluntary or gratuitous, diminishes the loss and enures to the insurer’s benefit unless the third party’s intention, express or inferred, was to benefit only the insured to the exclusion of the insurer. That test is one of intention, not causation. Castellain showed that a causally unconnected payment may still diminish the loss.

Applying that test, the exception did not apply. The CJRS was not limited to uninsured losses, and nothing suggested an intention to benefit employers to the exclusion of insurers, even though the Government knew some businesses held such insurance. The letter of 25 September 2020 from the Economic Secretary concerned specified one-off grant funds, not the CJRS. Notably, no similar expectation was expressed about furlough payments.

On the appellants’ more general argument from principle, the court held that the decisive point was that CJRS payments were not voluntary or gratuitous at all:

“The rock on which the collateral benefits argument founders is that it is untenable to characterise payments made under the CJRS as voluntary donations.”

Payments were made pursuant to a legal obligation and entitlement under the Treasury Directions, with no discretion as to whether or how much to pay. It was irrelevant that the Government voluntarily created the scheme, just as a contractual payment is not voluntary because the obligor chose to contract. The absence of consideration was immaterial for a statutory scheme. In any event, employers gave something in return, including retaining staff and bearing unreimbursed costs, and the scheme served public economic and health aims. Finally, the court cautioned against extrapolating from tort and contract damages, since an insurer is not a wrongdoer and no mitigation rule applies in non-marine insurance unless the policy so provides. It added that, if any analogy existed, it was with state benefits payable as of right, which at common law are deducted (Hodgson v Trapp).

Practical significance

The decision confirms the market practice of deducting furlough payments from Covid-19 business interruption recoveries under standard ABI-type savings clauses. It reportedly validates around £1 billion of deductions.

More broadly, it establishes four points:

• Savings clauses are construed by reference to economic substance rather than legal liability.
• The indemnity purpose of insurance is a legitimate aid where quantification wording is ambiguous.
• The FCA test case approach to causation applies symmetrically to gains under savings clauses, so policyholders cannot invoke a ‘but for’ test to exclude benefits while relying on its rejection to establish cover.
• The collateral benefit exception in insurance turns on the third party’s intention to benefit only the insured, and statutory entitlements paid as of right fall outside it.

Verdict: Appeals dismissed. The Supreme Court unanimously held that Jacobs J and the Court of Appeal were correct: on the proper construction of the savings clauses in the Arena and Gatwick policies, furlough payments received under the CJRS (1) reduced the charges or expenses of the policyholders’ businesses and (2) did so in consequence of the insured peril. They must therefore be deducted from lost revenue in calculating the amount payable as indemnity.

Source: Gatwick Investment Ltd and others v Liberty Mutual Insurance Europe SE; Bath Racecourse Company Ltd and others v Liberty Mutual Insurance Europe SE and others [2026] UKSC 14