News & Views

Court of Appeal clarifies law on composite insurance policies and furlough payments

The Court of Appeal recently handed down judgment in Liberty Mutual Insurance Europe SE & Ors v Bath Racecourse Company Limited & Ors EWCA Civ 153, a case which raised important issues regarding the interpretation of composite insurance policies and the treatment of furlough payments under business interruption insurance policies.

Composite insurance vs. joint insurance

It is important to understand the distinction between composite insurance and joint insurance.

Composite insurance

A composite insurance policy is a single policy document that insures the interests of multiple parties. It is often used by companies within a corporate group or by those with related but distinct interests. The key feature of a composite policy is that it is legally treated as a series of separate contracts of insurance between the insurer and each insured party.

One of the key benefits of a composite policy is that it protects the interests of innocent insureds. If one insured party does something or fails to do something which entitles the insurer to avoid cover, the other insured parties are not impacted by this conduct and retain the benefit of the indemnity.

Joint insurance

In contrast, a joint insurance policy covers the interests of multiple parties jointly. It is typically used where the insured parties have a shared interest in the insured property or venture. In a joint policy, there is only one contract of insurance between the insurer and all the insured parties collectively.

Under a joint insurance policy, all named insureds are exposed if one of their number does something that allows the insurer to avoid cover. This is because the policy is treated as a single contract between the insurer and all the insureds.

The Liberty Mutual case

The Liberty Mutual case involved several business interruption insurance claims arising from the Covid-19 pandemic. The policies in question were composite policies covering multiple companies. The key issues before the Court of Appeal were:

• Whether the policy limits in a composite policy apply separately to each insured or as an aggregate limit for all insureds.
• Whether furlough payments received by the insureds under the Coronavirus Job Retention Scheme (CJRS) should be deducted from the business interruption indemnity.

Policy limits in composite policies

The Court of Appeal clarified that the 'expectation' in a composite policy is that each insured has a separate limit of indemnity, not that the insureds share a single aggregate limit. This is because a composite policy is legally treated as a series of separate contracts of insurance. The court emphasized that this is a matter of legal construction, not a presumption or a rule.

Furlough payments and business interruption insurance

The Court of Appeal also addressed the issue of whether furlough payments received by the insureds under the CJRS should be deducted from the business interruption indemnity. The court held that furlough payments do constitute a saving that must be deducted from the indemnity. This is because the CJRS payments reduced the insured's wage costs, which are a charge or expense of the business. The court rejected the argument that furlough payments were a collateral benefit or a gift, finding that they were directly related to the insured peril (the government restrictions imposed due to the pandemic).

Implications of the decision

The Liberty Mutual decision provides important guidance on the interpretation of composite insurance policies and the treatment of furlough payments under business interruption insurance policies. The court's clarification on policy limits in composite policies will be welcomed by policyholders, as it confirms that each insured has a separate limit of indemnity. However, the court's decision on furlough payments may be less welcome, as it means that insureds will have to deduct these payments from their business interruption indemnity.

For further information, please email Josh Bates or Sally Lazar or call 0151 906 1000.