How government COVID assistance causes controversy in business interruption insurance

The judgment of the Supreme Court in FCA v. Arch Insurance and others [2021] UKSC 1, handed down on 15 January 2021 was seen as a victory for many insured businesses. It provided clarity as to whether non-physical damage business interruption cover clauses in various insurance contracts would respond to losses as a result of the COVID-19 pandemic.

The Supreme Court decision

In respect of many of the policy wordings considered, the Supreme Court found against the insurance companies and in favour of the insured entitling thousands of small businesses to claim for an interruption to their business caused by the COVID 19 pandemic and/or resulting restrictions.[1]

The Supreme Court did not go on to quantify the loss suffered by individual businesses. This, of course, would not have been possible as the test case jurisdiction of the financial list only allowed matters of principle to be addressed and not the individual circumstances of each case.[2] The expectation was that the guidance set down in the judgement along with further guidance from the FCA would allow these payments to be administered smoothly.[3]

Treatment of government support

Controversies, however, continue to abound. One important question is whether the payments made under the under the various schemes established by the UK government to help small businesses such as the Bounce Back Loan Scheme, the Coronavirus Business Interruption Loan Scheme, various grants and the Coronavirus Job Retention Scheme (commonly referred to as furlough) (together Government COVID Assistance) should be deducted from any payment made pursuant to cover for business interruption.

In many cases, if the Government COVID Assistance is deducted from the BI insurance cover, the businesses receive little to nothing in payments under the insurance contacts.  

The government has been clear that it expects that insurers will not deduct various forms of government assistance from business interruption insurance claims. In a letter from Mr John Glenn MP, the Economic Secretary to the Treasury to the Association of British Insured dated 25 September 2020[4], Mr Glenn makes it clear that:

It is the Government’s firm expectation that grant funds intended to provide emergency support to businesses at this time of crisis are not to be deducted from business interruption insurance claims. The principle of these grants is to provide emergency support and help businesses survive. The practice of making these deductions would mean that taxpayer funds are being channeled into savings for insurers, rather than supporting businesses to ride out the disruption brought on by this pandemic.

In this letter, he commends the “many insurers” that have committed to not making deductions from BI claims to account for government grants. He “strongly encourages” those who have not yet made that commitment to consider the difficulties faced by businesses during the pandemic and refrain from making such deductions.

Contractual terms

As the COVID-19 pandemic was unprecedented, no contract wording will refer specifically Government COVID Assistance. Further, it is unlikely that contract wording will even include analogous language. Consequently, it will be a matter of contractual interpretation to assess whether the definitions in specific contract wording allow insurers to deduct these payments. In many cases, it could be argued that the definitions of “Revenue” and “Savings” as well as other relevant terms do not on their natural meaning encompass the Government COVID Assistance. While the specific wording must be taken into account, “Revenue” is often defined as “money payable for goods and services” and “Savings” Is defined as “costs that would normally be payable”. It is far from evident that Government COVID Assistance falls into either of these definitions. As such, there will be a strong argument that such payments ought not to be deducted.

On the other hand, according to the principle of indemnity, an insurance contract compensates the insured for any damage, loss, or injury. The purpose of an insurance contract is to make the insured "whole" in the event of a loss. To the extent that a business has benefited from the Government COVID Assistance, it has not suffered a loss.  

Public policy

There are good public policy reasons why insurance companies should not be allowed to deduct such payments. As pointed out by Mr Glenn in his letter, the Government COVID Assistance is funded by the taxpayer. If insurance companies are allowed to deduct these amounts from payments they are required to make, the British taxpayer is effectively subsidising the insurance industry and providing it with a windfall. This was not the basis upon which the Government COVID Assistance was made and not the basis up on which the British public have tacitly accepted that it must foot the bill.

One suggestion is that insurance companies might account for this “windfall” through tax adjustments going forward. This, however, does not assist business owners who thought that the damage suffered by their business would be covered by the insurance that they purchased.

Ultimately these costs may end up being borne by the public either way as it would be naïve to think that the insurance companies would not also pass this loss back to the public through an increase in insurance premiums.


There is no easy answer to this issue. It would be impractical for small businesses to fight a claim on this basis on an individual level. It may be that there is too much uncertainty to make a class action on the questions viable.

The quickest way to cut through the issue is for the FCA to issue definitive guidance to the companies that it regulates. It has done this in respect of serval other aspects of payment under BI cover and should do so again here.

Perspectives on test case
Perspectives on High Court judgment
High Court judgment
Supreme Court judgment


[1] For summary see here.

[2] For discussion of the use of the Test Case jurisdiction as a means of collective justice see further here.