New Precedent on Savings Clauses and Government Support: FBD Insurances PLC v Public House Owners

Introduction

The case of Hyper Trust Limited trading as The Leopardstown Inn v FBD Insurances PLC; Inn on Hibernian Way LTD trading as Lemon & Duke v. FBD Insurances PLC ([2023] IEHC 455) marks a significant development in the interpretation of business interruption insurance policies amidst unprecedented global challenges. This judgment, delivered by Mr. Justice Denis McDonald in the High Court of Ireland on July 26, 2023, involves multiple plaintiffs who are public house (pub) owners seeking indemnity from FBD Insurances PLC ("FBD") for losses incurred due to government-imposed closures during the COVID-19 pandemic.

Each plaintiff was covered under the FBD Public House Insurance policy, which included extension 1(d) for business interruptions caused by outbreaks of contagious diseases within a 25-mile radius of the premises. The central dispute revolves around the proper interpretation of the policy's "savings clause" in relation to government support schemes received by the plaintiffs, such as the Temporary Wage Support Scheme ("TWSS"), Employment Wage Support Scheme ("EWSS"), COVID Restrictions Support Scheme ("CRSS"), as well as the Restart Grant and Restart Grant Plus for small businesses, and the Fáilte Ireland Grant Scheme.

Summary of the Judgment

The High Court examined whether the payments received by the plaintiffs from various government support schemes should be deducted from the indemnity amount awarded under the FBD policy's savings clause. The court held that these government supports do constitute "savings" in consequence of the insured peril — the government-imposed closures following COVID-19 outbreaks within the specified radius. Consequently, these payments must be deducted from the indemnity payable to the insured to adhere to the principle of indemnity and prevent overcompensation.

The judgment navigated through complex issues of policy interpretation, causation, and the application of precedents. It differentiated between policy language and overarching indemnity principles, affirming that the explicit terms of the policy prevail unless they are ambiguous or contrary to the parties' intentions. The court also addressed the methodology for calculating losses due to partial closures and deliberate agreements between the parties to ensure fair allocation of costs without violating indemnity principles.

Analysis

Precedents Cited

The judgment extensively referenced several key cases to elucidate the principles governing insurance indemnity and the interpretation of policy clauses:

Castellain v. Preston (1883) emphasized the fundamental principle of indemnity, asserting that insurance contracts aim to restore the insured to their pre-loss financial position without providing profit.
Financial Conduct Authority v. Arch Insurance (UK) Ltd [2021] discussed the interpretation of "damage" in business interruption policies, aligning it with the insured peril rather than physical damage alone.
LCA Marrickville Pty Ltd v. Swiss Re International SE [2022] FCAFC 17 contrasted the application of savings clauses in different jurisdictions, highlighting the importance of policy-specific language over broader indemnity principles.
Stonegate Pub Company Ltd v. MS Amlin Corporate Member Ltd [2022] EWHC 2548 (Comm) and Synergy Health (UK) Ltd v. CGU Insurance Plc [2010] EWHC 2583 (Comm) further delved into the application of savings clauses, especially concerning government subsidies and their causative links to insured perils.
Mobis Parts Australia Pty Ltd v. XL Insurance Company SE [2018] NSWCA 342 introduced a nuanced approach to interpreting savings clauses, considering the contract's context and the parties' intentions without overrelying on rigid indemnity principles.

These precedents collectively informed the court's approach in balancing policy language with indemnity principles, ultimately favoring an interpretation that aligns with the explicit terms of the insurance contract.

Legal Reasoning

The court's legal reasoning hinged on a meticulous analysis of the policy's "savings clause," which stipulates deductions from the indemnity based on "any sum saved during the indemnity period in respect of such of the charges and expenses of the business as may cease or be reduced in consequence of the damage." Here, "damage" was interpreted broadly to encompass the insured peril, i.e., the government-imposed closures due to COVID-19 outbreaks within the specified radius.

Critical to the court's reasoning was the principle that policy language is paramount. Even though the principle of indemnity underscores that insurance should not confer a profit to the insured, the explicit wording of the policy provides a defined methodology for calculating indemnity and savings. The court emphasized that the agreement between the parties to use a predetermined formula for calculating savings does not negate the indemnity principle but rather operationalizes it in a practical manner.

Moreover, the court addressed the causation aspect, establishing a direct link between the insured peril and the government supports. By demonstrating that the closures were proximately caused by COVID-19 outbreaks within the 25-mile radius, and consequently led to the eligibility for government support schemes, the court affirmed that these supports are indeed savings to be deducted from the indemnity.

The agreed-upon methodology between the parties for calculating partial closure losses was also validated. This approach ensures that indemnity calculations are proportionate, preventing overcompensation while accurately reflecting the losses incurred due to the closed sections of the premises.

Impact

This judgment sets a crucial precedent for the insurance industry, particularly in the context of unforeseen global crises like pandemics. It underscores the necessity for precise policy language and the importance of understanding how government interventions intersect with insurance contracts. The ruling clarifies that:

Government supports directly linked to insured perils must be considered savings and thus deducted from insurance payouts.
The explicit terms of an insurance policy take precedence over general indemnity principles when there is no ambiguity.
Methodologies for calculating partial losses need to be fair, proportionate, and reflective of actual business impacts to prevent overindemnification.

Insurance providers and policyholders alike must heed this judgment by ensuring that policies are drafted with clear definitions and sufficient detail to handle complex loss scenarios. Additionally, insurers may need to reassess their current policies to align with the clarified interpretations to avoid future disputes.

Complex Concepts Simplified

Principle of Indemnity

The principle of indemnity in insurance mandates that the insured should be restored to the financial position they were in prior to the loss, without profiting from the insurance claim. In this case, it ensures that the indemnity from FBD does not exceed the actual loss incurred by the pub owners due to the closures.

Savings Clause

A savings clause in an insurance policy allows for deductions from the indemnity amount based on savings the insured has made in their business-related expenses as a result of the insured peril. For instance, if a business saves on certain costs because they are not operational, those savings can reduce the amount payable by the insurer.

Proximate Cause

Proximate cause refers to the primary cause of a loss, without which the loss would not have occurred. In this judgment, the court determined that the COVID-19 outbreaks within the specified radius were the proximate causes of the government-imposed closures, thereby linking the losses and savings directly to the insured peril.

Concurrent Proximate Causes

When multiple causes independently contribute to a loss, each of those causes can be considered without the need for them to be equal in their contribution. Here, each COVID-19 outbreak within the 25-mile radius independently led to closures, making each a concurrent proximate cause of the loss and the resultant savings.

Conclusion

The High Court's decision in FBD Insurances PLC v Public House Owners establishes a clear precedent regarding the interplay between insurance policies and government support schemes during unprecedented events like pandemics. By reaffirming that government supports arising directly from insured perils constitute savings to be deducted, the judgment ensures that the principle of indemnity is upheld without allowing overcompensation.

This ruling emphasizes the crucial role of precise policy drafting and the importance for both insurers and policyholders to understand the implications of policy clauses under different loss scenarios. Moving forward, insurance contracts must meticulously define terms and outline methodologies for loss and savings calculations to avert future disputes and ensure fair indemnification.

Ultimately, this judgment contributes significantly to the body of insurance law, providing clarity and guidance on handling complex claims arising from multifaceted loss events triggered by global crises.