Insurers criticised for furlough payment deductions from BI claims

In September, John Glen MP, economic secretary to HM Treasury, rebuked insurers for deducting government grants from BI claims payments, warning of further action if the cuts to payouts continued.

“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,” he said in a letter to Association of British Insurers director general Huw Evans.

He went on to call for insurers to “respect the spirit” of the government support schemes.

Speaking to Post this week, Jonathan Samuelson, a partner at loss assessors Harris Balcombe, said that where insurers had accepted liability on business interruption claims, policyholders were regularly facing deductions for furlough payments.

Harris Balcombe is currently dealing with between 400 and 500 claims on policies that it believes afford cover.

Though some of these are awaiting the outcome of insurers’ appeal to the Supreme Court, Samuelson said that some insurers had accepted liability and were making payments.

“All of them, without exception, have said that furlough payments are going to be deducted because they believe they are savings,” he said.

He continued: “That is at odds with the announcement from the economic secretary to the Treasury who said, so far as they are concerned, government grants are not to be taken into account”, though, he added: “There is a debate over whether furlough payments are a grant or something different.”

Rebuke

“There is absolutely no reason whatsoever why [government grants and furlough payments] should be treated differently if you look at it on the basis that all of this government support was there to help small businesses,” Russell Griffiths, a former property and BI underwriter turned bed-and-breakfast owner who has been in contact with businesses making claims through the pandemic, told Post.

“The insurers are banking government money to reduce their loss by increasing the policyholder loss.”

Griffiths continued: “The principle behind the way that the furlough scheme was run and why it was paid via HMRC through essentially a PAYE system was to avoid fraud.

“The other option would have been for individuals to make the application themselves to HMRC to get their wages paid. But that would have been much more complicated and much more open to fraud, hence the reason HMRC distributed the furlough money through employers.

“The business was only a channel to get this money to the employees. It wasn’t a fundamental part of the business itself.”

Limits

Beside the argument about the intended purpose of the furlough payments, the experts argued that it was wrong for insurers to make such deductions in light of the fact that policy indemnity limits mean businesses are unlikely to be made whole even if they do receive a payout.

Samuelson said: “The argument the insurers run is that, if there is a proper indemnity under the business interruption cover and if the business also retained the furlough payment, then they would actually be in a better position.

“However, the chance that there is going to be a full indemnity under these policies is unlikely. Apart from anything else, most of these policies have a limit both in terms of the amount and in the period for which cover is provided.

“In those circumstances, the business is not going to be made whole by the business interruption payment and the furlough payments made by the government are in effect payments made to allow businesses to continue to fight another day, as it were.

“We are arguing very strongly that the furlough payments should not be deducted. Unsurprisingly, insurers say they absolutely should be.”

Offering a glimpse of one possible way the disputes could be resolved, Samuelson said: “The buzz at the moment is that the government are proposing to say to insurers: if you’re going to deduct furlough payments as savings in the calculation of the BI claim, then you will have to return the furlough deduction to the government, to the Treasury, because the payments were not made in order to benefit insurers. They were made to benefit businesses.”

Samuelson said that the suggestion was not based on any formal communication from the Treasury, but was a point of discussion among loss assessors and loss adjusters.

He continued: “If there is a definitive announcement by the government as to what their position is with regard to furlough payments being deducted, depending on what it says, that would be very helpful.

“If they say if insurers deduct them, then then we expect them to be repaid to the government, that’s less good for policyholders. But hopefully that may mean that some insurers won’t deduct them and the policyholder retains the benefits of the furlough payments.”

Commenting on the argument that furlough payments covered wages that insureds would have otherwise had to pay, and therefore represented a saving, Griffiths said: “I wouldn’t disagree with that if they were dealing with a full business interruption loss where the indemnity periods are 12, 18 or 24 months and the full sum’s insured.

“But where you’ve got sub-limited policies, a limit of £10,000 or £25,000, or a restricted indemnity period, to deduct furlough wages from the from the top line loss, which is limited, when the insured is actually going to suffer a much bigger loss over a 12-month period is just really not right.”

He added: “The insurers will say what happens outside the indemnity period has got absolutely nothing to do with us and is of no concern to us.

“Looking at the way general Insurance and claims practice works, they are technically correct. But morally, it is absolutely not correct.”

A spokesperson for the Association of British Insurers told Post: “Furlough payments were payments to employees, made via employers for administration purposes. They were not intended to be income replacement for businesses and, as they do not cover a loss incurred by the claimant, should not be included in any claim.

“Grants are very specifically designed to help businesses; they go to the business owner and can be used for whatever purpose.

“Given the individual specifics of a businesses’ circumstances and the details of their claim, claims will be assessed on a case-by-case basis.”

The Treasury did not respond to an approach for comment.