The UK Supreme Court has ruled in favour of thousands of small businesses in the Financial Conduct Authority’s business insurance test case litigation, delivering a notable victory for the regulator's advisers, Herbert Smith Freehills (HSF).

The ruling will affect insureds and insurers alike impacted by pandemic-related business interruption losses. It follows a remote, expedited trial in July 2020 before a Divisional Court consisting of Lord Justice Flaux and Mr Justice Butcher. 

The fast-track ‘leapfrog’ appeal hearing, from the first instance decision, heard remotely in November, was before a strong constitution of the Supreme Court, comprising its president, Lord Reed, Lord Hodge, the deputy president, and Lord Briggs, Lord Hamblen and Lord Leggatt.

Counsel from an array of leading sets including 4 New Square, 7 King’s Bench Walk, and Fountain Court appeared at the appeal.  At first instance the FCA had been largely successful and the Supreme Court substantially upheld the FCA’s appeals, where it had chosen to appeal, and dismissed the appeals made by eight insurers, represented by Clyde & Co, Simmons & Simmons, DAC Beachcroft, DWF, and Allen & Overy.

HSF's global head of insurance disputes, Paul Lewis, led the team advising the HSF.

Dismissing the appeal, with the backing of Lord Reed, Lords Hamblen and Leggatt said while they “accepted some of the insurers’ arguments on their appeals, in no case has that affected the outcome of the appeal”.

In a long judgment notable for detailed consideration of the arguments of all sides and for being rich in counterfactuals, the justices decided there was cover in principle for Covid-19 related losses under all the clauses addressed during the appeal.

The court allowed the FCA’s appeals in two instances and in qualified terms in two others, as well as where the appeal affects the outcome of certain wordings. Appeals by an intervener, representing Hiscox insureds, advised by Mishcon de Reya, were allowed in full for one ground and in qualified terms again for two others.  

In a briefing on the judgment, Fountain Court Chambers noted the court had found that policyholders with disease clauses had cover for business interruption losses if a case of Covid-19 occurred within the specified radius of the clause. This, argued HSF, meant “the court took a narrower approach to identifying the insured trigger in disease clauses", in defining the causation requirement implicit in such clauses.

Those with prevention of access and hybrid clauses were also covered, regardless of whether the losses were concurrently caused by other consequences of the pandemic. Trends clauses could also not be relied on by insurers to adjust claims downwards because of the concurrent, uninsured effects of the pandemic.

Previous precedent in the shape of the 2010 Orient Express Hotels case, in which both Lord Hamblen and Lord Leggatt had appeared, was wrongly decided and overruled. 

Leading insurance chambers 7 KBW, which supplied counsel for Hiscox and Amlin, said the case was “a landmark decision because it makes significant new law on concurrent causation” the court having “held that each individual case of Covid-19 was a separate but equally effective cause of government measures taken in response to the pandemic” such that it was unnecessary to establish ‘but for’ causation.

In a short concurring judgment, Lord Briggs argued that if the insurer arguments were taken at face value “the cover apparently provided for business interruption caused by [the pandemic]… was in reality illusory, just when it might have been supposed to have been most needed by policyholders".

That, said Briggs, was “clearly contrary to the spirit and intent of the relevant provisions of the policies in issue”.

The practical effect of the ruling is that businesses whose agreements contain any of the specimen clauses put forward for consideration are now covered for business interruptions caused by the first wave of Covid-19.

Despite being on the losing side, Brick Court’s Simon Salzedo QC acknowledged “the law - in insurance and beyond - has been significantly developed”.