It was the moment that the insurance industry and consumers throughout the UK had been waiting for since the early days of the Covid-19 pandemic: the final ruling on the appeal of the Financial Conduct Authority (FCA)’s business interruption case.
The judgment in January 2021 brought guidance for businesses and the watchdog as to whether certain business interruption policies linked to the pandemic related to losses. Crucially, it meant that businesses could make claims to insurance providers for losses incurred due to the pandemic.
The FCA had teamed up with Herbert Smith Freehills to bring a series of test cases to resolve the uncertainty. Senior associate Antonia Pegden, who joined the firm in 2010, was part of a team led by global head of insurance disputes Paul Lewis and partners Sarah McNally and Greig Anderson representing policyholders in the case.
It was the first test case under the Financial Markets Test Case scheme, a scheme set up to allow urgent judicial interpretations of issues facing financial markets.
Additionally, the timetable was unprecedented. Herbert Smith was instructed on the FCA case in early May 2020. The claim was issued in June 2020, an eight-day High Court trial was held in July 2020 and the “leapfrog” appeal to the Supreme Court was heard in November 2020 with judgment handed down by the Supreme Court in January 2021.
Pegden’s previous experience includes acting on a range of insurance disputes, for policyholders, brokers and insurers in relation to a broad range of policies including PI, D&O, pension trustee liability, cyber, crime/bankers blanket bond, export credit and business interruption.
Despite disputes often being resolved by confidential arbitrations, one that stands out in particular for her was an arbitration acting for a financial institution policyholder seeking cover under its Crime policy for losses resulting from alleged fraudulent activity by a customer.
“It was a real learning experience for me as a junior associate, combining the need for investigatory work into the underlying customer activity, complex insurance law and my first experience of an arbitration process,” Pegden says.
“What I have always enjoyed more generally about the cases I have worked on is the wide range of subject matters that come with working in insurance disputes and that they are often linked to significant global trends. Cyber insurance, and cyber insurance disputes, for example, have in recent years become an area of real activity, and we can expect to see more of that as ransomware in particular continues to cause problems globally.”
Long-contested points of business interruption caselaw
What made the FCA case critical was the immediate importance to businesses across the country (and indeed across the world) in the context of the unprecedented global pandemic. Pegden and her team had to get a decision on the issues urgently so that there was clarity for policyholders and insurers alike on cover and, importantly, so claims could start being paid to businesses that were in need of liquidity.
She states: “We managed to achieve that, taking a complex case with multiple defendants from claim form to High Court and then to the Supreme Court in seven months. That was a privilege to be part of and could only have been done through the whole team pulling together.”
Business interruption is a complex area of law and Pegden notes that it even required a trip by one associate to the British library to look at some historic texts.
It was estimated that some 700 types of policies held by 370,000 policyholders across 60 different insurers could potentially be affected by the case. The FCA recently posted that approximately £472m has already been paid out in interim and final business interruption claim payments following the Supreme Court’s ruling on the test case.
“The case was also significant from a legal perspective because the Supreme Court overturned the High Court’s decision in Orient Express,” Pegden continues. “This is positive news for policyholders beyond those with Covid-19 business interruption claims – in particular this decision will have significant implications for property damage claims arising from natural catastrophes.”
Welcome news to policyholders
The case was seen as a resounding win for policyholders as the impact of the High Court and Supreme Court judgments was that the majority of clauses which were considered in the case did provide cover for the business interruption caused by Covid-19. Significantly, the Supreme Court’s findings on causation mean that it will be very challenging for insurers to deny cover, or reduce an indemnity otherwise due to an insured, on the basis that losses that would otherwise be covered under the policy would have resulted in any event from uninsured perils whose underlying cause is the Covid-19 pandemic.
English law now has a precedent for how the economic climate created by a loss impacts the measurement of losses during the indemnity period.
A key takeaway from the case for Pegden is how, under the constraints of the pandemic, “people really came together in support for one another, for the client and for the goal of achieving clarity for policyholders and insurers on the complex issues brought about by the pandemic, and doing so quickly.
There was a real sense of working for a very important cause, and that sense of responsibility really drove the team forward. The case was an example of what teamwork can achieve in terms of taking a complex high-profile case from claim to Supreme Court in challenging circumstances and a tight timeframe,” she concludes.
About Antonia Pegden
2017-present: Senior associate, Herbert Smith Freehills
2012-17: Associate, Herbert Smith Freehills
2010- 12: Trainee solicitor, Herbert Smith Freehills
Who’s Who: the Herbert Smith Freehills team
Lead partners: Paul Lewis, Sarah McNally and Greig Anderson
Senior associate: Antonia Pegden
Supported by: Consultant Frank Thompson, senior associates David Jones, Dan Saunders, Rachelle Waxman, Jade Hu and associates Tristan Smith, Nikita Dave, William Gibson, Joanna Giza, Bianca Chang, Sarah McCadden, Hebe Peck and Juliana Rego