The impact of Covid-19 on the (re)insurance sector in Ireland

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Eoin Caulfield
William Fry, Dublin
eoin.caulfield@williamfry.com

Claire O’Connor
William Fry, Dublin
claire.oconnor@williamfry.com

The effects of the Covid-19 pandemic have caused reverberations throughout the insurance sector worldwide. Ireland is no exception.

In this article, we discuss the Irish regulator, the Central Bank of Ireland’s (the 'Central Bank') response to Covid-19 in the Irish insurance market; the test cases in progress and what the United Kingdom Financial Conduct Authority (FCA) test case could mean for Irish insurers; and the likely future impact of Covid-19 on the insurance sector.

The Central Bank’s response

In a divergence from the FCA’s regulatory approach in the UK, the Central Bank has stated that it does not have a statutory role in dealing with individual customer complaints. It has indicated it will not bring a test case to the Irish courts to decide whether business interruption (BI) cover for Covid-19-related claims exists under relevant types of Irish insurance policies.

The Central Bank has however made a number of pronouncements on its expectations for (re)insurers in light of the effects of Covid-19. Most notably, the Central Bank published a ‘Dear CEO’ letter, entitled ‘Central Bank of Ireland Expectations of Insurance Undertakings in Light of COVID-19’, on 27 March 2020 (the 'Dear CEO Letter') and its COVID-19 and Business Interruption Insurance Supervisory Framework (the 'Supervisory Framework') on 5 August 2020. The Supervisory Framework expands on the statements made by the Central Bank in the Dear CEO Letter and sets out what the Central Bank expects of Irish insurers in their approach to Covid-19-related BI claims.

The Central Bank is clear as to its expectations of insurers, who must assess the relevant issues in line with their obligations to act honestly, fairly and professionally in the best interests of customers and with due skill, care and diligence. The Central Bank emphasises that insurers must take remedial action where issues of concern are identified relating to customer treatment and/or issues of interpretation of BI policies. The Central Bank, having made the point in the Dear CEO Letter, reiterated its key message: unclear BI policy wordings should be given the interpretation which is most favourable to the customer. This places a high onus on the insurer and affords a high level of protection to consumers.

Strikingly, and perhaps controversially, the Central Bank has instructed insurers in circumstances where BI court proceedings are considered a ‘test case’ to pay the reasonable costs of the insured applicant in such litigation. Furthermore, the Central Bank has said the insurer should be cognisant of the high costs associated with litigation and therefore it expects that, in these scenarios, the insurer will not seek recovery of its costs to the extent that an insurer is successful in defending the claim. This is perceived as onerous on insurers and is something which has yet to be tested before the Irish courts. It is foreseeable that an insurer involved in a test case may argue that the Central Bank has ‘stepped on the toes’ of the judiciary in making a costs order pre-emptively. Such an order is normally a court discretion, once the case has reached its conclusion.

The Supervisory Framework makes it clear that the Central Bank will be robust in its supervisory approach and its engagement with insurers relating to their handling of Covid-19-related BI claims. The way this contentious issue has played-out in the public domain during Covid-19 has inevitably ensured that the Central Bank will be motivated to apply the full rigour of its supervisory powers.

The European Systemic Risk Board and the European Insurance and Occupational Pensions Authority have each recommended that European national competent authorities (including the Central Bank) should request that financial institutions be circumspect in making dividend payments or irrevocable commitments to make dividend distributions until at least 1 January 2021. The Central Bank has endorsed these recommendations via a public FAQ statement on its website. In this, it recommends that insurers (as distinct from specifically calling-out reinsurers) should postpone any payment of dividends or similar transactions until they can forecast costs and future revenues with sufficient certainty. The Central Bank expresses its expectation that insurers will engage with their supervisory desk teams before proceeding with any distribution, demonstrating ‘satisfactory forward-looking solvency, liquidity and operational resilience positions in light of the current environment.’

Test case

Four groups operating bars in Ireland have initiated a test case against FBD Insurance, the largest Irish-owned insurer, claiming that losses arising from the government-enforced closure of pubs were covered by their BI policies. This test case commenced before the Commercial Court on 6 October 2020 and is expected to run for 20 days.

There are four substantive issues being argued before the court, which echo some of the issues considered in the recent English High Court FCA test case.

Whether any cover was triggered

The first issue to be argued is whether cover was triggered. FBD contends that there was no cover triggered as the policies only covered losses arising from local outbreaks of Covid-19 and not a ‘national pandemic’. As the closure of the pubs was in response to a national situation, rather than a localised outbreak, FBD is of the view that cover has not been triggered.

Insured peril in question

In respect of the second issue, of the insured peril in question, FBD has argued that the insured peril in question was the enforced closure of the business of the publicans and not an outbreak of a pandemic which subsequently led to such a closure. The legal team for FBD has noted that this was a ‘critical distinction’ between the policies in question and the disease clause considered in the FCA test case, on which the publicans are heavily relying.

Counter-factual

The third issue is with respect to the ‘counter-factual’ position which would apply if cover was provided under the policies. FBD’s position is that the only losses covered by the policy are those which represent the difference between the business being closed or operating during a pandemic. The publicans have argued that the recoverable loss is instead the difference between the business operating in current circumstances, including a period of closure, and operating as normal prior to the pandemic based on last year’s business performance.

Correct application of the ‘trends clause’

The final issue at hand is to determine what is the correct application of the ‘trends clause’ in the policies. Most BI policies include ‘trends’ clauses to allow for business trends which would affect the business had the events giving rise to the insurance claim not occurred.

Counsel for the publicans has suggested that there are in excess of 1,100 publicans with the same type of insurance policy as that in the FBD test case. While we await the Court’s determination, the judgment will have far-reaching effects. As in the English jurisdiction, the Irish findings may also be subject to appeal. This will potentially add to the lack of immediate clarity, although any appeal is likely to be expedited.

The Irish insurance sector has also been keeping a close eye on the developments in the UK relating to the FCA test case. Although the ruling is not legally binding in Ireland (and has been appealed directly to the UK Supreme Court on a ‘leapfrog’ basis by-passing the Court of Appeal), it is likely to have persuasive effects in Irish test cases. Similarly, the English High Court ruling provides an indication of how certain policy wordings might be interpreted by the Irish court. This could prompt a different strategy on the part of Irish insurers as defendants.

Likely future impacts

While the future impact of the pandemic on the insurance sector is currently speculation, it is foreseeable that there will be significant changes ahead.

For instance, many (re)insurers may find themselves insufficiently capitalised. This will present challenges for regulators, consumers and insurers alike. From a commercial perspective, the hospitality industry, and similarly affected areas may see premiums increase materially as a result of the BI disputes and the recalibration of pricing for associated risks. The decision of the Irish courts in the FBD and other test cases may prompt insurers to leave the Irish market or be reticent to enter it in the first place, consequently also causing an upward shift in premiums due to lack of supply.

In Ireland, insurers already had a public relations exercise ahead of them as they sought to improve the perception of the sector. High premiums were an issue prior to the pandemic. The Central Bank is currently undertaking an investigation into differential pricing of insurance premiums and a Department of Finance Cost of Insurance Working Group has been established. Now, with this issue, insurers will be tasked with balancing consumer sentiment with the need to recoup losses which are going to be an inevitable consequence of Covid-19 claims.

Conclusion

BI claims have already had an impact on the Irish insurance sector. The Central Bank has been forced to react to the crisis by setting out its expectations of insurers. Irish insurers must assess to what extent they can meet these expectations at a time when the financial markets are uncertain and consumer sentiment is at relatively low levels. The sector is hoping for a definitive determination in the FBD and other test cases to enable insurers, insureds and the Central Bank to move forward with clarity.

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