UK & Europe
Insurance & Reinsurance
The Central Bank of Ireland (CBI) on 5 August 2020 clarified its approach to resolving interpretation issues associated with business interruption coverage in the Covid-19 context, via its attached "COVID-19 and Business Interruption Insurance Supervisory Framework" (the Framework).
1. Framework Summary
(i) The CBI will not be launching a test case of its own, unlike the FCA in the UK. While "the Central Bank serves the public interest by safeguarding monetary and financial stability and by working to ensure that the financial system operates in the best interests of consumers and the wider economy", the Framework states that "the Central Bank does not have a statutory role in dealing with individual customer complaints". The Framework makes clear that an insured should firstly complain to its insurer if BI coverage is denied, with the Insured then having "the option of bringing a complaint to the FSPO and/or arbitration and/or litigation …" to determine the matter;
(ii) It is instead stated that insofar as "the Central Bank has no tolerance for systemic consumer or customer harm to go unresolved … the Central Bank will continue to monitor the overall approach by [Insurers] to business interruption insurance for the purposes of identifying systemic issues that may require its direct intervention to resolve …". To this end the Framework involves four "modules":
a. Module 1: Scope, Information Gathering and Certification
b. Module 2: Analysis and Categorisation
c. Module 3: Supervisory Engagement and Escalation
d. Module 4: Legal Action Outcomes – Wider Beneficial Impact Assessment
(iii) Before considering these Modules, the Framework sets out a number of CBI expectations in the Covid-19 BI context, including the following:
a. "… Where BI insurance policy wording provides that cover is dependent on there being an imposed closure of a business by reason of an order (or other similar language) of a Government or other public authority, it is the Central Bank’s firm view that the Government’s communication to the country in March to close businesses as a result of the outbreak of COVID-19 in Ireland should be treated as an order and/or direction and/or mandate (or other similar language) for the purposes of determining the issue of cover …".
This confirms the CBI's view that despite closure directives from government - which impacted various sectors on 12, 15 and 24 March 2020 - not being legally enforceable until 7 April 2020, they should be considered "orders" etc. for BI coverage purposes;
b. ambiguous policy wording must be interpreted contra proferentem in favour of the Insured. Unlike the CBI's prior 27 March letter in this regard, the Framework now sets out the following steps that must be adopted by the Insurer in this regard:
i. "Review customer communications including queries, complaints and claims to assist in assessing what customers reasonably understood;
ii. Assess whether there were conflicting communications to customers from its own staff and/or any intermediaries dealing with the policyholder in relation to whether the BI insurance policy was responsive to COVID-19 related claims;
iii. Ascertain what understanding its own staff had of the meaning of the relevant policy wording in respect of COVID-19 related claims and whether this changed over time; and
iv. Consider any internal discussions and/or debate and/or disagreements and/or concerns in relation to the interpretation of the relevant policy wording."
The above factors involve the CBI requiring that Insurers, for prudential compliance purposes, take into account post-contract factors (i), unilateral subjective interpretations (iii and iv) and (potentially) broker communications (ii) (despite the broker being the agent of the Insured), which is contrary to the position at common law. This thereby potentially causes a divergence between the standard expected of insurers as a matter of law on the one hand, and for regulatory purposes on the other;
c. "… Where policyholders have commenced litigation against an RFSP, and it is agreed between the parties that the case has the potential to act as a “test case” for the determination of issues in relation to BI insurance policies for wider groups of customers …" the Central Bank expects that:
i. Insurers should "consider how the issues in dispute can be narrowed to ensure that the litigation can proceed in the least costly and most expeditious manner possible, reflecting the RFSP’s obligation to act fairly, honestly and professionally in the best interests of its customers …";
ii. "In circumstances where the RFSP obtains the benefit of a court’s interpretation of the relevant policy wording … an RFSP should agree:
1. to pay the reasonable costs of such customer plaintiffs in agreed test case litigation, to be assessed in default of agreement; and
2. should not seek its costs against these plaintiffs."
The underlined section in (i) above is somewhat unclear, but appears to suggest that it is only where both the relevant insured and the Insurer mutually agree that the relevant case has "the potential to act as a test case" that narrowing of issues, and the (very unusual) expectation of a victorious Insurer having to pay the costs of the unsuccessful Insured, will apply. While it is clear that a case such as the FBD case – involving similarly circumstanced insureds under an identical wording as part of a particular insurance facility (publicans cover) - might have test case status, it is not clear whether and how this should apply outside such specific circumstances;
(iv) Turning to the various Modules, Module 1 comprises the CBI's statutory information request for BI policies and terms that was circulated on 19 June 2020 to 26 providers of business interruption insurance potentially impacted by the Covid-19 phenomenon;
(v) Module 2 comprises an analysis by the CBI of the relevant BI wordings "to determine whether it is responsive to the outbreak of Covid-19 in Ireland …" from three perspectives:
a. Cover - "… the Central Bank will mainly be considering [BI] policy wording … where there has been no physical damage to property and where the following are insured events/perils under the policy:
i. There is a notifiable and/or infectious and/or contagious disease (or its equivalent) at or within a certain radius of or within the vicinity of the insured’s premises; and/or
ii. Where some form of public authority (including the Government) acts or directs or orders or takes some other action that prevents and/or restricts and/or interferes with and/or interrupts access to and/or use of the insured’s premises";
b. Causation - "… the [BI] loss … must have been caused by an insured event/peril. Policyholders must be able to establish that the COVID-19 related interference and/or interruption that was covered under the policy caused the loss suffered by the insured. The relevant policy wording will be analysed to determine whether it is responsive to the outbreak of COVID-19 in Ireland, the response of the Government and public health authorities and the attendant interference and/or interruption to the insured’s business. The assessment of the issue of causation is necessarily fact-based but the Central Bank will consider any issues of principle relevant to the question of causation under the policy wording";
c. Quantum and Claims Handling – "… The issue of quantum is a fact-specific determination that will depend on the individual circumstances of the relevant insured’s business. Its consideration will also depend on the exact wording of the relevant BI insurance policy and to what extent any losses incurred can be attributed to a COVID-19 related insured event/peril that is covered by the policy or to other concurrent trends and circumstances. Equally, how claims are handled and processed will be a case -specific matter. The Central Bank’s expectations in relation to these issues are that they will be dealt with by RFSPs in line with their legal and regulatory obligations."
(vi) In relation to Cover and Causation, the Central Bank will categorise BI insurance policies as follows:-
a. "Responsive Policies – Issues of Cover and Causation are Clear:- In certain BI insurance policies, the policy wording will be clear in relation to both the issues of cover and causation in favour of the customer;
b. Potentially Responsive Policies - Strong or Reasonable Argument that Cover and Causation arise under the Policy:- In certain BI insurance policies, strong or reasonable arguments may be made on the basis of policy wording in favour of the customer in relation to cover and/or causation;
c. Nonresponsive Policies – Clear No Cover and/or Causation under the Policy:- In most BI insurance policies, the policy wording will be clear that no argument can be made in relation to the issues of cover and/or causation";
(vii) Having engaged in the categorisation above, Module 3 ("Supervisory Engagement and Escalation") provides as follows:
a. "Responsive Policies – Issues of Cover and Causation are Clear:- Where an [Insurer] does not accept that cover and causation are established, the Central Bank may set out its view and expectations that the [Insurer] should accept that these issues are established in respect of the relevant policy. Where the [Insurer] does not conform to the Central Bank’s expectations, the Central Bank may consider taking such further measures as may be appropriate to the circumstances with the aim of ensuring that [Insurers] comply with their obligations to customers under these policies.
b. Potentially Responsive Policies - Strong or Reasonable Argument that Issues of Cover and Causation arise under the Policy:- Where an [Insurer] is denying cover and/or causation or both, the Central Bank may intervene to seek to bring clarity to the position as quickly as possible by communicating the Central Bank's view with the aim of bringing about a resolution of those issues. Where the [Insurer] does not conform to the Central Bank’s expectations, the Central Bank may consider taking such further measures as may be appropriate to the circumstances with the aim of bringing about a resolution of the issues. If a resolution can be reached which is beneficial to policyholders, the Central Bank’s aim will be to ensure that [Insurers] apply the beneficial impact of the resolution to all similarly affected customers.
c. Nonresponsive Policies – Clear No Cover and/or Causation under the Policy:- No further action will be taken by the Central Bank.
d. Quantum and Claims Handling - Where systemic issues of customer harm and/or breach of legal and/or regulatory obligations have been identified, the Central Bank may set out its view and expectations to the [Insurer] on how these issues might be addressed. Where the [Insurer] does not conform to the Central Bank’s expectations, the Central Bank may consider taking such further measures as may be appropriate to the circumstances with the aim of ensuring that [Insurers] comply with their obligations to customers …";
(viii) Module 4, which is titled "Legal Action Outcomes – Wider Beneficial Impact Assessment", provides that where a legal action (litigation, arbitration, FSPO reference, or appeals therefrom, to which the relevant insurer is a party) in relation to Covid-19-related BI coverage has "concluded" (settled, final decision and/or determination (including by appeal)), the Central Bank will require the Insurer to provide the following certified information:
a. "Details in relation to the legal action and how it was concluded;
b. Details in relation to the final outcome/s;
c. Details in relation to the beneficial impact assessment that the RFSP will be required to carry out to analyse and determine whether the final outcome/s has a wider beneficial impact for similar groups of customers;
d. Where a wider beneficial impact has been determined, details in relation to the RFSP’s proposed remedial action to ensure that the beneficial impact of the final outcome/s is applied to similar groups of customers and/or reasons why such remedial action may not be carried out.
e. Where it has been determined that there is no wider beneficial impact, details as to why it was considered that there was no wider beneficial impact to other potentially similarly impacted customers …
As with Module 3, it is not possible to outline the nature and extent of the supervisory engagement that will follow if an RFSP refuses to take the remedial action expected by the Central Bank and/or how that supervisory engagement might be escalated. This will be a circumstance specific determination depending on the relevant issues, the aim sought to be achieved and the speed at which clarity can be provided to policyholders via the exercise of the relevant option. No course of action will be ruled out for consideration by the Central Bank in this regard."
Besides our comments as set out in paragraph (iii) above:
(i) the lack of a CBI-driven test case (unlike the approach adopted by the FCA in the UK) appears to be the product of both statutory restrictions on the CBI and a certain pragmatism i.e. it appears that it is not clear from the statutory background to the CBI's regulatory authority that it has locus standi to act as proxy for BI insureds to argue their coverage cases for them. This deficiency – if indeed that is the view that has been taken by the CBI as a driver for it not being more proactive in initiating test litigation – likely needs to be addressed by government, as it means that the regulator has effectively been forced to "leave it to the market" to decide key BI coverage issues, affecting thousands of Insureds, through a patchwork of Court, arbitration, FSPO and/or mediated resolutions. That said, there is likely also a realism to the CBI's approach, in that were it to have initiated test proceedings (assuming locus standi to do so) it would likely be simply replicating, at considerable cost, a detailed process that is already far advanced via the FCA's Covid-19 BI test case in the UK, in which context a judgment at first instance is expected by mid-September 2020;
(ii) the Framework is not surprising as regards its focus on non-damage BI extensions for notifiable disease/denial of access. The underlined sections in point (v)(b) and (c) above illustrate that the CBI is correctly focused on the need for the Insured to demonstrate a causal link between the insured peril and the BI loss suffered, and also on the relevance of the trends clause to quantum adjustment;
(iii) what is somewhat disappointing in the Framework is the lack of clarity from the CBI as to what steps it envisages taking should the Insurer not accept the CBI's assessment of coverage under the terms of the policy, such that the Insurer thereby refuses to apply that interpretation across its book. The reality is probably that the CBI will lean in through a critical review of any Module 4 assessment by the Insurer - across its broader book - of whether a concluded decision by a Court, arbitrator or FSPO has a beneficial impact for Insureds.
The precise approach that the CBI will adopt will have to be awaited as matters develop.