Central Bank’s Role in Bringing Clarity to Disputed Business Interruption Claims
In recent months business interruption cover has emerged as a bone of contention, particularly for business owners who felt that their insurance policy should provide cover in the event of a pandemic. We have already seen a number of businesses initiate proceedings against insurers where there is a stark difference of opinion as to what is and is not covered by a particular policy. All the signals suggest that many more cases against insurers are in the pipeline.
Of course, these disagreements on the scope of coverage are not unique to Ireland – the same challenges are being grappled with by insurers and businesses in the UK. However, the approach being adopted by the regulatory authority of our nearest neighbour greatly contrasts with the approach that (so far) has been taken in Ireland.
In May the Financial Conduct Authority (FCA) in the UK issued a statement that made for very interesting reading – it revealed the FCA’s intention to obtain a court declaration to resolve contractual uncertainty in business interruption insurance cover. At that time, the FCA had indicated that it would identify a sample of cases that are representative of all the most frequently used policy wordings that are giving rise to uncertainty. That sample would then form the basis of the case that it would present to court. The FCA’s expectation is that the court declaration would provide a basis for the resolution of business interruption claims. The case is scheduled to open on 20 July and is set to run for 8 days.
Against that backdrop, it was interesting to hear the comments made by Central Bank of Ireland (CBI) Governor Makhlouf during his presentation to the Oireachtas Special Committee on Covid-19 Response on 7 July last. Governor Makhlouf indicated that the CBI has spoken to the FCA, and that the CBI “are looking after what needs to happen in the Irish system. We have lawyers and all sorts of people involved in looking at what is essentially a legal issue … We are absolutely determined that insurance companies should pay up where they have to pay up. They should not be obligated to pay up if nothing is required in the contract. It is inevitable that in some cases this will need to be taken to the courts. Whether or not we can intervene in the way the FCA has been doing is precisely the issue we have been taking advice on.”
Though regulated firms might often disagree, in its prudential supervision and conduct of business supervision of firms in Ireland, there tend to be boundaries beyond which the CBI does not stray. From an ideological standpoint, embarking on a court action aimed at bringing clarity to parties in disagreement on the scope of a business interruption policy might seem like an adventure too far for CBI. A question that arises is whether CBI would be acting within the scope of its statutory powers if it were to pursue such a course of action.
While there does not appear to be a provision within the Central Bank Acts that would provide a clear and unequivocal basis for CBI to pursue such a course of action, it is however possible to identify some provisions within its governing legislation that could potentially serve as a basis upon which CBI could act.
Section 5A(1)(f) of the Central Bank Act 1942 states that the CBI is responsible for “monitoring the provision of financial services to consumers of those services to the extent that the Bank considers appropriate, for the purposes of protecting the public interest and the interests of consumers;”. Under section 5A(2), the CBI “has power to do whatever is necessary for or in connection with, or reasonably incidental to, the performance of its functions.”. When read together, these provisions combine to give CBI broad powers in relation to protecting the interests of consumers. It is arguable that the above provisions could serve as a basis for the CBI to pursue a course of action similar to the FCA.
CBI has a range of other powers, some of which could potentially serve as a means of approaching the matter from a different angle.
For example, CBI could initiate a thematic review focusing on an examination of a representative sample of the most frequently used BI policy wordings that are giving rise to uncertainty. As part of a thematic review, the CBI could engage a Senior Counsel or retired judge to provide an Opinion which would then form part of the CBI’s formal findings and the Opinion could be appended to the report/outcome of the thematic review. Counsel’s Opinion could then be of persuasive value to insurers who may be minded to adhere to the interpretative approach advocated in the Opinion. While this approach is not binding to the extent that a decision of the courts would be, this approach may have the effect of placing insurers in a ‘comply or explain’ type position.
Another approach might be for CBI to issue directions to insurers. Section 45(2)(d) of the Central Bank (Supervision and Enforcement) Act 2013 empowers CBI, in the interests of the proper and effective regulation of financial service providers, to give a direction to a regulated financial service provider in circumstances where the firm is conducting business in such a manner as to jeopardise or prejudice the rights and interests of customers. The direction could, in accordance with s.45(3)(e) require the firm to make such modifications to its business practices and dealings with third parties as may be specified in the direction.
Governor Makhlouf’s messaging to Oireachtas Special Committee on Covid-19 Response seemed to suggest that in respect of disputed business interruption claims, the CBI will not be content to be mere observers. While it is not possible at this stage to predict whether the CBI will ultimately adopt a course of action that is similar to that taken by the FCA, the outcome of the FCA-led court case in the UK will be read with great interest.