COVID-19: Analysis of CBI business interruption insurance supervisory framework

Following political and media focus on insurers' approach to COVID-19 business interruption claims, the Central Bank of Ireland has published its COVID-19 and Business Interruption Insurance Supervisory Framework. The Central Bank had previously stated that it was using its information gathering powers in its programme of supervision of insurers. The Framework sets out what the Central Bank intends to do with that information.

In short, the Framework sets out:

1. The Central Bank's expectations of regulated financial service providers (RFSPs) in handling COVID-19 business interruption claims and related litigation
2. An overview of the Central Bank's engagement with RFSPs to date
3. The Central Bank's intended approach to analysing the information provided
4. The basis on which the Central Bank will engage with RFSPs

We examine these below and outline some initial practical points to consider, both by reference to the Framework itself, the context of the Central Bank's industry engagement and lessons from the regulatory approach to previous industry reviews. Although the Central Bank directs the Framework to RFSPs the publication will be particularly relevant to insurers and regulated insurance intermediaries, we therefore use the term insurer throughout this article. 

The Central Bank's expectations

The Central Bank previously set out its expectations of insurers in dealing with COVID-19 claims in the "Dear CEO" letter of its 27 March 2020 (previously discussed here). Essentially, it reiterated the obligations on insurers to act honestly, fairly and professionally in the best interest of consumers and set out its expectation that, where policy wording is unclear, the interpretation most favourable to the policyholder should prevail. The Framework builds upon that communication by stipulating that:

• Firstly, in assessing whether policy wording is unclear, insurers are expected, among other things, to:

1. Review policyholder communications such as queries, complaints and claims to assist in assessing what policyholders reasonably understood
2. Ascertain whether there were any conflicting communications to policyholders from their own staff or any intermediaries
3. Ascertain what understanding their 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
4. Consider any internal discussions and/or debate and/or disagreements and/or concerns in relation to the interpretation of the relevant policy wording

• Secondly, where a policyholder has commenced litigation against an insurer and the parties agree that the case has the potential to act as a "test case" for a wider group of policyholders, the Central Bank expects the insurer to consider how the issues can be narrowed to ensure that the litigation can proceed in the least costly and most expeditious manner possible. Perhaps more controversially, the Central Bank also expects an insurer that succeeds at trial to agree to pay the costs of the plaintiff policyholder and to refrain from seeking its costs against such plaintiffs. How the Central Bank's expectations will play out in both respects is unclear. The awarding of costs in legal proceedings is a matter for the discretion of the Courts with the general principle being that the "loser pays", although the Courts can take into account as part of their discretion, wider public interest considerations in awarding costs in any given case.
   
• Finally, the Central Bank also expects insurers to carry out an impact assessment where a legal action which might impact a group or groups of policyholders has concluded, to ascertain whether there is a wider beneficial impact for such policyholders and to take any necessary remedial action in that context. This would be good practice in any event.

The Central Bank's supervisory engagement 

The Central Bank has already gathered information from 26 insurers, including information relating to a range of infectious disease policy wordings, details of the number of claims under such policies, whether they have been accepted or rejected, and the reasons why. The Central Bank now proposes to analyse that information to focus on three issues - cover; causation; and quantum and claims handlings. 

Assessing 'cover'
In analysing when cover is available, the Central Bank will mainly be considering two common types of business interruption policy wording:

• The first type of policy wording is where cover is provided for loss arising from a public authority (including the government) directing or ordering or taking 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.  
  
  This 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 resulting interference and/or interruption to the insured’s business
  
  The Framework suggests that it is the Central Bank's "firm view" that the Government's communications in March 2020 exhorting businesses throughout the country to close should be treated as such an order. (While it would ultimately be a matter for the Courts to determine that issue, the general approach of insurers to date seems to be to accept the March 2020 communications as such a direction in any event). 
   
• The second type of policy wording is where cover is provided for loss arising from interference and/or interruption to an insured’s business where 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. The Central Bank has not yet expressed a view on this question of policy interpretation (which is currently the subject of litigation in both Ireland and the UK).

Assessing 'causation'

Once the Central Bank reaches its conclusion as to the extent of infectious disease cover, it will examine the issue of causation to see whether policyholders can establish that the interference/interruption that was covered under the policy caused the loss suffered by the policyholder. This is necessarily a fact-based assessment but the Central Bank is considering the extent to which it may be able to opine on issues of principle relevant to the question of causation.

Categorising policy wording

Following its analysis as to cover and causation, the Central Bank will categorise the policy wordings into:

• Responsive (where the wording favours the policyholder on cover and causation)
• Potentially responsive (where 'strong or reasonable arguments' may be made on the basis of policy wording in favour of the policyholder on cover and causation)
• Non-responsive (where the policy is clear and no argument can be made on cover and/or causation)

If the Central Bank concludes that cover and causation are established under a policy, it will monitor insurers to ensure that they process claims in accordance with the policy terms. 

Importantly, for the 'potentially responsive' policy wording, the Central Bank has indicated that if it concludes that there are 'strong or reasonable arguments' which may be made on the basis of policy wording in favour of the customer on cover and causation, it intends to 'challenge' insurers with the aim of ensuring that prompt appropriate action is taken by the insurers or that the Central Bank may itself take action where necessary, to ensure a final resolution of these issues. 

A variety of other factual and legal issues may well arise which are not addressed in detail in the Framework, such as the application of "trends" clauses (which provide for variations in the amount payable to account for other factors affecting the policyholder's business).

The Central Bank's supervisory engagement

Understandably, the Central Bank is not yet in a position to specify the exact nature and extent of any further engagement with insurers following its analysis of policy wordings. It also notes that the existence of related court proceedings will also be a factor in its assessment.  However, the Central Bank does specify that it may engage with insurers who do not conform to the Central Bank's expectations in respect of cover and/or causation with a view to resolving any such issues. It does not specify the form which such engagement might take and the ultimate adjudication of issues between insurers and insureds regarding the interpretation of the policies and the factual and legal issues relating to individual claims would be matters for the Courts. However, the Central Bank has a role in ensuring that insurers and other RFSPs comply with their regulatory obligations, including the duty to treat consumers fairly and to act with due skill, care and diligence. It also has considerable powers at its disposal, including for example the power to:

• Require an RFSP to provide information or documents, for example to progress the Central Bank's assessment
   
• Commission a report or require an RFSP to do so regarding a range of matters relating to policy wording, coverage and claims handling
   
• Give directions, including to ensure compliance with the provisions of financial services legislation
   
• Direct redress in certain circumstances where there have been widespread or regular defaults and customers have suffered loss or damage as a result
   
• Conduct an investigation, including into suspected contraventions of regulatory provisions, such as the Consumer Protection Code
   
• Require the attendance of certain individuals for interview

Practical considerations

Whilst the underlying issues were different, and business interruption insurance issues focus on the wording of individual policies, there are some parallels with the Framework that the Central Bank published in December 2015 regarding the Tracker Mortgage Examination in the context of retail mortgage lending.  The Central Bank has been overseeing that industry wide review, including associated litigation and Financial Services and Pensions Ombudsman (FSPO) complaints, closely for the last five years. 

A number of practical issues arise from the latest Framework, interpreted through the experience of previous industry reviews.  Some examples include:

• Senior management and board accountability: The Central Bank refers to the responsibility of Senior Management in, for example, certifying the accuracy and completeness of information provided to the Central Bank during its enquiries and assessment of policy wording.  Beyond the process of responding to regulatory information requests, the Central Bank has outlined an expectation that Boards and Senior Management oversee the appropriate assessment of claims, and where cover is in place, the prompt payment of claims. 
   
• Assessing policy wording and associated 'artefacts': The Framework refers to a range of documentation and communication as being relevant to a firm's assessment of whether its policy wording is clear or unclear.  Some of this material, such as internal discussions and/or understanding of policy wording, goes beyond the 'factual matrix' that the Courts have considered in interpreting contractual provisions.  It will be important that insurers collate and assess, with the appropriate weight and context, surrounding material, even if this is more relevant to the clarity of customer communications rather than the legal interpretation of contractual wording. 
   
• Complaint and litigation management: The Framework sets out certain expectations regarding insurers' assessment of the potential broader impact of court (and presumably FSPO) adjudications on both coverage and causation issues.  It is critical that insurers have in place adequate processes to identify themes arising from complaints and to ensure that similar issues are identified, assessed and responded to consistently during the handling of these complaints or associated litigation.  This assists insurers in ensuring that customers are treated fairly, and that any claims impacted by a particular adjudication are paid or otherwise resolved promptly and consistently, beyond insurers' general obligations under, for example, the Consumer Protection Code to monitor and analyse patterns of complaints on a regular basis.  

The treatment of legally privileged material in engagements with the regulator, customers and any other third parties needs to be carefully considered.It is particularly important to understand what documents are privileged and to decide on, and take a consistent approach to, handling such material including whether and if so in what circumstances it should be circulated, referred to in communications with or disclosed to any third parties.

Conclusion

The Framework sets out the Central Bank's approach to identifying and resolving any potentially systemic issues concerning COVID-19 business interruption claims. Nowhere in the Framework is there a suggestion that the Central Bank expects insurers to indemnify policyholders if they are not required to do so under the relevant policy wording. However, the Central Bank clearly does not expect insurers to adopt an overly legalistic approach and it would be important for insurers to ensure that they consider claims not only from a contractual perspective but also in light of any relevant communications to policyholders and the obligations imposed on insurers under the Consumer Protection Code.

Unlike the Financial Conduct Authority in the UK, the Central Bank has not sought to bring a test case and the Framework does not set out any timeframe for the completion of the Central Bank review of policy wordings and subsequent engagement. 

In fact, the pending legal proceedings may crystallise the issues, one way or the other. As the Central Bank has noted, numerous individual policyholders have issued proceedings against insurers to determine whether or not their policies provide cover in their individual circumstances. The first cases are expected to be heard by the Commercial Division of the High Court in October 2020. Such litigation may impact on key issues as to the interpretation and application of policy wordings, in which case the judicial determinations in such proceedings will be expected to influence the approach taken both by the industry and also by the Central Bank when dealing with similar wordings and situations.

Although persuasive rather than binding in Ireland, the outcome of the test case taken by the Financial Conduct Authority in the UK against eight insurers could also influence attitudes in Ireland (including that of the Central Bank). A decision in that case is expected to be handed down by the end of September 2020, potentially days before the hearing of the first test case is due to commence in the Irish High Court (in cases brought by FBD policy holders).    

For more information on this topic please contact James Grennan, Laura Mulleady, Sinéad Lynch, Insurance Partners, Eileen Roberts, Liam Kennedy, Litigation and Dispute Resolution Partners, Dario Dagostino, Financial Regulation Partner and Don Collins, Litigation and Dispute Resolution Associate.

Date published: 7 August 2020