Covid-19 business interruption insurance claims: expectations set in Ireland

A supervisory framework issued by the CBI sets out its expectations on how insurers should assess BII claims and how systemic issues of customer harm should be identified and addressed. At the heart of the CBI framework is the need for insurers to put customers first and treat them fairly.

Test cases lodged before the courts in both Ireland and the UK promise to provide further guidance this autumn on insurers' liability under BII policies in the context of the disruption arising during the pandemic.

The Covid-19 BII supervisory framework

Business interruption insurance policies sold in the Irish market have had much scrutiny since the Irish government imposed lockdown measures in March 2020 as a result of the Covid-19 pandemic. Businesses and insurers alike have both been actively reviewing the terms of their insurance policies to determine whether in their view the policy terms provide cover for business interruption resulting from the current pandemic and it is expected that there will be a high volume of BII disputes in the near future.

On 5 August, the CBI provided helpful guidance on its response to BII claims. The publication by the CBI of the Covid-19 and business interruption insurance supervisory framework (Framework) is intended to identify systemic issues of breaches of legal and regulatory obligations and/or customer harm across groups of customers, rather than individual claims.

The purpose of the Framework is to outline:

• the CBI's overall expectations of insurance undertakings in the context of the implementation of the Framework;
• the overall approach to the identification of potentially systemic issues of customer harm relating to BII, and;
• the escalation strategy for intervention by the CBI to address that harm where necessary.

CBI expectations

The Framework reiterates and expands on expectations the CBI outlined of the insurance industry in a 'Dear Chairperson/CEO' letter on 27 March:

• Insurers must adopt a customer first approach and assess BII claims 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 CBI expects the full cooperation of the board of directors and senior management of insurers in implementing the Framework, in particular in respect of the certification of information the insurer is compelled to share with the CBI and in the consideration and implementation of the communicated views and expectations of the CBI;
• Where there is unclear policy wording in the BII policy, insurers should apply the interpretation most favourable to the customer;
• Insurers must ensure that they handle claims effectively and properly and, where appropriate, must offer assistance to their customers in the process of making a claim, including alerting their customer to policy terms and conditions that may be to their benefit;
• The CBI expects that insurers should agree to pay the reasonable costs of customers raising claims in agreed test case litigation. The costs should be assessed in default of agreement and insurers should not seek to recover their respective costs against participating customers;
• Where a legal action has been concluded and the final outcome may have a wider beneficial impact for similar groups of customers, insurers should carry out an impact assessment and take remedial action to ensure that those other customers obtain the benefit of the final outcome. In practice, this will mean that insurers will need to have adequate systems and structures in place to ensure that they can identify cohorts of customers that have similar factual and legal issues arising and ensure that they are treated fairly and in the same manner. For instance, if a settlement is reached on favourable terms with a particular customer, insurers should take proactive steps to identify other similar customers and offer these customers the same equivalent resolution as was provided to the original customer.

Identification of potentially systemic issues of customer harm

The CBI proposes to identify and address systemic issues of customer harm through four modules.

Module 1 - scope information gathering and certification

The CBI has already progressed the information gathering stage to determine the scale of the issue. To-date, 26 insurers have been compelled by the CBI under its statutory information gathering powers to provide specific information and this information must be certified as accurate and complete by senior individuals within the insurers who have authority to bind that insurer and to sign on its behalf.

The CBI has confirmed that it has specifically requested insurers to provide confirmation that they sell BII policies; the number and name of the policies that provide cover for consequential loss arising from interference and/or interruption to a business as a result of a notifiable disease and the business sectors covered;  specific information on the trigger for cover for the occurrence of a notifiable disease, and; copies of the relevant responsive BII policy wording, whether any wording changes had occurred in the last six months to those policies and the rationale for those changes.

Module 2 - analysis and categorisation

In its assessment of whether a BII policy is responsive, the CBI will monitor and analyse the approach taken by insurers in the areas of cover, causation and quantum and claims handling.

Cover: this will depend on the wording of the particular policy and the facts of each particular case. The relevant policy wording will be considered by the CBI to determine whether, in its view, it is responsive to the Covid-19 pandemic and any related interference or interruption to the relevant business.

Causation: this will also depend on the wording of the particular policy and the facts of each particular case. Causation requires the insured party to demonstrate a causal link between the cause – i.e. whether the business interruption and/or interference as a result of Covid-19 was an insured event – and the loss suffered by the insured. While causation will depend on the facts of each particular case, the CBI will consider any issues of principle relevant to the question of causation under the policy wording. 

Quantum and claims handling: the CBI will also ensure that any customer claims are processed and handled and that losses are calculated in line with the insurer's legal and regulatory obligations. The CBI will monitor the reliance on and application of contractual terms that relate to loss calculation by insurers.

The CBI also identified how it would deal with responsive policies, potentially responsive policies and non-responsive policies.

For responsive policies, the CBI will identify standard and commonly applied contractual provisions that, in the CBI's view, clearly provide cover for Covid-19 related interruption and/or interference to businesses and where causation can in principle be established. The CBI will then identify and engage with insurers which do not accept that cover and causation are established.

For potentially responsive policies, the CBI will also identify provisions which it considers that there is a strong or reasonable argument that there is cover. For non-responsive policies, the CBI will take no further action.

Module 3 - supervisory engagement and escalation

After the work in the first two modules is complete, the CBI will then determine whether to take steps to proceed with supervisory engagement with an insurer and/or escalation. The Framework does not categorically outline the nature and extent of the supervisory engagement that the CBI intends to pursue in respect of BII policies. This is not surprising, although the CBI has said no course of action is ruled out. The CBI has confirmed that any decision that it takes to exercise its powers in the event of non-compliance by an insurer will be case specific but that it will consider the existence of court proceedings that deal with the relevant issues as part of its assessment.

Module 4 - final outcomes and legal actions

The CBI will monitor ongoing litigation, arbitrations, individual complaints raised before the Financial Services and Pensions Ombudsman and settlements. Where individual outcomes have the potential to beneficially impact customers more widely, the CBI will require insurers to take remedial action to address the wider beneficial impact to other customers.

The future for business interruption claims

It is clear that the CBI intends to exercise the full extent of its supervisory function to closely monitor the activities of insurers in responding to BI claims. Insurers should be cautious when considering the terms of their policies as well as their overall communications with the policyholder when determining the extent of cover as it is clear that decisions to decline cover in respect of BII policies will be heavily scrutinised by the CBI. Insurers should also be mindful of the need to adopt a consistent approach for customers with similar policy terms so as to ensure that cohorts of customers with similar issues are treated in the same manner.

This area is likely to see considerable development and activity in the coming months as the CBI will be considering the material received from the 26 insurers and determine the next steps to take under the Framework.

Wider developments are also likely to shape the way the CBI regulates insurers in this area.

A number of test cases taken by publicans against FBD Insurance are due to be heard in the Irish Commercial Court in October 2020 and these cases are expected to address a number of issues which include questions on causation and the application of principles of quantum in cases of this nature. The court is also expected to consider the proper interpretation of the "trends clauses" which typically allow insurers to reduce the amounts payable under the policy where other wider factors have affected its ability to trade.

In addition, the UK's Financial Conduct Authority has brought a test case against eight insurers which is expected to be determined in September. The outcome of this test case is likely to have persuasive authority in the Irish courts where similar clauses and issues have been considered by the English courts, and the judgments could impact the approach that the CBI takes in pursuing its goals outlined in the Framework.