Considering the Impact of the High Court Decision on Business Interruption Insurance including the IPID
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Introduction
The landmark High Court judgment delivered by Judge McDonald on Friday, 5 February 2021 in Hyper Trust Limited t/a The Leopardstown Inn & Others v. FBD Insurance plc provided some clarity on the interpretation of policy wording of the insurance contract in relation to certain types of policy extensions covering business interruption losses arising from outbreaks of human notifiable diseases. In this insight we look at some of the notable aspects of the decision, outside of the findings in relation to the interpretation of the specific wording in the policy or relating to the “but for” test or causation in general (which are outside the scope of the insight).
The impact of the judgment from a regulatory perspective
Insurance companies outside of FBD have no doubt carefully analysed the impact of the judgment on their own business interruption policies. While the judgment provides clarity on particular words and phrases which may be similar across many policies, it may not cover all wordings of different policies. That said, where the final outcomes of a legal action may have a wider beneficial impact for similar groups of customers, the Central Bank of Ireland (“CBI”), under its COVID-19 and Business Interruption Insurance Supervisory Framework on this matter[1], will expect insurance companies to “carry out an impact assessment to ascertain whether there is such a wider beneficial impact [of legal action outcomes] and take remedial action to ensure that those customers obtain the benefit of the final outcomes”. It is likely that CBI will now expect insurers to reflect carefully on the implications of the High Court decision in the FBD case on their own book of outstanding claims, in addition to their obligation to assess 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. This would no doubt include considering the FBD judgment and how it applies to their own policies and claims. In that context it is notable that the Restaurant Association of Ireland has now stated that it is aware of 423 claims by its members which it states are valid claims arising out of the ruling with a further 140 potential claims[2]. There have also been calls from various sectors on insurance companies to proactively deal with claims in light of the judgment[3].
The importance of the IPID
In interpreting the policy wording, McDonald J. reiterated the importance of reading the terms in the context in which they were agreed (the “terms in context” approach), noting that the “Court’s task is essentially to work out the meaning of the contractual term by reference to the contractual term… construed in the context of the terms of the contract as a whole and also in the context of the factual and legal background.[4]” The Judge held that even if the policy is a standard form contract, the factual background is important in interpreting the contract[5]. However, the Judge stressed that evidence of subjective understanding of the parties cannot be used to interpret the contract.
In this case, the Judge placed particular emphasis on the insurance company’s association with the pub industry and that the FBD policy was specifically designed for that industry[6].
In addition to the factual background, the Judge noted that the legal and regulatory context is also important in interpreting the policy wording[7]. In particular, McDonald considered the information provision requirements of the EU (Insurance Distribution) Regulations 2018 (SI 229/2018) (the “Insurance Distribution Regulations”), including the requirement to provide objective information about the insurance product in a comprehensive form to allow the customer make an informed decision[8].
The Judge was guided by the requirement on insurance distributors to provide an insurance product information document (the “IPID”) under the Insurance Distribution Regulations and the requirement to provide a summary of the main risks insured. While the Judge noted that the IPID (as well as the information provided by FBD in its Features & Benefits document) was not intended to be a comprehensive description of the insurance product, McDonald J. agreed with the Plaintiffs that the wording used in the IPID could be considered by the Court in identifying the “insured peril” covered by the policy in question. While noting that it was important not to overstate the utility of the IPID, he held that the IPID and Features & Benefits document formed “part of the broader context against which the insurance policy is to be construed.[9]” This shows the broader importance of ensuring that the IPID provides an accurate summary of the risks insured and is not misleading.
The admissibility of certain evidence of subjective intention
Another interesting aspect of this judgment was the decision to admit certain evidence obtained on discovery to assist in the interpretation of the contract. This related to the admissibility of evidence in relation to what was contemplated by the insurance company at the time of offering the policy. Expert evidence was sought to be put forward by FBD in relation to the fact that no solvency margin was held in respect of what was termed in the judgment as “pandemic risk” and that while the expert opined that this was not because it was thought that the chances of a pandemic was unlikely but that the chances of recovery under the policy was thought to be unlikely. In his report, the insurance expert noted that the regulator would usually require an “add on” of solvency margin to cover the risk but the absence of such an add-on would show that consequential material loss from the pandemic to the business interruption coverage was not contemplated. The expert further opined that this was not surprising since it would “go beyond the boundaries of instability; an insurer would find it difficult prudentially or purposefully to offer such coverage in any material amount” and that providing such cover would be foolish.
The Plaintiffs argued that internal correspondence at the time was relevant to show that FBD did in fact intend to provide the cover and cited the Supreme Court decision in Law Society of Ireland v. Motor Insurers’ Bureau of Ireland[10] in which it was held that while the test is an objective one in determining the type of contract the parties intended to enter into, if it can be shown that the party actually intended to enter into that type of contract then that that evidence should be admitted. In concluding that the rule precluding subjective evidence as an aid to interpreting a contract did not apply when responding the argument that FBD sought to bring in that it would have been foolish for FBD to agree to such cover, the Judge agreed with the Plaintiff policyholders and allowed evidence of FBD’s intention. This ruling resulted in FBD withdrawing the related aspects of the expert report from its insurance expert and so avoiding the admission on the evidence sought to be relied on by the plaintiffs in challenging the insurance expert evidence.
Conclusion
While insurance companies across the Irish market will be analysing the outcome of the case in detail over the coming days and weeks and how it might apply to their own policies, the wider regulatory context will also need to be considered in any response or approach to be taken and the insurance companies will no doubt take a closer look at the ramifications of the judgment on other policy wording in their insurance contracts as well as any IPIDs provided. In particular, the High Court decision should prompt insurers to conduct an analysis of other policy extensions which may have been assessed as being unlikely to occur.
[2] Statement by the Restaurant Association of Ireland, 7 February 2021
[3] /news/business/2021/0205/1195311-pub-insurance-reaction/
[4] Paragraph 6
[5] The Judge states at paragraph 77 that it is “essential to keep in mind that the FBD policy was designed specifically for the pub trade. The nature of that trade is therefore a key aspect of the context against which the policy is to be construed.”
[6] Paragraph 77
[7] Paragraph 102
[8] Paragraph 104
[9] Paragraph 109
[10] [2017] IESC 31