Central Bank considers legal action over Covid-19 insurance cover

Four test cases being taken against FBD

Grafton Street, Dublin, in early April.

Grafton Street, Dublin, in early April.

 

Central Bank governor Gabriel Makhlouf signalled on Tuesday the regulator is considering taking legal action to resolve standoffs between insurers and businesses over whether losses resulting from Covid-19 should be covered by insurance companies.

The regulator is “taking advice” on whether it should follow the lead of the UK Financial Conduct Authority (FCA), which launched at test case last month against eight insurers who have denied business interruption claims and where there is a dispute over the meaning of wording in policy documents.

Losses

FBD Holdings’ pubs policy, which covers losses where a premises is closed under the orders of a local or government authority in the event of an infectious disease outbreak within 25 miles, is currently at the centre of litigation in the Republic.

An action taken in May by the Lemon & Duke pub in Dublin is among four test cases against FBD to be heard in October.

Speaking to the Oireachtas special committee on Covid-19 said that the Central Bank has been taking legal advice and talking to “the insurance company” currently involved in litigation, known to be FBD.

“We are absolutely determined that insurance companies should pay up where they have to pay up. They shouldn’t be obligated to pay up where there’s nothing in the contract. It’s inevitable in some cases this is something that needs to be taken to the courts,” he said, adding that the Central Bank is “taking advice” on whether to can take the same legal action as the FCA.

Sinn Féin TD Pearse Doherty told Mr Makhlouf that the Republic faces a financial services scandal along the lines of the tracker-mortgage debacle, which has cost banks €1.5 billion to date, if the issue of disputed business interruption policies is not resolved.

The vast majority of insurance policies are clear on what is covered, the Central Bank has previously stated.

“We’re pursuing a multi-pronged approach which we believe is the most effective way forward,” Mr Makhlouf said.

“I can’t really comment about the actions we’ve made, which are extremely live.”

Mr Makhlouf also said that he was concerned when it emerged last week that a lender, known to be AIB, had adopted policy of pausing the acceptance of mortgage applications from borrowers whose wages were being subsidised by the State during the Covid-19 crisis.

Uproar

AIB subsequently announced a U-turn on this approach, after it lead to political uproar.

While the Governor said banks must not lend recklessly, a blanket policy against the acceptance of applications from certain groups of customers “implied to me that there wasn’t a proper targeted creditworthiness assessment”.

Meanwhile, Mr Makhlouf said that the Central Bank will hold a “round table” discussion in the coming weeks with banks and other interested parties on mortgage arrears.

It comes as banks are under pressure to find longer-term forbearance and restructuring solutions for borrowers who have availed of temporary loan payment breaks in recent months but will be unlikely to return to contracted payment schedules after the period of relief expires.

Banks have been rolling up interest on loans during the interest break periods. But the industry and the Central Bank are at odds over whether this is necessary to ensure that a borrower’s credit rating is not affected by the payment moratorium.

European Banking Authority (EBA) guidelines in April said the break “envisages only changes to the schedule of payments, namely by suspending, postponing or reducing the payments of principal amounts, interest or of full instalments, for a predefined limited period of time; no other terms and conditions of the loans, such as the interest rate, should be changed”.

However, the Central Bank has said that the EBA guidelines “do not give specific guidance” in relation to interest rate accrual. “As a result, the approach taken by Irish banks, whereby interest continues to accrue on loans subject to the Covid-19 moratoria, is acceptable within the context of the EBA Guidelines,” according to a spokeswoman.