Setanta saga winds up with policyholders footing the bill

More than three years after Malta-registered Setanta Insurance collapsed into liquidation, its 1,750 claimants in Ireland are finally set to receive some compensation.

This follows a landmark ruling by the Supreme Court, which decided on Thursday, by a margin of 5-2, that the State’s Insurance Compensation Fund should be responsible for paying claims.

This overturned an earlier High Court ruling that the Motor Insurers’ Bureau of Ireland (MIBI) was liable to pay the bill.

Setanta was incorporated and prudentially regulated in Malta but traded solely in the Irish market. It offered some of the cheapest premiums here and had 75,000 policyholders when it was placed into liquidation in April 2014. Its liquidation left a shortfall in funding in terms of meeting the cost of claims, which led to questions about who should foot the bill.

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This was a matter of debate between the Government and the industry on one side, and the Law Society of Ireland on the other.

This followed an invitation from the then president of the High Court Nicholas Kearns to the Law Society to take a case in the public interest to get clarity on what was considered a grey area in legislation. It had been assumed that the Insurance Compensation Fund (ICF) would pick up the tab, up to a limit of 65 per cent of claims or €825,000, whichever is the lesser. Established in 1964, it was designed to facilitate payments to policyholders in the event of a liquidation or administration of a non-life insurer here.

The ICF stepped in when the likes of PMPA and Quinn Insurance went into administration but different rules applied in those cases as continuity of insurance cover was ensured and claims were paid in full.

The ICF pays claims via loans from the exchequer, which get repaid annually through the collection of a levy each year on non-life insurance policies.

Not-for-profit

MIBI was set up in 1955 to deal with cases involving road traffic accidents caused by uninsured drivers or unidentified vehicles. It pays out about €60 million a year to meet the cost of these claims. It is a not-for-profit company set up by motor insurers here and operates under the terms of an agreement with the government. It fulfils Ireland’s obligations under EU motor insurance directives, and all companies providing motor insurance here are required to be members of the MIBI.

The High Court’s ruling on Setanta had rocked the industry, as it has implications for an insurer’s cost of capital and their reserving of claims. Senior industry sources claim the Setanta ruling scared off a number of potential new entrants to the Irish market.

“Essentially, the industry was being asked to pick up the tab of a failed competitor. Why would any company enter the Irish market on that basis?” said one insurance executive who asked not to be named.

MIBI appealed the High Court decision, which was rejected, and so the matter ended up in the Supreme Court. It means that 11 of the most senior judges in the country have considered this matter, with six of them finding in favour of the Law Society and five for MIBI.

Crucially, those five were in the Supreme Court and so the matter is settled.

For claimants, the Supreme Court’s ruling creates certainty in terms of who is on the hook for the bill although the judgement means they might not be paid in full.

With the ICF only obliged to pay 65 per cent of the costs, versus 100 per cent for MIBI, there will clearly be a shortfall in claims. The liquidator had previously indicated he could meet 30 per cent of the costs but the passing of time and the accumulation of other expenses might well have reduced this figure.

Even if it hasn’t, claimants would face a shortfall of about 5 per cent.

The other potential fly in the ointment is that the ICF usually pays out claims in six-month batches. It is not clear if the liquidator is in a position to file all of the claims at once. If not, some of the Setanta claims might not be paid until 2018.

Insurance sources indicated on Thursday that some €8 million in court or out-of-court settlements have so far been agreed by the liquidator and will likely get priority for payment.

Some 1,400 of the claims involve third-party personal injury claims or third-party property and damage claims, which will be partly met by the ICF.

Fianna Fáil’s Michael McGrath said there was a “moral obligation”on the Government and the industry to meet the Setanta bills in full, particularly given the long passage of time since its collapse.

Insurance Ireland, the industry’s representative group, said it was “important that we are moving towards the settlement of the outstanding Setanta claims given the uncertainty claimants have experienced. Clarity needs to be provided to claimants on the process for the settlement of their claims”.

Ciarán Phelan, chief executive of the Irish Brokers Association, expressed his hope that the liquidator could “expedite and pay many of the outstanding claims over the next few weeks and months”.

“Hopefully, this resolution will give consumers improved confidence in the system, but there remains a definite need for greater certainty for consumers regardless as to where companies operating in Ireland are regulated in the EU,” he said.

Limiting claims

The complexities of the case were captured by Mr Justice Donal O’Donnell, who said the logic of limiting claims in respect of insolvent insurers made some sense in the context of claims by Setanta policy holders to whom “some moral hazard” may be considered to apply. However, there was a “strong and perhaps unanswerable case in equity” for amendment of the scheme to permit full recovery of claims against Setanta policy holders.

No comment was available from the Malta-based liquidator Paul Mercieca following the judgement. However, a note from the liquidator on Setanta’s website said the ICF would now “start the process of making payments”.

“The liquidator anticipates that a significant proportion of the balance of these claims will be met from the proceeds of the distribution of Setanta’s assets on completion of the liquidation process,” it added. It said the liquidator was keen to progress the payment of claims and was liaising with all relevant parties to agree the next steps to achieve this.

“As soon as the implications of the Supreme Court judgment have been considered an update will be published here.”

A meeting of creditors is expected to be held in Malta next month.

In a statement, Minister for Finance Michael Noonan said the Supreme Court’s ruling provided “clarity” on the payments to be made to Setanta claimants. Mr Noonan said the Department of Finance was moving to bring certainty to the structure of the compensation framework in the future, particularly in the event of a liquidation of a motor insurer in Ireland.

The draft heads of a Bill for amendments to the relevant Insurance Acts are expected to be brought to cabinet next month, following work by Eoghan Murphy, the Minister of State in the department. Mr Murphy met the chief executives of the major insurers earlier this week to discuss the implementation of the recommendations of the Review of the Framework for Motor Insurance Compensation in Ireland.

This report was issued by a joint working group involving the departments of finance, and transport, tourism and sport last year. In future, the full amount due from the liquidation of a motor insurer will be paid 65 per cent by the ICF and 35 per cent by MIBI members.

Compensation fund

Mr Murphy said he had agreed a proposal in principle with the insurance industry on their level of funding, which will involve them paying a fixed percentage of gross premiums to build up a fund over a period of time.

Neither the Minister nor industry representatives would comment on the size of the fund but The Irish Times has learned that it will involve them paying 2 per cent of their gross written premium each year.

In hard money terms, that amounts to about €27 million a year, up to the point where the fund reaches €150 million, at which point the insurers should be able to take a break from paying into it.

This is bad news for policyholders as the insurers are certain to seek to recoup this money from their customers.

“One way or another, policy holders will pick up the bill for the collapse of any insurance firm,” Mr McGrath said. “But at least we now have some clarity [on the mechanism].”

On a more positive note, the near €58 million bill that the ICF will have to meet to fund its end of the Setanta claims is unlikely to result in an increase in the existing 2 per cent levy on non-life policyholders that is paying for the failure of Quinn Insurance. Instead, the timeframe over which this money is collected by the ICF is likely to be lengthened. The money will still be paid by consumers but over a longer timeframe, smoothing out the hit.

Mr Murphy called for the recommendations of his inter-departmental review group to be implemented as “soon as possible” to ensure that full compensation is paid to claimants in future motor insurance insolvencies.

He also noted that his agreement with the industry represented a “significant step forward” to achieving a “more stable insurance market” that should “make Ireland more attractive to new entrants”.

Time will tell on that front.

There are other loose ends to be tidied up. MIBI is understood to have run up a legal bill of about €1 million fighting its corner on the Setanta saga, and will seek to recoup this in full from the Law Society. This matter will be decided by the court.

The Law Society, meanwhile, has made no comment on the Supreme Court’s ruling.

What is the Insurance Compensation Fund?

The Insurance Compensation Fund was set up under the Insurance Act 1964 to facilitate payments to policyholders in cases where an Irish authorised non-life insurer or a non-life insurer authorised in another member state but operating here goes into liquidation.

It is maintained and administered under the control of the President of the High Court acting through the Accountant of the High Court.

It is financed through contributions received from non-life insurance companies up to a maximum of 2 per cent of the aggregate of the gross premiums paid to them.

It has been used in the past to pay certain claims relating to PMPA and Quinn Insurance. In these cases, the payouts were so high that the exchequer was required to loan money to the fund to cover the cost of claims.

This money is then repaid over a period of years via a levy on all non-life insurance customer policies.

The total amount that may be paid out of the fund for claims is 65 per cent of the sum due to the policyholder or €825,000 whichever is the less.