FBD has a problem. In fact, the Irish insurance company has multiple problems, ranging from an increasingly tetchy relationship with government, to the fact that it cancelled a bumper dividend many of its shareholders had already mentally banked.

However, its biggest problem will be finally aired in the High Court this morning, when four Irish publicans outline their case against the insurer over disputed Covid-19 insurance cover.

The four are just the tip of a growing iceberg; but they will set the direction of travel for hundreds of other Irish publicans in a similar position.

One, or potentially a mix of these actions, will be the pathfinder case – essentially a trendsetter that will determine the fate of other policyholders. The consequences for both sides are obvious – but, given its dominant market position in the pub sector, FBD is heavily exposed in this row.

The insurer has been frantically trying to quantity the potential exposure if it loses the looming court action. The company is not alone; officials in the Department of Finance and regulators in the Central Bank have been carrying out similar exercises.

There is no final figure – that will become evident when the lockdown ends, and Ireland’s pubs begin to trade again. But, as of now, the best estimates put the bill at between €300 million and €400 million.

This is a big number for any insurer to absorb. But unlike others in the sector, FBD is not bankrolled by an international giant or a multinational balance sheet. It is listed on the Irish stock market, has a disparate shareholder base that includes hundreds of farmers and small-time investors, and, until quite recently, was a financial basket case.

It has recovered and last year doubled profits to more than €110 million increased gross premiums to €370 million. Within the context of those numbers, the potential exposure if it loses this action – even if the figure comes in less than the €300 million ballpark – is highly significant.

At the turn of 2019, its solvency ratio was 192 per cent, which is comfortably above its target of 120-140 per cent. In other words, even if FBD’s pool of assets were to take a hit, its still got plenty to finance the claims against it.

However, it would place strain on FBD’s cash reserves and short-term asset position. Based on the state of the markets, its financial assets are down between five and 10 per cent and its liabilities from claims are likely to go up by some amount.

The issue is complicated further by the business of reinsurance. Most insurance companies sell on a portion of the risk to reinsurers. The Irish insurer has contacted many of its reinsurers to determine if they would be covered if they opted to pay out. The answer came back negative. Put bluntly, they could pay, but they would have to cover it themselves. 

In previous cases internationally such as Hurricane Katrina or BP’s Deepwater Horizon oil spill, where insurers were forced to pay out, most of the risk was spread around through re-insurance because terrorism, pollution, and extreme weather are at least recognized risks. It remains unclear whether a pandemic on this scale was ever re-insured by the major insurers. Certainly, this is emerging as a major concern for FBD.

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Rivals with deep pockets

Ireland’s publicans, however, are unlikely to care all that much about FBD’s internal dynamics. Ever since the insurer dispatched formal letters to policyholders outlining that it was not paying business interruption cover as a result of Covid-19, it was obvious that the next step was litigation.

There are four major cases in play now, and all will come briefly before the commercial division of the High Court tomorrow morning. There are different elements and nuances to each case, but the central argument remains the same – all contend that they had insurance for business interruption as a result of an infectious disease within 25 miles of a property and that the lockdown triggered by Covid-19 also triggered this clause.

I have outlined FBD’s position in some detail before, but the core point is its contention that the pubs are victims of social distancing requirements and not a pandemic as such.

Lawyers I have spoken to on the matter – whom I also asked to examine a number of differing policies – are split on the matter. But all agree it comes down to a matter of legal interpretation.

The Lemon & Duke pub off Dublin’s Grafton Street was the first to issue proceedings. It is run by Noel Anderson, an experienced publican and incoming chairman of the Licensed Vintners Association (LVA), and its shareholder roster includes rugby stars Rob Kearney, Jamie Heaslip, Sean O’Brien and Dave Kearney.

There are other pubs controlled by the same backers, but they are not involved in this case. It is unlikely that this case will be the sole pathfinder, as the pub claims to have correspondence from FBD specifically stating it has insurance for Covid-19 – as opposed to a more general clause about an infectious disease.

Instead, it is likely that the test case will involve pubs who have the boilerplate FBD policy. Sean’s Pub, an Athlone institution that has solid claims to be the oldest bar in Europe, issued proceedings against the insurer, which FBD has sought to move to the Comemrcial Court. Although a handsomely profitably establishment, it remains unclear if the quantum of damages suffered fulfils the €1 million-plus criteria of the Comemrcial Court.

The other two clearly do, however. The Loyola Group runs a chain of high-profile pubs throughout Dublin, including the landmark Lep Inn, as well as the Bath Pub and the Old Spot near the Aviva Stadium. It also owns Bakers Corner and the Landmark Pub.

Owned by Stephen Cooney and Brian O’Malley, the group has been extremely successful, and recently sold The Jar pub on Dublin’s Camden Street at a tidy profit. Loyola is taking the case through the Lep Inn, but it is on behalf of all the group’s properties.

The other litigant is the biggest of the four. Chris Kelly, owner of the eponymous Chris Kelly Group, is nominally taking the case on behalf of Sinnotts, a well-known pub he owns that is sited under the St Stephen’s Green Shopping Centre. But, like the Loyola case, it is actually on behalf of his other pubs too – and that list is quite substantial.

In addition to Sinnotts, it includes Copan, a large pub and venue in Rathmines and Capitol, another sprawling venue in the city centre. The portfolio also includes the Gate Bar in Crumlin, The Black Lion in Inchicore, Graingers in Marino, and the Marble Arch in Drimnagh.

Both Loyola and Chris Kelly have the same legal team, McCann FitzGerald, and are essentially running the same case. Both will seek to ensure that their groups are part of any test case against FBD, and will outline to the court they have the means and the resources to deal with the heavy demands of litigation within the commercial division of the High Court.

For the publicans, the stakes are big. The policy will not just cover loss of profits arising from the shutdown, but will subsidise the policyholder until the pub is back trading at the same pre Covid-19 level – up to a period of between 18 and 24 months (depending on the policy).

FBD has played hardball. But it is now playing the game against pretty sizable rivals.

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The escalating battle with publicans in recent weeks has inflicted massive reputational damage on the insurer, and stretched relations with Ireland’s legion of publicans, as well as the wider business community.

The insurer’s ad campaign based around ‘Support, its what we do’ has been subject to mocking online by publicans who feel they have simply been cast adrift. After all, more than 1,100 of them have been loyal and customers.

FBD, no doubt, will be confident of riding out the negative press. These things invariably pass. However, if it loses this case, it will have a big impact on its financial position over the years ahead.