A State insurance compensation fund is potentially liable for millions of euros in claims against collapsed insurer Setanta after the Supreme Court, by a five to two majority, overturned a finding the Motor Insurers’ Bureau of Ireland was potentially liable.

The liquidator of Maltese-registered Setanta, which sold insurance policies exclusively in Ireland before it collapsed in 2014, has determined the total cost of an estimated 1,750 claims could run to about €90 million.

The Supreme Court majority upheld the MIBI argument that various agreements with the Minister for Transport did not cover insolvent insurers.

MIBI had argued the State’s Insurance Compensation Fund (ICF) should pick up the Setanta bill, as was done in the cases of PMPA and Quinn Insurance and the Supreme Court ruling means claims against Setanta will be met from the ICF, set up under the Insurance Act 1964.

The court noted that the rules governing the ICF claimants against Setanta policy holders will recover no more than 65 per cent, as opposed to a potential 100 per cent if MIBI was held liable.

Mr Justice Donal O’Donnell said the logic of limiting claims in respect of insolvent insurers makes 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.

“A victim does not choose the party with whom he or she collides, and still less his or her insurer,” he said.

If such victims continue to be limited to 65 per cent recovery, the constitutional validity of applying that limit to third-party claimants “would clearly arise”.

He was giving judgment allowing MIBI’s appeal against a Court of Appeal decision rejecting the bureau’s interpretation of agreements between itself and Minister for Transport between 1955 and 2009, referred to as the MIBI agreement.

The case – brought by the Law Society on foot of a court order – was essentially aimed at preventing the accountant of the High Court making payments from the ICF to claimants on the basis it appeared the MIBI could instead pay out.

The core issue was whether the MIBI agreement – particularly clause 4.1.1 and 4.1.2 - covered claims to be met by an insolvent insurer.

Jigsaw

Mr Justice O’Donnell said the agreements were “ambiguous” and like a “freeform jigsaw” with pieces that could be arranged in at least two different patterns and some pieces difficult to fit into the overall pattern.

When considering the “overall picture”, he concluded the MIBI interpretation – the agreement does not extend to liability for claims against drivers whose insurer had become insolvent – was “more plausible” and correct.

The complex arguments concerning the agreement were only necessary because of the “substantial difference” between the available recovery under the ICF (limited to 65 per cent or €830,000) and the near full indemnity available against the MIBI.

While the Law Society had argued a finding the ICF was liable “would be to the benefit of insurers at the expense of victims”, the court was not being asked to decide if a victim should be partly or fully compensated but rather to interpret an agreement in line with principles applicable to every contract.

What interpretation was given, there would be consequences including, if claims were to be met from the ICF, there would be pressure for amendment of the relevant scheme.

The Chief Justice, Ms Justice Susan Denham, Mr Justice William McKechnie, Mr Justice Peter Charleton and Ms Justice Iseult O’Malley also agreed the appeal should be allowed.

Mr Justice McKechnie, in a separate concurring judgment, said, “not without some difficulty” he preferred Mr Justice O’Donnell’s approach to construing the agreement to that adopted by Mr Justice Frank Clarke in his dissenting judgment.

Mr Justice Clarke found the agreement obliged the MIBI to cover claims against drivers insured with Setanta. He said it was “particularly unfortunate”, when the ICF came into existence under the 1964 Insurance Act, the then MIBI agreement or its successors were not amended to make clear where liability for victims of drivers insured by insolvent insurers would lie.

Mr Justice MacMenamin, who also dissented, said the most important part of the MIBI agreement was Clause 4.1 which, in his view, creates a liability against the MIBI. It was open to the parties to revise the relevant agreements, he also noted.