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The European Court of Justice (the "ECJ") has ruled against Ireland in a judgement handed down on the 29 September 2011.
The case, which was brought against Ireland by the EU Commission, effectively centred on exemptions currently enjoyed by the VHI from certain EU rules on non-life insurance. In essence the case was over the fact the VHI is not subject to regulation or "authorisation" by the Central Bank in the same manner as competitors in the market. The VHI was granted a derogation from such regulation under Article 4 of the First Non-Life Insurance Directive. Significantly, in order for the derogation to apply, no change in the VHI's capacity as it was then could occur.
Under various amending legislation, the VHI's capacity was altered and the VHI subsequently obtained, inter alia, the right to provide other 'health-related' services, the power to act 'as agent for an insurer in respect of the provision of insurance cover pursuant to an international healthcare plan' and the right to carry out 'activities of an advisory or consultative nature' under the 'additional powers' granted to it.
Ireland did not dispute the fact that the VHI's capacity had been altered, however it argued that such changes were immaterial on two counts. First, the changes were related to the VHI's original basic activity (i.e. the provision of voluntary health insurance). Second, the changes accounted for such a minor percentage of the VHI's total revenues.
The ECJ is of the opinion that the concept of 'capacity' in the derogation set out in Article 4 must be strictly interpreted. As such, if the essential functions or activities carried out by the VHI were altered by the addition of new activities or functions that did not come within its existing capacity at the time the derogation was granted, that derogation should cease to be applicable.
By way of background in November 2007, following a complaint, the European Commission issued a reasoned opinion to Ireland requesting that it take the measures necessary to ensure compliance with the European Union Non-Life Insurance Directives within two months. In response, Ireland informed the European Commission that it applied for Central Bank authorisation in respect of the VHI and that it had enacted legislation which would ensure compliance with the European Union Non-Life Insurance Directives. It transpired that this legislation was not implemented due to certain national issues relating to the economic crisis. In this regard the ECJ held that a Member State cannot plead provisions, practices or situations prevailing in its domestic legal order to justify failure to observe obligations arising under European Union law.
Failure to comply with the ECJ's decision will be a breach of Ireland's duty of loyal cooperation under the Treaty on the Functioning of the European Union. As such, should the necessary implementing measures in respect of the European Union Non-Life Insurance Directives not be applied, Ireland will face financial sanction at EU-level.
In addition, and significantly, the ECJ has ruled that the temporal effect of its judgment will not be limited. This was in spite of Ireland's submission that to do so would give rise to the risk of 'serious difficulties' which might have 'financial consequences'. As such, it will be open to parties affected by Ireland's failure to apply the European Union Non-Life Insurance Directives to all insurance undertakings on a non-discriminatory basis to issue proceedings against the State in respect of any loss they may have suffered. If they can prove that, on the balance of probabilities, they have suffered such a loss, they will be entitled to damages.
The ECJ Judgement can be accessed at: http://curia.europa.eu/
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