PA(GI) Ltd v GICL 2013 Ltd and another [2015] EWHC 1556

In PA(GI) Ltd v GICL 2013 Ltd and another [2015] EWHC 1556, the High Court ruled that liabilities relating to mis-selling of payment protection insurance (PPI) underwritten by the claimant did not transfer to the first defendant under an insurance business transfer scheme under Part VII of the Financial Services and Markets Act 2000 (FSMA).

The claimant sold creditor insurance policies and PPI through third party agents, including to a well-known clothing retailer who sold the PPI policies in connection with its store card accounts. Under a profit-sharing agreement between the parties, the retailer received 85 per cent of the underwriting profit from the PPI business it sold. The retailer ceased selling PPI policies on the claimant’s behalf in 2004. Since 2012, however, several hundred customers have complained to the Financial Ombudsman Service (FOS) that they were mis-sold PPI. A series of Part VII transfers took place between 2005 and 2013, with the claimant arguing that liability for any potential mis-selling was transferred to the first defendant under a 2006 scheme. The FOS provisionally decided that such liabilities were not transferred and that the claimant remains the responsible insurer and the correct respondent to mis-selling complaints.

In deciding the issue before the court, Andrews J considered the construction of the definition of ‘Transferred Liabilities’ in the 2006 scheme documentation, specifically whether liability for mis-selling fell within the meaning of ‘liabilities of the Transferor…under or attaching to the Transferred Policies…’ On this construction point, the court found that, as a matter of natural interpretation, liability for mis-selling would not arise ‘under’ or ‘attach to’ a contract of insurance. Andrews J further stated that the natural interpretation makes commercial sense in the context of the transfer. In the absence of an express provision, the court was unconvinced that the first defendant would have agreed to accept an open-ended liability for the claimant’s mis-selling in relation to insurance business for which it received no premium.

Significant weight was also given to the intention of the parties in the drafting of the 2006 scheme documentation. The court noted that an intention to make provision for the transfer of mis-selling liabilities would qualify as an unusual feature of a scheme which might have a material financial impact and would, therefore, be expected to be expressly disclosed in application for a Part VII transfer. Neither the scheme documents nor the report of the independent expert made express provision for, or even referred to, any possible liabilities for the alleged historic mis-selling of PPI. The court concluded that it is inherently unlikely that, if the parties did intend to transfer liability for mis-selling claims to the first defendant, the documentation would have been silent on the topic.

The court concluded that any liability for the alleged mis-selling of PPI was not transferred to the first defendant and, therefore, the claimant is the responsible insurer for any claims before the FOS. The case also highlights some important drafting considerations and the court’s approach to the construction of definitions in the absence of express provisions.

For further information: PA(GI) Ltd v GICL 2013 Ltd and another [2015] EWHC 1556.

R (on the application of Bluefin Insurance Services Ltd) v Financial Ombudsman Service Ltd [2014] EWHC 3413 (Admin)

High Court rules that FOS erred in accepting jurisdiction for complaint against broker under D&O policy


The High Court gave judgment in a judicial review claim brought by Bluefin Insurance Services (claimant), an insurance broker, challenging a decision made by the Financial Ombudsman Service (FOS) to accept jurisdiction over a complaint made against the claimant.

The claimant originally acted as a broker for a Directors and Officers (D&O) insurance policy taken out by Betbroker Ltd. Mr Lochner, founder, CEO and shareholder of Betbroker, benefitted from the D&O policy as an ‘insured person’. A claim was brought against Mr Lochner for allegedly dishonest misrepresentations made in the course of fund-raising on behalf of the Betbroker group. Litigation commenced in 2011 and Mr Lochner sought the protection of the D&O policy. The insurer rejected his claim contenting that it had not received any notice of a claim or circumstance likely to give rise to a claim pursuant to the policy terms. Mr Lochner claimed to have notified the claimant (the broker) of the potential claim before the policy expired but the claimant failed to pass that information on to the insurer. Consequently, Mr Lochner brought a complaint to the FOS against the claimant.

In its decision of May 3, 2013, the FOS found that it did have jurisdiction to investigate Mr Lochner’s complaint and he was an ‘eligible complainant’, in this case ‘a consumer’, for the purposes of the Dispute Resolution: Complaints (DISP) section of the Financial Services Handbook. The FOS reasoned that the claim under the D&O policy related to a legal action against Mr Lochner personally and that his complaint concerned a loss of policy benefits that would go to him as an individual rather than his former company. The FOS decided that Mr Lochner was complaining on his own behalf and was, therefore, acting outside his trade, business, or profession. As such, Mr Lochner satisfied the DISP definition of a consumer.

The High Court ruled that ‘this was a case where the FOS decision was one of precedent fact and, upon its being challenged in judicial review proceedings, it is a decision which the court has to take, rather than being limited to review the decision of FOS on conventional judicial review grounds’. In giving judgment, Wilkie J then went on to consider whether the FOS was wrong to conclude that Mr Lochner was ‘a consumer’ and found in favour of the claimant concluding that, as an issue of precedent fact, Mr Lochner did not fall within the compulsory jurisdiction of the FOS as he was not an eligible complainant.

This is an important case for a number of reasons. It determines that it is for the courts to determine whether eligibility is a question of precedent fact. Furthermore, the case reviews case law on who is a consumer and draws boundaries around the eligibility of natural persons seeking redress from the FOS in relation to D&O policies taken out for protection against liability in their role as directors.

For further information: R (on the application of Bluefin Insurance Services Ltd) v FOS [2014] EWHC 3413 (Admin).

Bate v Aviva Insurance UK Ltd [2014] EWCA Civ 334

The assured's premises, The Long House, which was insured by the defendant insurers, was badly damaged by fire on June 5, 2006. The Long House was a substantial 19th century house, which formed part of a small estate including a tack house and stables. In 2001 the assured obtained planning permission to convert The Long House into four dwellings, and to convert the tack house into a fifth dwelling known as The Stables, and the stables themselves into five garages. The Long House was to be extended to include a Coach House. Three of the garages were to belong to The Long House, one to The Stables and one to The Coach House. In February 2006 The Coach House was completed and given to the assured's daughter. At the time of the fire The Stables had been completed and was occupied by the assured's brother pending conversion work on The Long House, the assured was living in part of The Long House which was still being converted, the assured's daughter was living in The Coach House, the assured was conducting a loss adjusting business from one of The Long House garages and a company (Parthenon) owned by the assured had its base in The Coach House garage. The insurers sought to avoid the policy for non-disclosure and breach of condition. HHJ Mackie QC held as follows.

  1. The Coach House was not insured under the policy.
  2. The insurers' assertion that at the time of the proposal The Stables was being used in connection with a business was rejected, so there was no misrepresentation. The failure of the assured to disclose that business was being conducted from The Coach House garage was not a material fact, given the evidence that insurers generally did not ask questions about business on neighbouring land.
  3. The fact that the garage of The Long House was being used to conduct a loss adjusting business was not a matter which had induced the insurers, because their underwriting guide showed that they took no objection to a business being operated from insured premises. However, the fact that Parthenon was carrying on a building business from The Coach House garage was material: this was not a case in which the activities were being carried on from neighbouring land, because there was one single site.
  4. The fact that work was being carried out at The Coach House was, in the circumstances, material, given that The Coach House was in effect part of The Long House.
  5. The assured had been in breach of the duty of utmost good faith by implying, in respect of a previous fire at The Long House, that the fire had occurred at other premises and had been the fault of contractors. The fire had been at The Long House and the contractors were Parthenon, the assured's alter ego.
  6. There was breach of a condition precedent that works carried out at The Long House would be notified to the insurers.
  7. The insurers were not in breach of ICOB. Their rejection of the assured's claims had not been unreasonable. Accordingly, the assured did not have a cause of action under section 150 of the Financial Services and Markets Act 2000.

The assured appealed on points (5) and (7). The Court of Appeal dismissed the appeal. As to point (5), the judge had not erred by inferring inducement from materiality, because inducement had been proved. However, this was a case in which the materiality was so obvious that an inference of inducement would have been justified. As to point (7), the assured had used a fraudulent means or device by asserting that the matters in question had been disclosed, and in those circumstances ICOB did not protect the assured.    

For further information: Bate v Aviva Insurance UK Ltd [2014] EWCA Civ 334.

Clark v In Focus Asset Management & Tax Solutions Limited [2014] EWCA Civ 118

Complainants prohibited from launching court proceedings following FOS settlement, Court of Appeal rules

The Court of Appeal handed down its decision in Clark v In Focus Asset Management & Tax Solutions Limited [2014] EWCA Civ 118 on February 14, 2014. In a welcome outcome for financial services firms, the Court ruled that a complainant cannot accept financial redress from a firm via the Financial Ombudsman Service (FOS) and then launch subsequent court proceedings in an effort to ‘top up’ the compensation awarded where the claim is based upon the same complaint.

The Court of Appeal overturned the High Court’s ruling that a complainant could accept a FOS award and still pursue a civil claim for losses that exceed the Ombudsman’s award limit of £150,000.

Facts

Mr and Mrs Clark (the Clarks) brought a complaint to the FOS alleging that they had lost more than £300,000 through negligent investment advice provided by In Focus Asset Management & Tax Solutions Limited (In Focus). The Ombudsman Service awarded compensation of £100,000 (the limit it could award at the time) and recommended that the firm pay full compensation. The award was accepted by the Clarks subject to their right to claim more in court proceedings. In Focus paid the Clarks the sum of £100,000, but not the full recommended amount. Not satisfied by this, the Clarks subsequently launched court proceedings.

The claim was dismissed at first instance but on appeal to the High Court, Cranston J held that the Clarks causes of action did not merge in the Ombudsman’s award and the lower court had, therefore, been wrong to dismiss the proceedings. In Focus appealed to the Court of Appeal.

Decision

The Court of Appeal unanimously overturned the High Court’s decision. The Court allowed In Focus’s appeal having considered the relevant provisions of the Financial Services and Markets Act 2000 and the common law doctrine of res judicata (meaning ‘a matter already judged’) that precludes a person who has obtained a decision from one court or tribunal from bringing a claim before another court or tribunal for the same complaint.

In reaching its decision the Court of Appeal considered the effect of the Ombudsman’s power, under rules governing the procedure for complaints, to dismiss proceedings where there have been previous court proceedings, and whether the Ombudsman is a judicial tribunal.

Lady Justice Arden, giving the principal judgment, stated that, "Parliament did not manifest any intention that complainants to the Ombudsman Service should be in any different position from other claimants who have taken their claim for compensation through a tribunal for dispute resolution and obtained a decision, and then sought to litigate the same grievances again in the courts. They are not able to raise the same claims in court proceedings even if they could have recovered more in court proceedings. What they had to do to obtain this higher level of compensation was to reject the award and bring court proceedings for that amount."

Arden LJ went on to explain that in future cases res judicata will apply, regardless of amount of the FOS award, if the firm can show that the consumer’s complaint is based on a set of facts which constitutes the cause of action already determined by the FOS in a fair and reasonable manner.

Comment

Financial services firms can breathe a sigh of relief that complainants cannot seek further compensation in the courts having already obtained a FOS settlement. A decision to the contrary would have led to significant upheaval in the consumer redress process. The FOS was established to protect consumers by creating a more level playing field for resolving disputes. Allowing complainants to pursue further compensation through the courts would be in conflict with Parliament’s intention.

The Court of Appeal affirms the Ombudsman’s status as a judicial body and clarifies that financial redress awarded by the FOS is accepted by complainants as final settlement of that claim, regardless of the amount awarded. The current statutory FOS award cap of £150,000 will be the maximum amount that claimants can receive. If claimants wish seek more than the FOS settlement, they must reject the award and pursue their claim in the civil courts.

For insurers writing professional indemnity (PI) cover this is a particularly helpful decision. The potential for complainants to pursue compensation via the FOS and in court would have made assessing liability risk increasingly difficult and might have forced some PI providers to exit the market.

For further information: Clark v In Focus Asset Management & Tax Solutions Ltd [2014] EWCA Civ 118.

Bate v Aviva Insurance UK Ltd [2013] EWHC 1687 (Comm)

The assured’s premises, the Long House, which was insured by the defendant insurers, was badly damaged by fire on 5 June 2006. The Long House was a substantial nineteenth century house, which formed part of a small estate including a tack-house and stables.

In 2001 the assured obtained planning permission to convert the the Long House into four dwellings, and to convert the tack-house into a fifth dwelling known as The Stables, and the stables themselves into five garages. The Long House was to be extended to include a Coach House. Three of the garages were to belong to the Long House, one to The Stables and one to The Coach House.

In February 2006 the Coach House was completed and given to the assured’s daughter. At the time of the fire the Stables had been completed and was occupied by the assured’s brother pending conversion work on the Long House, the assured was living in part of the Long House which was still being converted, the assured’s daughter was living in the Coach House, the assured was conducting a loss adjusting business from one of the Long House garages and a company (Parthenon) owned by the assured had its base in the Coach House garage. The insurers sought to avoid the policy for non-disclosure and breach of condition.

HHJ Mackie QC held as follows.

  1. The Coach House was not insured under the policy.
  2. The insurers’ assertion that at the time of the proposal The Stables was being used in connection with a business was rejected, so there was no misrepresentation. The failure of the assured to disclose that business was being conducted from the Coach House garage was not a material fact, given the evidence that insurers generally did not ask questions about business on neighbouring land.
  3. The fact that the garage of the Long House was being used to conduct a loss adjusting business was not a matter which had induced the insurers, because their underwriting guide showed that they took no objection to a business being operated from insured premises. However, the fact that Parthenon was carrying on a building business from the Coach House garage was material: this was not a case in which the activities were being carried on from neighbouring land, because there was one single site.
  4. The fact that work was being carried out at the Coach House was, in the circumstances, material, given that the Coach House was in effect part of the Long House.
  5. The assured had been in breach of the duty of utmost good faith by implying, in respect of a previous fire at the Long House, that the fire had occurred at other premises and had been the fault of contractors. The fire had been at the Long House and the contractors were Parthenon, the assured’s alter ego.
  6. There was breach of a condition precedent that works carried out at the Long House would be notified to the insurers.
  7. The insurers were not in breach of ICOBS. Their rejection of the assured’s claims had not been unreasonable. Accordingly, the assured did not have a cause of action under section 150 of the Financial Services and Markets Act 2000.

For further information: Bate v Aviva Insurance UK Ltd [2013] EWHC 1687 (Comm)

Digital Satellite Warranty Cover Limited and another v Financial Services Authority [2013] UKSC 7

Extended warranty contracts were contracts of insurance and therefore subject to FSA regulation

The Supreme Court has unanimously dismissed an appeal by Digital Satellite Warranty Cover Limited and Satellite Services Limited (the appellants) finding that extended warranty contracts provided by the firms were contracts of insurance subject to regulation as insurance contracts under the UK regulatory regime. The appellants were therefore carrying out a regulated activity without Financial Services Authority (FSA) authorisation. As such, the FSA was entitled to seek the winding-up of the firms.

In reaching its decision, the Court rejected the appellants’ argument that the First Council Non-life Insurance Directive, as amended by the Council Directive (the Directive), precludes member states from regulating wider categories of insurance under their national law. The EU law relied upon was not intended for maximum harmonisation and, the Court concluded, does not prevent member states from regulating other categories of business in the interests of consumer protection.

As to whether the services provided by the appellants amounted to contracts of insurance under the law of England and Wales, the Court held the extended warranty agreements made in the course of its business fell within the risks identified in Class 16 (Miscellaneous Financial Loss) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO).

Whilst the judgment provides clarity on the ability of member states to expand categories of business beyond the scope of the Directive according to their national requirements, it has also raised some questions at European level, particularly in relation to passporting.

Key outcomes

Minimum harmonisation of the Directive

In considering the purpose of the EU law the Court concluded that the Directive, together with the 18 classes of business listed in the annex, aimed to “impose certain uniform principles of authorisation and regulation on insurance business in the standard classes”. The Directive did not, however, seek to impose such principles on any business falling outside those classes. In line with the principle of minimum harmonisation, the UK is free to extend the classes, or indeed introduce new classes, as it sees fit.

The appellants’ case rested on the argument that, in implementing the EU law into national legislation, member states were not entitled to redefine categories of business more broadly than in the Directive itself. Additionally, the appellants contended that any extension of the classes of business must be enacted separately, not in the same legislative provisions which transpose the Directive into national law. Lord Sumption rejected both arguments stating that, in his view, it is clear that the Directive “is concerned only to prescribe what kinds of business national law must regulate and not what other kinds of business it may regulate”.

Does the Directive cover benefits in kind insurance?

The appellants argued that an important feature of the extended warranty contracts was that they only agreed to provide “benefits in kind” (repair services or replacement goods) and there was no pecuniary obligation to the insured. They argued that the Directive did not regulate such contracts and only covered insurances with an obligation to pay money.

The Court did not reach a firm decision on whether the Directive excluded benefits in kind from the categories of regulated insurance. Lord Sumption stated that his “instinctive view” was that they were not excluded, but chose to dismiss the appeal on other grounds.

This whole issue arises because, in implementing the classes of business covered by the Directive into national law, the UK did not lift language directly from the Directive. Instead, the terms used to describe miscellaneous financial loss under Class 16 of the RAO is derived from the definition of “pecuniary loss insurance business” in section 83(6) of the Insurance Companies Act 1974 (now superseded by subsequent legislation). The Court notes that this definition was relevant to the provisions relating to authorisation under the domestic statutory scheme, which existed before the Directive was implemented. As a result, the RAO definition arguably goes beyond the Directive.

The next question before the Court was, therefore, whether the RAO covered repair/replace contracts (i.e. benefits in kind). Lord Sumption agreed with the judgment of Warren J in the Court of Appeal that a contract for repair or replacement does fall within Class 16(b), or if not (b) then (c), of the RAO. According to the Court, there is no material distinction between “a contract which provides only for repair or replacement and one which also provides for an indemnity for costs actually incurred by the insured”. The risk is the same in both cases; only the cover is different. Consequently, the warranties provided by the appellants can be categorised as contracts that prevented the insured from financial loss.

European issues — passporting

Particularly significant is Lord Sumption’s suggestion that passporting rights will not apply to firms carrying on a category of business which is regulated in one member state, but not considered insurance in another. So, for example, an insurer authorised in the UK to carry on an additional category of business not included in the 18 classes of the Directive “will not by virtue of his UK authorisation be entitled to carry on that particular category of business in another member state. He will have to submit himself to whatever rules the other member state may apply to it”. Lord Sumption goes on to explain that, in dealing with each others’ authorisations, member states pay no regard to any differences between the content of the classes in the Directive and the corresponding categories implemented at national level.

Our thoughts

This decision, whilst not particularly surprising, helpfully clarifies the Court’s position that the UK is free to regulate business beyond the scope of the Directive and, consequently, the FSA is entitled to take action against unauthorised firms providing extended warranties. However, the question remains whether benefits in kind insurance is excluded from Classes 1-17 of the Directive. Both the Court of Appeal and the Supreme Court instinctively feel that it is not, but only the CJEU can conclusively decide this point.

The judgment also calls into question the harmonisation of insurance regulation across the EU. The Directive was intended to impose uniform regulatory principles but with member states free to regulate beyond the mandatory categories, the potential exists for significant disparity across EU jurisdictions in terms of which insurance activities are regulated. Interestingly, it seems the European Commission is considering the need for a European insurance contract law and has recently instructed an expert group to examine whether the lack of harmonisation in EU contract law affects trade in insurance products. Given this scrutiny of insurance contracts at European level, the Commission might use the review as an opportunity to consider a pan-European definition of “contracts of insurance”.

For further information: Digital Satellite Warranty Cover Limited and another v Financial Services Authority [2013] UKSC 7.

Provident Insurance Plc v Financial Services Authority [2012] EWHC 1860 (Ch)

This was an application for directions under the Financial Services and Markets Act 2000 as to the transfer of insurance business from Provident (authorised in the UK) and Gateway (authorised in Gibraltar) to MMA (authorised in the UK), all three companies being in the same group. Henderson J held as follows:

  1. The court had jurisdiction to sanction a transfer from a Gibraltar company to a UK company: it resulted in the business transferred being carried on from an establishment of the transferee in an EEA State, in this case the UK (section 105(1)(b)); the scheme was not excluded under any of the classes set out in section 105(3) (section 105(1)(b)); and it satisfied one of the conditions in section 105(2), namely section 105(2)(c), namely “the whole or part of the business carried on in the United Kingdom by an authorised person who is neither a UK authorised person nor an EEA firm but who has permission to effect or carry out contracts of insurance … is to be transferred to another body” – Gateway was not an EEA firm but it did have permission to carry on business in the UK (section 105(1)(c)).
  2. It was appropriate to waive the disclosure requirements under the Financial Services and Markets Act 2000 (Control of Business Transfer) (Requirements on Applicants) Regulations 2001 in respect of: short-term policyholders; third party claimants where there were grounds for suspecting fraud; holders of dormant, lapsed, cancelled or avoided policies; policyholders who had used brokers, on the basis that there would be targeted newspaper notices relating to brand names.
  3. There would be no waiver of disclosure to policyholders who had purchased policies from one particular broker where policyholders may not have known who the insurer actually was. It was necessary to devise a notification mechanism which would minimise the risk of confusion.

For further information: Provident Insurance Plc v Financial Services Authority [2012] EWHC 1860 (Ch).

Digital Satellite Warranty Cover Ltd v The Financial Services Authority [2011] EWCA Civ 1413

Digital Satellite Warranty Cover Ltd (DSWC) offered extended warranties to consumers in relation to satellite television equipment, including dishes, digital boxes and cabling. The contracts issued by DSWC varied in form, but in most cases provided both breakdown and accidental damage cover. The Financial Services Authority (FSA) sought a winding up order on the ground that DSWC was carrying on insurance business without the authorisation required by the Financial Services and Markets Act 2000 (FSMA).

The Court of Appeal upheld the judgment of Warren J and granted the winding up order.

  1. It was not disputed that contracts providing benefits in kind were contracts of insurance.
  2. The EU Non-Life Directives, in listing 18 classes of business, did not intend to confine contracts covering benefits in kind to class 18 (assistance insurance).  A contract providing benefits in kind could fall within another class.
  3. The EU Non-Life Directives were in any event not designed to provide an exhaustive code, so that it was open to Member States to regulate classes of insurance not within the Directives.
  4. The present contracts fell within class 16(b) (risks of loss to the persons insured attributable to their incurring unforeseen expense) and 16(c) (risks not otherwise falling within class 16).

For further information: Digital Satellite Warranty Cover Ltd v The Financial Services Authority [2011] EWCA Civ 1413 (29 November 2011).