Case Preview: Digital Satellite Warranty Cover Ltd & Anor v Financial Services Authority
11 Tuesday Dec 2012
In 2010, the FSA petitioned for winding-up orders against two companies and a partnership, respectively: Digital Satellite Warranty Cover Ltd, Nationwide Digital Satellite Warranty Services Ltd and Freeman t/a Satellite Services (together the “Providers”). The orders were sought on the grounds that each of the Providers had been entering into and effecting “contracts of general insurance” – a regulated activity under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the “Activities Order”) – without authorisation . The FSA argued, therefore, that the Providers were in breach of the Financial Services and Markets Act 2000, s 19.
The Providers had been selling extended warranty cover plans (the “Contracts”) for satellite television equipment (such as digital boxes and satellite dishes) pursuant to which the Providers would repair or replace equipment which had broken down or malfunctioned. The Contracts did not, however, contain an obligation on the Providers to pay money to the customer in respect of any such equipment which had broken down or malfunctioned.
“Contracts of general insurance” are defined in Article 3.1 of the Activities Order as any contract falling within Part 1 of Schedule 1, which implements and reflects the classes of insurance contract contained in the Annex to EC Directive 73/239, as amended by EC Directive 84/641. Schedule 1 contains an extensive list of things to which contracts of insurance can apply. Para 16 deals with contracts of insurance against “miscellaneous financial loss”.
Summary of legal issues
There are two main legal issues. The first is whether a contract which provides cover for a risk in the form of non-monetary consideration can constitute an insurance contract, and if so, which class of “contract of general insurance” (as defined in Schedule 1), do the Contracts fall into?
The Providers case is that a contract of insurance has to provide for the payment of money and that a contract which provides the option for the provider to repair or replace, but does not contain an obligation to pay money, is not a contract of insurance at all.
The second issue relates to the Amending Directive, which introduced a new class of insurance contract to the Annex – class 18. According to the Amending Directive, certain benefits in kind insurance contracts may be covered by the Activities Order.
The Providers’ case is that the introduction of class 18 limits the regulation of benefits in kind insurance to the two types of contract now comprised in that class – a class to which the Contracts do not belong (the “benefits in kind argument”).
Decision of court of first instance
Sitting in the High Court, Warren J held that contracts of insurance were not confined to contracts for the payment of money and that there was no material distinction between a contract which provided for the repair or replacement of equipment only, and one which included an indemnity for costs incurred by the insured.
Warren J held that in each case the risk covered is essentially the same – it is the possibility of the equipment breaking down or malfunctioning; the inevitable conclusion of which is that the insured will need to incur costs in order to have working equipment. Accordingly, Warren J held that the Contracts fell within Schedule 1, para 16, on the basis that they provide cover for “miscellaneous financial loss”.
Warren J gave only cursory treatment to the benefits in kind argument and accordingly granted the winding-up orders.
Decision of Court of Appeal
On the appeal brought by Digital Satellite Warranty Cover Limited and Satellite Services, the benefits in kind argument was considered in greater depth. The court considered whether Schedule 1 should correctly be interpreted as more extensive than the Annex, as amended by the Amending Directive.
Patten LJ held that there was nothing in either the Annex or the Amending Directive to suggest that their purpose was the complete harmonisation – between EC and national law – of the regulation of insurance contracts. He held further that the Annex, as varied by the Amending Directive, was not intended to be all embracing, but should rightly be regarded as laying down a minimum regulatory framework, which does not restrict a national governments’ right to extend regulation. Accordingly, the Court of Appeal rejected the benefits in kind argument and agreed with the High Court decision that the Contracts provided cover for “miscellaneous financial loss”, thereby falling within Schedule 1, para 16, and were regulated: the appeal was dismissed.
The case before the Supreme Court
Digital Satellite Warranty Cover Limited and Satellite Services appealed to the Supreme Court, and the case is currently being heard by Lord Neuberger of Abbotsbury, Lady Hale of Richmond, Lord Clarke of Stone-cum-Ebony, Lord Wilson and Lord Sumption.