Geologistics, R (On the application of) v Financial Services Compensation Scheme v

Where an insurer becomes insolvent, the full indemnity required by section 6(4) of the Policyholders Protection Act 1975 extends to liabilities under a compulsory-insurance policy which arise in respect of the policyholder’s liability subject to compulsory insurance.

Section 6(5) does not confine recovery to an established liability which the policyholder was itself legally required to insure. The phrase identifies the type of liability covered. In its context, it includes liabilities and costs connected with that compulsory liability. Accordingly, defence costs incurred with the insurer’s consent in relation to an employers’ liability claim were recoverable, as were the claimant’s costs. The exclusion prevents recovery for liabilities and costs referable only to non-compulsory cover within a composite policy.

Geologistics held a composite business-liability policy with Independent Insurance Company Ltd. The policy included compulsory employers’ liability cover and non-compulsory cover. It also indemnified both a claimant’s recoverable costs and defence costs incurred with the insurer’s written consent.

After Independent entered liquidation, the Financial Services Compensation Scheme paid the employee’s damages and costs but refused Geologistics’ pre-liquidation solicitors’ costs of defending the employee’s claim. Geologistics obtained judicial review before Davis J, who held that those defence costs were payable.

The Scheme appealed. The central issue was whether those defence costs arose in respect of a liability subject to compulsory insurance for the purposes of sections 6(4) and 6(5) of the Policyholders Protection Act 1975.

1. Appeal dismissed. Waller LJ, with whom Latham and Thorpe LJJ agreed, held that the Scheme was obliged to meet Geologistics’ pre-liquidation defence costs.

2. Section 6(4) of the Policyholders Protection Act 1975 requires payment of the full amount of an insolvent insurer’s liability to a policyholder under a policy within the section. Section 6(5) qualifies that duty only where the insurer’s liability arises otherwise than in respect of a policyholder liability subject to compulsory insurance.

3. The statutory purpose did not permit a construction which treated protection of third-party victims as the sole or primary purpose of section 6. The Act also protects policyholders who have been required to obtain insurance and pay premiums. The similarity between section 6(4) and section 8(2), save for the extent of indemnity and inclusion of corporate policyholders, supported that conclusion.

4. The phrase liability subject to compulsory insurance describes the category of liability covered by compulsory insurance. It does not require an established liability of the policyholder of the precise kind which statute compels it to insure. In this statutory context, in respect of includes a connection with, or relation to, that liability.

5. On that construction, the policy extension for a claimant’s costs and the extension for defence costs incurred with the insurer’s consent both concerned an employers’ liability claim. Defence costs could not be placed in a separate irrecoverable category merely because they were payable to solicitors and could arise even where damages were not awarded.

6. Section 6(5) instead prevents the Scheme from meeting liabilities, and costs incurred in respect of them, which concern only the non-compulsory elements of a composite policy. It did not exclude the defence costs in issue. The appeal was dismissed with costs; permission to appeal to the House of Lords was refused.

1. Court of Appeal (Civil Division): The Scheme’s appeal was dismissed: [2003] EWCA Civ 1905.

2. High Court, Administrative Court: Davis J, on 4 March 2003, held that the Scheme was liable for Geologistics’ pre-liquidation defence costs.