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

Under section 6(5) of the Policyholders Protection Act 1975, the question is whether the liability under the policy is sufficiently connected with a liability which the policyholder was required to insure against. The connection is assessed by reference to the particular policy and the circumstances, as a matter of degree. Legal costs incurred by an insured company in defending an employee’s compulsory-insurance claim may therefore fall within the protection afforded by section 6(4), even where the defence is unsuccessful. The same applies to unrecovered costs of a successful defence. The statutory scheme primarily protects policyholders compelled to insure, rather than only third-party victims.

Geologistics Limited was insured by Independent Insurance Company Limited under a composite business liability policy, including employers’ liability cover. An employee brought a personal injury claim, which Geologistics defended through solicitors retained with Independent’s approval. Independent later entered provisional liquidation, and the Financial Services Compensation Scheme accepted liability for the employee’s damages, interest and costs but rejected liability for Geologistics’s pre-liquidation defence costs.

Geologistics sought judicial review and declaratory relief. The central issue was whether those defence costs arose, within section 6(5) of the Policyholders Protection Act 1975, in respect of a liability of the policyholder subject to compulsory insurance under section 1 of the Employers’ Liability (Compulsory Insurance) Act 1969.

1. The claim succeeded. The Scheme was liable to pay Geologistics’s proper pre-liquidation costs of defending the employee’s proceedings. The Scheme’s reasons for rejecting the claim were wrong in law.

2. Section 6(4) of the Policyholders Protection Act 1975 provided the starting point: it covered the full amount of the insurer’s liability to a policyholder under a policy within section 6. Section 6(5) limited that protection where the liability did not arise in respect of a policyholder liability subject to compulsory insurance.

3. The statutory purpose of section 6(5) was principally to protect policyholders who had been compelled by Parliament to obtain insurance. The victim-protection purpose of the Employers’ Liability (Compulsory Insurance) Act 1969 was distinct, although the two purposes were compatible.

4. The words “in respect of” required a sufficient connection between the insurer’s liability under the policy and the policyholder’s liability subject to compulsory insurance. Their application was not resolved by definition alone. The court had to consider the terms of the particular policy and the circumstances of the case, assessing the connection as a matter of degree. The general guidance discussed in Paterson v Chadwick [1974] 1 WLR 890, referring to Trustees Executors & Agency Co Ltd v Reilly [1941] VLR 110, was helpful in this contextual assessment.

5. The defence costs were incurred because of the very claim for which employers’ liability insurance was compulsory, and with the insurer’s approval. They were therefore sufficiently connected with the compulsory liability and formed part of the protection available under sections 6(4) and 6(5). Cover under unrelated sections of a composite policy, such as product liability or overseas employment liability not required by the 1969 Act, would not necessarily satisfy that connection.

6. Although not necessary to the immediate result, the judge considered that unrecovered costs incurred in a successful defence would likewise fall within section 6(5). Such a defence reduces or removes the insured’s prospective liability and correspondingly reduces the Scheme’s prospective exposure.