Whiteley Insurance Consultants (a/k As Kingfisher Travel Insurance Services), Re v

The liquidators applied for directions as to the treatment of claims arising from insurance policy documents unlawfully issued by Whiteley Insurance Consultants (WIC). The court held that, by issuing and performing policies without authority and by receiving and retaining premiums and paying claims, WIC acted as principal and was effecting and carrying out contracts of insurance. The remedy available to policyholders depends on when the policy documents were issued.

For policies issued in the Earlier Period (before 14 January 2005) the general prohibition in section 19 FSMA applied so that, by section 26 FSMA, such agreements were unenforceable against policyholders but policyholders are entitled to recover premiums and compensation under section 26(2). The court concluded that policyholders with claims arising out of events before liquidation should be treated as pursuing their claims under the policies, not seeking a return of premium. The court also concluded that the court should not, on the material before it, be expected to exercise the section 28 discretion to permit WIC to retain premiums.

For policies issued in the Later Period (from 14 January 2005) WIC had authorisation but contravened FSA requirements; section 20 FSMA applies so such contraventions do not render policies unenforceable and there is no statutory right to a return of premium comparable to section 26(2). Claims under section 20(3), and ordinary contract claims, are those available; unpaid or provable claims should be treated under the valuation rules for insurers in liquidation.

The Insurers (Winding-up) Rules 2001 apply to valuation of WIC's travel policies. Unexpired portions of policies expressed to run between definite dates should be valued by proportionate part of the premium under Schedule 1 paragraph 3(2)(a)(ii).

This is an application by the joint provisional/liquidators of Whiteley Insurance Consultants (a partnership) for directions under the Insolvency Act 1986 following discovery that WIC issued large numbers of travel insurance policies without authority. The FSA presented a petition to wind up WIC and provisional liquidators were appointed; WIC was subsequently wound up.

Nature of the application: directions as to the treatment of claims by persons issued with policy documents purportedly underwritten by named or unnamed underwriters when in fact there was no authority or no insurer; the liquidators asked how to treat claims for premiums, claims under the policies and the exercise of statutory discretions.

Issues framed:

• Whether WIC in issuing the unauthorised policies was itself carrying on insurance business and therefore the insurer (principal) liable on the contracts;
• What remedies and statutory consequences followed for policies issued before and after 14 January 2005, in particular the application of sections 19, 20, 26 and 28 FSMA;
• Whether the Insurers (Winding-up) Rules 2001 apply and how to value claims, including unexpired policy periods; and
• Whether the court should exercise the section 28 discretion so as to permit WIC to retain premiums.

Court's reasoning and conclusions: The court found as a matter of law that, because WIC received and retained premiums, handled claims and paid them, and in many cases knew no principal existed, it was effecting and carrying out contracts of insurance as principal and was liable on them. The temporal distinction in remedies turned on regulatory change effective 14 January 2005: before that date section 19/sections 26 and 28 apply; thereafter section 20 (contravention of FSA requirement by an authorised person) applies.

For the Earlier Period, the policies are unenforceable by WIC under section 26(1) but policyholders may recover premiums and compensation under section 26(2). The court concluded that claimants with pre-liquidation events should be treated as pursuing claims under the policies rather than seeking premiums back, and that the evidence did not support an assumption that the section 28(3) discretion would be exercised to allow WIC to retain premiums. The court noted limits to section 26(2)(b) (compensation) and that nominal claims for interest may not be provable in liquidation.

For the Later Period, policies are enforceable against WIC; there is no general statutory entitlement to repayment of premiums analogous to section 26(2) and claims should normally be dealt with as contract claims or, where appropriate, under section 20(3).

On valuation, the Insurers Rules apply to WIC and unexpired portions of policies "expressed to run from one definite date to another" are to be valued by proportionate part of the last premium paid (Schedule 1 paragraph 3(2)(a)(ii)). The court directed further interlocutory work and to hear submissions on the form of order and notice to policyholders.

The court determined the legal issues raised and gave directions. It held that WIC, by issuing and performing policies without authority and by receiving premiums and paying claims, acted as principal and was liable on those contracts. For policies issued before 14 January 2005 (the Earlier Period) section 26 FSMA renders agreements unenforceable against policyholders but entitles them to recover premiums and compensation; the court directed that policyholders with pre-liquidation events should be treated as pursuing policy claims rather than seeking premiums and concluded that, on the material before it, the section 28(3) discretion was unlikely to be exercised to allow WIC to retain premiums. For policies issued from 14 January 2005 (the Later Period) section 20 FSMA applies so policies were enforceable against WIC and there is no analogous statutory right to repayment of premiums; such claims are to be pursued under section 20(3) or ordinary contract remedies. The Insurers (Winding-up) Rules 2001 apply to valuation, and unexpired periods of definite-term travel policies are to be valued pro rata under Schedule 1 paragraph 3(2)(a)(ii). Directions were to be given as to the form of order and notice to policyholders.