Re Digital Satellite Warranty Cover Ltd (Court of Appeal)

The Court of Appeal dismissed appeals against winding-up orders made on public interest petitions by the Financial Services Authority. The central legal question was whether contracts under which appellants provided extended-warranty repair or replacement cover for satellite equipment were "contracts of general insurance" within the meaning of Article 3(1) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the RAO) and thus a regulated activity under section 22(1) FSMA requiring authorisation under the general prohibition in section 19 FSMA. The court accepted the judge's conclusion that such contracts were contracts of insurance and, in particular, fell within class 16(b) (or, alternatively, class 16(c)) of Part 1 of Schedule 1 to the RAO because the insured risk was essentially the insured incurring unforeseen expense from breakdown or malfunction.

The court applied principles of statutory interpretation including the Marleasing conforming-interpretation principle in considering the relationship between the RAO and the First Directive (73/239/EEC) as amended by 84/641/EEC, and held that the RAO need be construed to give effect to the Directive so far as possible but is not confined by the Annex to the Directive where domestic law extends regulation. The judge's subsidiary findings — that the warranty contracts were properly characterised as contracts of insurance (benefits in kind being capable of amounting to insurance) and that any cover for accidental damage was not merely ancillary to breakdown cover — were also affirmed.

This appeal arose from public interest winding-up petitions brought by the Financial Services Authority (FSA) against Digital Satellite Warranty Cover Limited (DSWC) and against a partnership trading as Satellite Services. The FSA alleged that the appellants had carried on regulated insurance activity without authorisation because the extended-warranty products sold to customers were contracts of general insurance within Article 3(1) RAO.

Issues before the court:

• Whether the extended-warranty contracts were "contracts of insurance" for the purposes of the RAO;
• If so, into which class or classes in Part 1 of Schedule 1 to the RAO they fell (in particular class 16(b)/(c) for miscellaneous financial loss, or classes 8/9 for damage to property, or class 18 for assistance);
• How to construe the RAO in light of the First Directive (73/239/EEC) and the Amending Directive (84/641/EEC), especially the treatment of benefits in kind and whether benefits-in-kind insurance is confined to class 18; and
• Whether, having so classified the contracts, winding-up orders were properly made without giving the appellants an opportunity to exclude particular risks.

Facts and procedural posture:

• DSWC and the partnership sold extended-warranty plans by mailshots and telephone sales, promising repairs or replacement (including in many cases accidental damage and dish re-alignment) but not payment of money to customers; some exclusions applied to theft or intentional damage and certain perils.
• Warren J in the Chancery Division (Companies Court) held the contracts were contracts of insurance and fell at least within class 16(b) of Schedule 1 to the RAO; winding-up orders followed. The appellants obtained permission to appeal to the Court of Appeal.

Court's reasoning:

• The court accepted established definitions that an insurance contract can provide benefits in kind (repair or replacement) and is not limited to a payment of money, citing authorities and European jurisprudence (for example Card Protection Plan).
• On construction of the RAO, the court applied the Marleasing principle: domestic provisions should be read, so far as possible, consistently with the Directive, but the Directive laid down a minimum harmonisation framework and did not preclude member states (or domestic law) regulating a wider scope of benefits-in-kind insurance.
• The judge’s characterisation was endorsed: the risk covered by a repair-or-replace warranty is, in substance, the risk of the insured incurring unforeseen expense from breakdown or malfunction, and therefore the contracts fall within class 16(b) (and, if necessary, class 16(c)) of Schedule 1. The alternative submission that benefits-in-kind insurance is confined to class 18 was rejected on the facts and on interpretation.
• Because the repair/replacement obligations formed the core of the appellants’ businesses and those activities required authorisation, there was no answer to the FSA’s public interest winding-up petitions.

Relief sought: The appellants sought to resist winding-up orders and to argue the products were outside regulation; the FSA sought winding-up orders on public interest grounds for unauthorised regulated activity.

Appeal dismissed. The Court of Appeal agreed with Warren J that the extended-warranty contracts were contracts of general insurance and, on proper characterisation, fell within class 16(b) (or alternatively 16(c)) of Part 1 of Schedule 1 to the RAO because the risk insured was essentially the insured incurring unforeseen expense from breakdown or malfunction. The RAO should be read to give effect to the Directives so far as possible but does not preclude wider domestic regulation; therefore the winding-up orders were justified.

Appeal from Warren J sitting in the High Court of Justice, Chancery Division, Companies Court (Companies Court files Nos. 4762 of 2010 and 9329 of 2010). The Court of Appeal (Civil Division) delivered the judgment in [2011] EWCA Civ 1413 dismissing the appeals on 29 November 2011.