Digital Satellite Warranty Cover Ltd v The Financial Services Authority

A contract of insurance may provide a service or other benefit in kind, including repair or replacement, rather than payment of money. The European non-life insurance directives establish minimum regulatory requirements. They do not prevent domestic legislation from regulating a wider class of insurance, provided that additional regulation is consistent with and does not undermine that framework. Domestic provisions implementing a directive must be construed compatibly with it so far as possible, but conforming interpretation cannot become judicial law-making. A warranty contract covering repair or replacement after equipment breakdown may protect the customer against the financial loss of meeting the resulting expense. Such cover falls within class 16(b) of Part 1 of Schedule 1 to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 SI 2001/344.

The Financial Services Authority presented public-interest winding-up petitions against Digital Satellite Warranty Cover Ltd and Bernard Freeman and Michael Anthony John Sullivan, trading as Satellite Services. The High Court, Chancery Division, Companies Court, Warren J, made winding-up orders in proceedings numbered 4762 of 2010 and 9329 of 2010. The appellants appealed with leave.

The businesses supplied extended warranty plans for satellite television equipment. The principal question was whether contracts promising repair or replacement after breakdown or malfunction were contracts of general insurance within Article 3(1) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 SI 2001/344, particularly class 16(b) of Part 1 of Schedule 1. The appeals also raised the broader question whether benefits-in-kind insurance was regulated only where it fell within class 18.

1. Disposition. Patten LJ, with Aikens LJ and Maurice Kay LJ agreeing, dismissed both appeals. The winding-up orders stood because the repair-and-replacement obligation formed an irredeemable regulated core of each business.
2. Insurance contracts and benefits in kind. The court accepted the unchallenged conclusion that a contract of insurance is not confined to an obligation to pay money. It may promise a corresponding service, such as repair, replacement or assistance in kind. That approach was consistent with Prudential Insurance Co v Inland Revenue Commissioners [1904] 2 KB 658, Department of Trade & Industry v St Christopher Motorists Association Ltd [1974] 1 WLR 99 and Card Protection Plan v Customs and Excise Commissioners Case C-349/96.
3. Minimum harmonisation. The First Directive and the Amending Directive established a minimum regulatory framework for direct non-life insurance. They did not achieve complete harmonisation or prevent domestic regulation of a wider class of benefits-in-kind insurance, provided that the additional regulation was not inconsistent with or destructive of the framework.
4. Conforming interpretation. Under the Marleasing principle, domestic legislation implementing a directive must be interpreted, so far as possible, in the light of the directive’s wording and purpose. A non-natural construction may sometimes be adopted, but the process remains interpretation and cannot cross into judicial law-making.
5. Class 16(b). The risk covered by the warranties was essentially financial. Without the warranties, a customer whose equipment broke down would have to incur the cost of repair or replacement. The fact that the appellants supplied the benefit in kind, rather than reimbursing the cost, did not alter the character of the risk. The warranties therefore fell within class 16(b). It was unnecessary to decide whether they also fell within classes 8 or 9. The court declined to reopen the case on tax consequences or to make a reference to the Court of Justice; any application for permission to appeal or reference was left to the Supreme Court.

1. Court of Appeal (Civil Division): In [2011] EWCA Civ 1413, Patten LJ, Aikens LJ and Maurice Kay LJ dismissed the appeals and upheld the winding-up orders.
2. High Court of Justice, Chancery Division, Companies Court: Warren J made winding-up orders on the Financial Services Authority’s public-interest petitions in proceedings numbered 4762 of 2010 and 9329 of 2010. The appeals were brought with leave.