Re Digital Satellite Warranty Cover Ltd & Ors

A contract of insurance need not provide for payment of money. An obligation to repair or replace equipment may constitute insurance where performance provides a benefit corresponding to money’s worth, the insured event is uncertain and adverse, and the insured has an insurable interest.

Extended warranty contracts covering breakdown or malfunction alone may fall within paragraph 16 of Schedule 1 to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. Additional cover for risks such as accidental or storm damage may also place a contract within classes 8 or 9. Where a contract contains distinct insurance elements, the court should identify those elements and the relevant classes, subject to the qualification for ancillary risks. Persistent unauthorised insurance business may justify winding-up orders in the public interest.

The Financial Services Authority presented three related public-interest petitions seeking the winding-up of two companies and a partnership that sold extended warranty plans for Sky satellite television equipment.

None of the respondents was authorised under the Financial Services and Markets Act 2000. The central issue was whether their contracts constituted insurance business, and whether effecting or carrying out those contracts breached the general prohibition in section 19.

The contracts principally promised repair or replacement following breakdown or malfunction. Some documentation and sales conversations also indicated cover for accidental damage and other risks. The court had to determine whether such arrangements were contracts of insurance falling within Schedule 1 to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, and whether winding-up orders were appropriate.

1. Contracts of insurance. Applying 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 Medical Defence Union Ltd v Department of Trade [1980] 1 Ch 82, the judge held that insurance may provide services or other money’s worth rather than money. The contracts involved an uncertain and adverse event, an insurable interest, and a benefit consisting of repair or replacement.
2. The same conclusion applied under European Union law. The description of insurance in Card Protection Plan v Customs and Excise Commissioners Case C-349/96 [1999] 2 AC 601, and the House of Lords judgment reported at [2002] 1 AC 202, supported treating services in kind as capable of constituting insurance.
3. Classification. Following the substance-based approach in Re Sentinel Securities [1996] 1 WLR 316, In re Law Guarantee Trust and Accident Society Limited, Liverpool Mortgage Insurance Company’s Case [1914] 2 Ch 617 and Re Cavalier Insurance Co Ltd [1989] 2 Lloyd’s Rep 430, the contracts fell within class 16 of Schedule 1. Repair or replacement protects the insured against the financial loss involved in having non-functioning equipment, even where the insurer is not obliged to reimburse expenditure actually incurred.
4. Alternatively, the additional cover supplied by DSWC and the Partnership, including accidental and storm damage, constituted insurance within classes 8 or 9. The evidence supported the same conclusion for NDSWS in many, if not all, cases.
5. The court rejected a restrictive construction merely because breach of section 19 was criminal. Applying ordinary principles, and having regard to the consumer-protection purposes of FSMA, the Directives and the RAO, the respondents’ businesses required authorisation.
6. Where a contract contains several insurance elements, the court should identify the discrete elements and the classes into which they fall. The principal-object approach does not permit significant additional insurance cover to be disregarded as ancillary. An exception may apply where the additional risk is genuinely minor or ancillary in the sense contemplated by Part C of the Annex to the First Directive.
7. Each respondent had consistently conducted insurance business in breach of section 19. In light of the wholesale nature of the breach and the FSA’s warnings, winding-up orders were in the public interest. Orders were made on all three petitions.

First-instance decision. No prior appellate decision is stated in the judgment.