In the matter of Digital Satellite Warranty Cover Limited and another v Financial Services Authority

European Union non-life insurance directives prescribe the categories of business which national law must regulate. They do not prevent a member state from regulating additional or wider categories, nor dictate the legislative technique used to do so.

The principle of conforming construction therefore requires domestic insurance classes to be no narrower than the corresponding European classes. It does not require the exclusion of wider business which domestic law independently regulates. A warranty covering breakdown by providing repair or replacement in kind protects the insured against the expense otherwise required to obtain functioning equipment. It accordingly falls within miscellaneous financial loss insurance, despite imposing no obligation to pay money.

The Financial Services Authority sought public-interest winding-up orders against two businesses which sold extended warranties covering satellite television equipment. The businesses undertook to repair or replace malfunctioning equipment but did not promise monetary payments. The courts below proceeded on the unchallenged assumption that the warranties were contracts of insurance at common law.

Warren J ordered the businesses to be wound up: [2011] Bus LR 981. The Court of Appeal dismissed their appeal: [2011] EWCA Civ 1413; [2012] Bus LR 990.

The issue was whether the European non-life insurance directives prevented the United Kingdom from treating insurance providing benefits in kind as regulated miscellaneous financial loss insurance under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.

1. Appeal dismissed unanimously. Lord Sumption delivered the judgment, with which Lord Neuberger, Lady Hale, Lord Mance and Lord Clarke agreed.

2. The First Non-life Insurance Directive prescribed the kinds of direct non-life insurance business which national law was required to regulate in accordance with European Union law. It did not prescribe every kind of business which national law was permitted to regulate. Nor did it restrict the legislative form by which a member state could regulate business outside or wider than the Directive's standard classes. That conclusion followed from the Directive's limited harmonising purpose, its authorisation and solvency provisions, and the subsequent passporting regime.

3. Even assuming that Classes 1 to 17 of the Directive excluded insurance providing benefits in kind, the United Kingdom remained free to regulate insurance of the relevant descriptions whether benefits were provided in cash, in kind, or both. Such wider national regulation did not interfere with the Directive's authorisation, solvency or passporting arrangements.

4. The extended warranties fell within paragraph 16(b) of Schedule 1, Part I to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, or alternatively paragraph 16(c). Miscellaneous financial loss classes identify business by the nature of the insured risk. Breakdown inevitably requires expenditure if functioning equipment is to be restored. A contract which supplies the repair or replacement therefore protects against financial loss, although the insurer provides only benefits in kind.

5. The common law did not confine insurance to contracts promising money. Insurance could provide a monetary payment or a corresponding benefit. There was consequently no common-law basis for implying an exclusion of benefits in kind.

6. The principle of conforming construction required domestic legislation to conform, so far as possible, to mandatory European Union requirements. It required the domestic standard classes to be no narrower than their Directive counterparts. Because European Union law did not prohibit wider national regulation, whether the Order extended further was a question of domestic law.

7. The interpretative principle concerning statutory language borrowed from an instrument with an established meaning did not assist the appellants. The wording of domestic Class 16 came from the United Kingdom's pre-Directive regulatory legislation, rather than from the Directive's Annex. Questions concerning Classes 8 and 9 therefore did not arise.

1. United Kingdom Supreme Court: Dismissed the appeal unanimously: [2013] UKSC 7.
2. Court of Appeal: Dismissed the appeal from Warren J: [2011] EWCA Civ 1413; [2012] Bus LR 990.
3. High Court: Warren J rejected the appellants' construction of the regulatory scheme and ordered both appellants to be wound up: [2011] Bus LR 981.