Manchikalapati & Ors., R (on the application of) v Financial Services Compensation Scheme

Under the Financial Services Compensation Scheme, a valid claim may extend beyond the civil liability strictly arising under a protected insurance contract. The expression “in respect of” means “in connection with”. A further claim is compensable where it is sufficiently connected with, integral to, and part and parcel of the protected liability.

Litigation costs necessarily incurred to enforce benefits under a protected building guarantee policy, and interest on the resulting judgment debt, may therefore qualify. They need not themselves be liabilities owed under the insurance contract or protected claims under rule 9.1. Rule 20 governs calculation of the contractual civil liability; it does not exclude ancillary claims satisfying the required connection.

The claimants were leaseholders of a dangerously defective housing development covered by building guarantee insurance. They successfully litigated against the insurers and obtained judgment for remedial works, interest and costs. The insurers then entered administration.

The Financial Services Compensation Scheme accepted the claim for VAT but refused compensation for unpaid litigation costs and judgment interest. The claimants sought judicial review of that refusal, advancing three alternative grounds: that the claims were “in respect of” a protected claim; that they were protected claims; and that they were liabilities owed under the insurance contracts.

1. Ground 1 succeeded. The FSCS had misconstrued the governing rules by treating “in respect of” as meaning “for payment of”. In context, the phrase means “in connection with” and permits a claim extending beyond the contractual civil liability where there is a sufficient degree of connection.
2. The court adopted a two-stage analysis. First, identify the liability protected and compensable under the Scheme. Secondly, ask whether the additional claim is integral to, part and parcel of, or sufficiently connected with that protected liability. The latter is a Class 2 claim. The taxonomy was explanatory rather than an additional legal test.
3. The claimants’ litigation costs were necessarily incurred to recover the benefits due under the protected building guarantee policies. The judgment interest was similarly integrally linked to the protected liability. Both therefore fell within the scope of a valid claim.
4. The court treated Geologistics as persuasive assistance rather than binding authority because it concerned a different statute and scheme. Its reasoning supported the conclusion that costs beyond the protected liability may be recoverable where sufficiently connected with it.
5. The building guarantee policies were not compulsory by statute, but in practice were necessary to obtain mortgage finance and had features analogous to compulsory insurance. The PRA’s decision to provide 100 per cent cover for such policies informed the purpose and appropriate degree of protection, without creating limitless horizontal cover.
6. Grounds 2 and 3 failed. Costs and interest were not themselves protected claims under rule 9.1 and were not liabilities owed under the insurance contracts.
7. The FSCS decision dated 6 May 2021 was quashed for error of law. Declaratory relief was granted and the matter was remitted to the FSCS to reconsider the claims in accordance with the judgment.

This was a first-instance judicial review. Permission was granted on the papers by a Deputy High Court Judge on 16 November 2021. The Administrative Court quashed the FSCS decision and remitted the matter for reconsideration.