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

The Court of Appeal allowed the Financial Services Compensation Scheme's appeal against a High Court order quashing the FSCS decision refusing compensation for post-judgment interest and litigation costs unpaid by an insolvent successor insurer. Central legal principles concerned the construction of the Policyholder Protection Rules (PPR), in particular the meaning of "in respect of" in rule 3.1(2) and the definition of a "claim" in rule 1.2, the scope of a "protected claim" (rule 9.1) and what is owed "under" a contract of insurance. The court held that the PPR compensate claims for amounts owed under the terms of a policy (protected claims) and do not extend to amounts due pursuant to statute or court order (judgment interest) or to litigation costs that are not payable under the policy. The decision applied contextual and purposive construction of the rules, having regard to FSMA, the PRA's rule-making remit and related PPR provisions (notably rules 16–20, 6, 17, 19 and 20).

The claimants were leaseholders whose structural-defect insurance claims ultimately succeeded in the Court of Appeal and resulted in judgment for the policyholders. The insurer's liabilities were transferred and the successor insurer paid the judgment sum but later became insolvent without paying VAT, statutory interest on the judgment debt and substantial costs. The policyholders applied for compensation from the FSCS. The FSCS accepted liability for VAT but refused compensation for the unpaid judgment interest and litigation costs on the basis that those amounts were not claims "under" the insurance policies and so did not fall within the Policyholder Protection Rules (PPR).

The policyholders obtained permission for judicial review and succeeded before the Deputy High Court Judge, who quashed the FSCS Decision on the principal ground that the unpaid interest and costs were "in respect of" a protected claim within rule 3.1(2). The FSCS appealed.

The Court of Appeal considered three interrelated issues: (i) whether sums not themselves "protected claims" nevertheless fell within rule 3.1(2) because they were "in respect of" a protected claim; (ii) whether the definition of "claim" and thus "protected claim" could be read to include interest and costs not owed under the policy; and (iii) whether the unpaid interest and costs were owed "under" the contract of insurance. The court applied conventional principles of interpretation adapted to regulatory rules: focus on the words, read in context, purposive construction and attention to practical operation of the scheme, with regard to FSMA and the PRA's objectives.

The court concluded that (i) the PPR use "claim" and "protected claim" to mean claims for amounts owed under a contract of insurance and that the context of rules 16–20, including the calculation provisions in rules 19 and 20 and the limits in rule 17, demonstrate that compensation is to be measured by reference to benefits under the contract; (ii) the unpaid interest and litigation costs were not owed "under" the insurance contracts but arose by statute and court order, and therefore were not "protected claims"; and (iii) rule 3.1(2) does not extend to collateral liabilities or sums merely "connected with" a protected claim. The court allowed the appeal and reinstated the FSCS Decision. The judgment records sympathy for the policyholders but emphasises that the court must apply the rules as drafted and cannot extend cover to hard cases by interpretation.

Appeal allowed. The Court of Appeal held that the Policyholder Protection Rules compensate claims for amounts owed under a contract of insurance (protected claims) and do not extend to judgment interest or litigation costs that are not payable under the policy. The FSCS's decision refusing compensation for those items was reinstated because the PPR, read in their statutory and regulatory context (notably FSMA and rules 16–20), do not treat amounts due pursuant to statute or court order as "claims under" the policy or as claims "in respect of" a protected claim for the purpose relied on by the policyholders.

Appeal from the Administrative Court (Mr Dexter Dias KC sitting as a Deputy High Court Judge), whose decision quashing the FSCS's decision was reported at [2022] EWHC 2228 (Admin). The appeal was determined by the Court of Appeal in this judgment, [2023] EWCA Civ 1006.