Digital Satellite Warranty Cover Ltd v The Financial Services Authority

This is an appeal with the leave of the judge against winding-up orders which were made by Warren J on the hearing of public interest petitions brought by the Financial Services Authority (“the FSA”). The appellants are Digital Satellite Warranty Cover Limited (“DSWC”) and Mr Bernard Freeman and Mr Michael Sullivan who traded in partnership as Satellite Services (“SS”). In each case the appellants are alleged to have entered into contracts with their customers which are contracts of general insurance within the meaning of Article 3(1) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 SI 2001/344 (“the RAO”). If this is correct then the business which they carried on was a regulated activity within the meaning of s.22(1) of the Financial Services and Markets Act 2000 (“FSMA”) for which the appellants were required to be authorised. Since DSWC has never been authorised to carry out insurance business of this kind and SS (not being a corporate body) is not capable of being authorised, it would therefore follow that they acted unlawfully in breach of the general prohibition contained in s.19 FSMA.

The sole issue therefore before the judge was whether their business consisted of the making of contracts of general insurance within the meaning of Article 3(1). Because Article 3 defines a contract of general insurance as any contract falling within Part 1 of Schedule 1 to the RAO, this involves a consideration of the contents of the relevant classes of insurance contracts contained in Part 1 and a question of characterisation in relation to the contracts which the appellants entered into and the risks which they undertook. This task is complicated by the fact that the RAO was intended to give effect to the First Council Directive 73/239/EEC (“the First Directive”) as amended by Council Directive 84/641/EEC (“the Amending Directive”) which dealt with the harmonisation or at least the co-ordination of the regulation of direct insurance.

This has raised the familiar question as to whether or to what extent the RAO has to be construed in a way which replicates the meaning and effect of the Directives and the more fundamental question of whether (on the premise that they should be treated as co-extensive) the contracts entered into by DSWC and SS are subject to the regulatory framework which now exists under those Directives.

There is no challenge to the judge’s summary of the evidence and I can take the statement of the relevant facts from his judgment:

“4.

The respondents have each carried on the business of providing extended warranty contracts in relation to satellite television dishes, digital boxes and associated equipment such as cabling. The warranty plans were in similar, but not identical, form for each of the respondents.

5.

Contracts with customers arose largely as a result of mail-shots to customers and telephone conversations between customers and salespersons (sometimes after cold calls). From databases which they had acquired, the respondents were able to target persons who had purchased Sky satellite systems and whose warranties (provided on purchase by the manufacturer or supplier) were shortly to expire.

6.

The evidence about the terms of the contracts entered into by customers comprises different elements. First, there are copies of mail-shots to potential customers. Secondly, there is a script which was available to the salesperson which could be used as a map for the “pitch” made to the customer. Thirdly, in a few cases, there is a transcript of the actual telephone call: a small number of examples were referred to at the hearing. Fourthly, there are more formal written conditions which purport to contain the terms on which customers contracted with the respondents.

7.

DSWC: An example of a mail-shot (including an application form for the extended warranty) is headed “IMPORTANT NOTICE REQUIRING URGENT ATTENTION” reminding the recipient that “Your sky digital satellite system warranty is due to expire. Why wait 3 days for a service call, when our unique same day service is available from only £6.49 per month”. The following contents of the mail-shot and the application form are to be noted:

a.

The recipient is told that, without a warranty, a minimum call-out fee of £72 would be incurred. The customer is invited to “restore peace of mind and extend your sky digital warranty with us…”.

b.

A highlighted box contains the words “Extend your warranty cover with unlimited call-outs” with “no repair bills, call-out charges or labour to pay”.

c.

The application form is headed “Sky Digital Satellite Coverplan”.

8.

A second mail-shot is described as a “FINAL REMINDER” to take up “this exclusive offer”. Introduced by the words “This is what your warranty will cover” is a box containing 6 bullet points the last of which read “Even covers accidental damage”.

9.

The script to which I have referred includes the following:

“Now I do appreciate what you're saying HOWEVER Not only do you get unlimited call outs, you are covered for all repairs including outside dish, set top box, cables and remote control.”

10.

Following such a telephone call, a customer taking out some form of cover would receive a document called a “Sky Digital Warranty Certificate” including the words “Fully Comprehensive Gold Option Benefits”. This included dish alignment and re-cabling and remote control unit cover. There is nothing in this document which would exclude cover in the case of accidental damage.

11.

None of the above material suggests that DSWC is under any obligation other than to repair, or if repair is impracticable, to replace the equipment covered. There is no obligation to pay money either in respect of repair or replacement costs in fact incurred by a customer or in place of fulfilment of the repair or replacement obligation.

12.

An early edition of the DSWC terms and conditions contains a few provisions which I should mention:

a.

Condition A under “What is provided” purports to provide that a contract upon those terms comes into being upon signing and return of the application form duly completed or by verbal acceptance (presumably in the telephone call with the salesperson). There is nothing to suggest that a customer would know of these terms and conditions during the course of the telephone call.

b.

Condition C refers to “repair or replace”. There is no obligation to meet any cost incurred by the customer.

c.

Condition F provides that where a remote control unit needs replacing, it must be sent back to the service department when a replacement will be provided. There is no exclusion in this provision for accidental damage.

d.

There is a section headed “What is not provided under your service contract with us”. Condition E under this heading excludes a case

“Where any damage to the Equipment has been caused by theft, attempted theft or intentionally, or the damage is caused by fire, explosion, dampness or liquid spillings or foreign bodies inside the Sky Box.”

e.

And under Condition J, cover is not provided where the fault existed before the application form was sent.

13.

A later version of the DSWC terms and conditions contains exclusions in similar terms.

14.

Mr Davis submits that, in cases where the script which I have described was followed in the course of a telephone conversation between the customer and the salesperson, a binding contract came into being. The terms of the contract in any individual case can, of course, only be ascertained from the contents of the conversation. Nonetheless, the form of the mail-shot and the script suggest that contracts may well have been entered into during the course of the telephone conversation the terms of which contracts would provide for more than repair or replacement in case of breakdown and would include at least accidental damage.

15.

At best from DSWC's point of view, contracts would be governed by one of the two sets of terms and conditions which I have referred to. As before, there is no obligation on DSWC to pay money to the customer in any circumstances; the contractual obligation is to repair or replace. However, the list of exclusions under the heading “What is not provided” demonstrates that the repair and replacement obligation is perfectly general but subject to express exclusions. There is no exclusion for accidental damage, even where it has been caused as the result of negligent conduct on the part of the customer, although intentional damage is excluded. Apparently, therefore, there would be cover for a control unit damaged by being accidentally trodden on, or for a skybox accidentally knocked to the floor and thereby damaged. There is no exclusion for storm damage which would be relevant to satellite dishes installed outside a building. Nor is there exclusion for many other types of damage for instance, albeit unlikely, as the result of rodents chewing them or, a less unlikely occurrence, water damage from a leaking roof or overflowing bath neither of which could be described as “liquid spillage” within the exclusion.

…..

19.

The Partnership: There does not appear in the bundle a copy of any mail-shot from the Partnership. But there is a “Satellite Service Warranty Certificate” in similar form to the DSWC certificate referring to “Fully Comprehensive Gold Option Benefits”. It contains an additional benefit “annual service on your satellite digital equipment” and states that “your cover is fully activated to ensure peace of mind”.

20.

There are some transcripts of telephone conversations between customers and salespersons. I deal with them under the Partnership heading although it is not entirely clear whether the salesperson was representing DSWC or the Partnership.

21.

In the first place, there are transcripts of two conversations with potential customers in November 2010. During the course of one conversation, the salesperson (identified only as Jonathan) says that he is from “Digital Satellite” and that Sky Digital (the supplier and person providing the original warranty) “don't actually do the insurance themselves”. During the course of the other conversation, the salesperson (identified only as Carl) said “We deal, we cover your dish, your cables, your mobile control, set-top box, twenty-four hour unlimited call-outs, and also includes accidental damage as well”.

22.

There is also a transcript of a conversation with an existing customer (Mrs L) concerning her direct debit. There are references by the salesperson (identified only as Danielle) to the customer's “policy” and to “cover” of the Sky box. Mrs L refers to telephoning to “insure my Sky package. I had it insured against breakdown and what have you.” It was not suggested to her that she was not insured against, for instance, accidental loss or storm damage or that she was covered only for precisely the same matters as the manufacturer's warranty covered. Mrs L asks “What actually will it cover me for? Just my Sky box?” to which Danielle responds “It will cover your box, your remote controls and also… Your cables on the inside of the flat”. I wonder what that last cover, in respect of cables, would be if the cover is restricted to repair and replacement in the same circumstances as falls within the manufacturer's warranty.

23.

The terms and conditions in relation to the Partnership are similar to the later version of the DSWC conditions with extra provisions to deal with the annual service to be provided. The exclusions relevant for present purposes are materially the same. The observations made in relation to the DSWC terms and conditions apply equally to the Partnership terms and conditions.”

The judge considered the question of authorisation on the assumption that the relevant contracts were governed by one of the two sets of conditions summarised in paragraph 15 of his judgment and I propose to do the same. On this basis, the liability of DSWC and SS extended to the repair and replacement of the equipment including in cases of accidental damage. Liability in cases of theft and intentional damage and fire is excluded but storm damage is not.

I shall come to the relevant provisions of the Directives and the RAO in a moment but it is obvious that a contract of general insurance as defined in Article 3 of the RAO must be a contract of insurance. This is made clear both by the terms of the Article 3 definition and by the contents of Part 1 of Schedule 1, each paragraph of which begins with the words “Contracts of insurance”. There is no definition of insurance or contract of insurance either in the amended First Directive or in the FSMA and the RAO and one is therefore left to apply the general law.

There was some argument before the judge as to whether the contracts under consideration were contracts of insurance at all. This was perhaps surprising in view of the fact that DSWC had successfully applied to be de-registered for VAT and to be registered for Insurance Premium Tax on the basis that it was carrying on an insurance business. But Mr Tamlyn submitted that the warranty plans entered into with the customers were no more than contracts to repair and (if necessary) replace the equipment. They imposed no obligation on DSWC or SS to pay any sum of money to the customer which, he said, was an almost invariable feature of any contract of insurance.

The judge rejected this argument and his conclusions on this issue are not challenged on this appeal. I mention the point therefore only because it may be relevant as background to the classification of risks which governs the issue of regulation. The most quoted definition of a contract of insurance is that given by Channell J in Prudential Insurance Co v Inland Revenue Commissioners [1904] 2 KB 658 at 664:

“A contract of insurance, then, must be a contract for the payment of a sum of money, or for some corresponding benefit such as the rebuilding of a house or the repairing of a ship, to become due on the happening of an event, which event must have some amount of uncertainty about it, and must be of a character more or less adverse to the interest of the person effecting the insurance.”

As the judge accepted, a contract of insurance is not therefore limited to an obligation to pay money upon the specified contingency but can include the provision of a service such as the repair or replacement of the insured’s property: see also Department of Trade & Industry v St Christopher Motorists Association Ltd [1974] 1 WLR 99 where the benefit comprised the provision of a driver if the insured was unable to drive due to disqualification or injury.

The position seems to be the same under European law. In Card Protection Plan v Customs and Excise Commissioners (Case C-349/96: [1999] 2 AC 601) the Court of Justice said that:

“17.

... the essentials of an insurance transaction are, as generally understood, that the insurer undertakes, in return for prior payment of a premium, to provide the insured, in the event of materialisation of the risk covered, with the service agreed when the contract was concluded.

18.

It is not essential that the service the insurer has undertaken to provide in the event of loss consists in the payment of a sum of money, as that service may also take the form of the provision of assistance in cash or in kind of the type listed in the annex Directive 73/239 as amended by Directive 84/641. There is no reason for the interpretation of the term 'insurance' to differ according to whether it appears in the Directive on insurance or in the Sixth Directive.”

The purpose of the First Directive, as its title confirms, was the co-ordination of the laws and regulations of member states relating to the taking up and pursuit of the business of direct insurance other than life assurance. The recitals confirm that this was to be achieved by the elimination of differences in national supervisory legislation and the promotion of a uniform classification of non-life business and insured risks for the purpose of specifying the classes of insurance subject to regulation and the solvency requirements for each such class.

The sixth and tenth recitals therefore state that:

“(6)

… it is necessary to extend supervision in each Member State to all the classes of insurance to which this Directive applies;….”

And that:

“(10)

… it is desirable to require a minimum guarantee fund related to the size of the risk in the classes undertaken, in order to ensure that undertakings possess adequate resources when they are set up and that in the subsequent course of business the solvency margin shall in no event fall below a minimum of security;”

Article 1 defines the scope of the First Directive by reference to the classes of insurance set out in the Annex to the Directive (“the Annex”). Various types of insurance are expressly excluded by Articles 2 and 3 along with the institutions specified in Article 4. The substantive provisions begin with Article 6. This provides that:

“Each Member State shall make the taking-up of the business of direct insurance in its territory subject to an official authorization.”

This has to be read in the context of Article 1 which makes it clear that “direct insurance” is shorthand for the types of direct insurance contained in the classes specified in the Annex and the point is put beyond doubt by Article 7(2) which states that:

“An authorisation shall be given for a particular class of insurance. It shall cover the entire class, unless the applicant desires to cover only part of the risks pertaining to such class, as listed in point A of the Annex.”

Insurance business for which authorisation is required is (in the case of the United Kingdom) to be conducted only by limited or unlimited companies and societies registered either under the Industrial and Provident Societies Acts or under the Friendly Societies Act: see Article 8(a). In each case the undertaking is to submit a scheme of operations which is to contain:

“…. the following particulars or proof concerning:

(a)

The nature of the risks which the undertaking proposes to cover; the general and special policy conditions which it proposes to use;

(b)

The tariffs which it is proposed to apply for each category of business;

(c)

The guiding principles as to reinsurance;

(d)

The items constituting the minimum guarantee fund;

(e)

Estimates relating to the expenses of installing the administrative services and the organization for securing business; the financial resources intended to cover them;

and in addition, for the first three financial years: (f) Estimates relating to expenses of management other than costs of installation, and in particular current general expenses and Commissions;

(g)

Estimates relating to premiums or contributions and to claims;

(h)

A forecast balance sheet;

(i)

Estimates relating to the financial resources intended to cover underwriting liabilities and the solvency margin.”

Article 16 specifies the method of calculating the solvency margin and Article 17(4) states that (subject to certain qualifications) one-third of the solvency margin shall constitute the guarantee fund.

Part A of the Annex contains a “classification of risks according to classes of insurance”. Some 17 classes are included. Classes 1 and 2 are fixed pecuniary benefits relating to accident and sickness. Classes 3-7 relate to damage to or loss of vehicles, rolling stock, aircraft, ships and goods in transit. Class 8 is damage to or loss of other types of property due to fire and natural forces. Class 9 covers other damage to property in class 8 due to hail or frost, theft or any event apart from those specified in class 8. Classes 10-13 relate to liability arising out of the use of motor vehicles, aircraft and ships and general liability. Class 14 relates to credit; class 15 to suretyship; and class 16 to miscellaneous financial loss. Class 17 relates to legal and litigation expenses.

Immediately prior to the implementation of the First Directive insurance business was regulated under the provisions of the Insurance Companies Act 1974 (“the 1974 Act”). This set out in s.1(1) the classes of insurance business which were relevant for the purposes of Part 1 of the Act. These included pecuniary loss insurance business which was defined in s.83(6) as meaning:

“… the business of effecting and carrying out contracts of insurance against any of the following risks, namely,—

(a)

risks of loss to the persons insured arising from the insolvency of debtors of theirs or from the failure (otherwise than through insolvency) of debtors of theirs to pay their debts when due;

(b)

risks of loss to the persons insured arising from their having to perform contracts of guarantee entered into by them;

(c)

risks of loss to the persons insured attributable to interruptions of the carrying on of business carried on by them or to reductions of the scope of businesses so carried on;

(d)

risks of loss to the persons insured attributable to them incurring unforeseen expense; and

(e)

risks neither falling within any of the foregoing paragraphs nor being of a kind such that the carrying on of the business of effecting and carrying out contracts of insurance against them constitutes the carrying on of insurance business of some other class.”

Section 12 prohibited the carrying on of insurance business in the s.1(1) classes unless it was by a body corporate authorised by the Secretary of State to carry on the relevant class of business or one of the other entities specified in s.2(1) and (2). Section 11 made it a criminal offence to carry on business in contravention of the Act.

The First Directive was implemented by the Insurance Companies (Classes of General Business) Regulations 1977 SI 1977/1352 (“the 1977 Regulations”) made under s.2 of the European Communities Act 1972. They amended the 1974 Act by specifying 17 classes of general business which were to constitute the classes of general business relevant for the purposes of Part 1 of the 1974 Act: see regulation 3(1). They therefore replaced the classes of insurance business set out in s.1(1) of that Act.

The 17 classes correspond to those set out in the Annex to the First Directive but the wording of class 16 is derived from s.83(1)(c)-(e) of the 1974 Act rather than class 16 in the Annex. It is the:

“Effecting and carrying out contracts of insurance against any of the following risks, namely-

(a)

risks of loss to the persons insured attributable to interruptions of the carrying on of business carried on by them or to reduction of the scope of business so carried out;

(b)

risks of loss to the persons insured attributable to their incurring unforeseen expense;

(c)

risks neither falling within head (a) or (b) above nor being of a kind such that the carrying on of the business of effecting and carrying out contracts of insurance against them constitutes the carrying on of insurance business of some other class.”

The new categories of insurance business substituted by the 1977 Regulations were not without their critics. Hobhouse J in Phoenix General Insurance Cov. Halvanon Insurance Co. Ltd [1988] 1 QB 216 at 227 said that they were in several respects baffling. But the Court of Appeal indicated that the correct method of allocating insurance contracts within the new classes of business was by identifying the nature of the risk insured. Kerr LJ (at page 262 B-F) said that:

“The wording of the Regulations appears to me to demonstrate that the allocation of particular insurances into their appropriate class of Regulations requires the need for an examination of the manner in which the particular risks are written. This is a question of the true construction of the wording of the cover (see per Lord Reid, at p. 468C) and the wording of the classes of the Regulations are directed to this question. In the context of the possibility of committing a criminal offence, by writing unauthorised insurance business, this interpretation is no doubt undesirable, artificial and unbusinesslike. And if it were not for the safeguard against prosecutions in section 81 of the Act of 1974 and the transitional provisions of the Regulations to which I come later, I should struggle even more strongly against this interpretation of the Regulations. But in his examination of the authorities Mr. Kentridge satisfied me that whenever it has been material to consider the nature of the precise interest or risk insured, its description in the contract is crucial. Thus, in Wilson v. Jones (1867) L.R. 2 Ex. 139, where a shareholder in a cable laying company took out cover on the successful laying and installation of a transatlantic cable of which part was subsequently lost at sea, it was held that he could recover because his insurance was upon the success of the adventure and not upon the cable itself, in which he had no insurable interest. Similarly in other well known marine insurance cases such as Joyce v. Kennard (1871) L.R. 7 Q.B. 78 and Cunard Steamship Co. Ltd. v. Marten [1902] 2 K.B. 624, where it was essential to determine whether the insurance was "on" goods or insurance against liability for goods, the wording of the cover and not the nature of the insurable interest was held to be decisive.

The conclusion to which I am driven, unfortunately from the point of view of what seems to me to be business sense, is that this is the approach which has to be adopted for the purpose of assigning the "nature of business" in Schedule 1 to its appropriate class of the Regulations.”

The English legislation was consolidated by the Insurance Companies Act 1982 (“the 1982 Act”) which retained in Part 1 of Schedule 2 the 17 classes in the form in which they appear in Schedule 1 to the 1977 Regulations. The 1982 Act also carried forward in s.2(5) a provision which first appeared in s.2(5) of the Insurance Companies Act 1981 as a qualification to the prohibition in s.2(1) on an unauthorised person carrying on insurance business in the United Kingdom. Section 2(5) of the 1982 Act provided that:

“Subsection (1) above shall not apply to general business consisting in the effecting and carrying out, by an insurance company that carries on no other insurance business, of contracts of such descriptions as may be prescribed, being contracts under which the benefits provided by the insurer are exclusively or primarily benefits in kind.”

So far as the researches of counsel could discover, the only contracts which were ever so prescribed were those providing for assistance in kind in the event of an accident or breakdown of a motor vehicle. This was contained in Article 23 of the Insurance Companies Regulations 1981 SI 1981/1654. These changes were made before the amendment of the First Directive but on 10^th December 1984 the Amending Directive replaced Article 1 of the First Directive with a new Article 1 which included within the activity of direct insurance contained in the amended First Directive a new assistance activity described in these terms:

“… the assistance provided for persons who get into difficulties while travelling, while away from home or while away from their permanent residence. It shall consist in undertaking, against the prior payment of a premium, to make aid immediately available to the beneficiary under an assistance contract where that person is in difficulties following the occurrence of a chance event, in the cases and under the conditions set out in the contract.

The aid may consist in the provision of benefits in cash or in kind. The provision of benefits in kind may also be effected by means of the staff and equipment of the person providing them.

The assistance activity does not cover servicing, maintenance, after-sales service or the mere indication or provision of aid as an intermediary.”

Article 14 therefore added a new class 18 to the Annex of “Assistance for persons who get into difficulties while travelling, while away from home or while away from their permanent residence” and Article 15 gave Member States the option to:

“….. make the provision of assistance to persons who get into difficulties in circumstances other than those referred to in Article 1 subject to the arrangements introduced by the First Directive. If a Member State makes use of this possibility it shall, for the purposes of applying these arrangements, treat such activity as if it were listed in class 18 in point A of the Annex to the First Directive without prejudice to point C thereof.

The preceding paragraph shall in no way affect the possibilities for classification laid down in the Annex to the First Directive for activities which obviously come under other classes…..”

Article 2 was also amended by adding as Article 2(3) a new exclusion from the Directive of roadside assistance in the event of an accident or breakdown involving a motor vehicle where the undertaking which provides the cover uses, in most circumstances, its own staff and takes the vehicle to the nearest or most appropriate location for repair. This exclusion does not, however, apply where the undertaking is otherwise subject to the First Directive because it conducts other types of insurance business. As Recital (6) explains, the only purpose of the change is to prevent undertakings from falling within the First Directive on the sole ground that they provide breakdown cover of this kind. The position therefore equates to the provision made for breakdown assistance under s.2(5) of the 1982 Act.

The Amending Directive was given domestic effect by the Insurance Companies (Assistance) Regulations 1987. They amended Part 1 of Schedule 2 to the 1982 Act by adding a new class 18 made up of the following types of business:

“Contracts of insurance providing either or both of the following benefits, namely—

(a)

assistance (whether in cash or in kind) for persons who get into difficulties while travelling, while away from home or while away from their permanent residence; or

(b)

assistance (whether in cash or in kind) for persons who get into difficulties otherwise than as mentioned in sub-paragraph (a).”

Class 18(b) was the result of the exercise of the option granted by Article 15 of the Amending Directive and would include the provision of breakdown assistance cover by an insurance company not excluded from regulation by the regulations made under s.2(5) of the 1982 Act.

The same 18 classes have been carried forward in Part 1 of Schedule 1 to the RAO. At the same time Article 12 of the RAO preserves the exception for the provision of breakdown assistance cover where the provider conducts no other insurance business.

The basis of the winding-up petitions is that the relevant contracts fell within one or more of the following classes of insurance set out in Schedule 1 to the RAO: namely classes 9 (damage to property); 16(b) and 16(c) (miscellaneous financial loss); and 18(b) (assistance). The judge held that a contract which merely provides for a repair and breakdown service in the event of breakdown or malfunction could only fall within class 16. It did not come within either class 8 or class 9 because it was not cover against damage at all.

His view was that the contracts fell within class 16(b) or (if he was wrong about that) class 16(c) because they provide cover against the risk of the insured incurring expense in the form of the cost of repair or replacement of the equipment. The fact that this is done by the appellants carrying out the repairs or providing a replacement rather than compensating for the loss by the payment of money is irrelevant:

“70.

In my judgment, a contract for repair or replacement only in the event of breakdown or malfunction which does not oblige the insurer to indemnify the insured for costs which the insured himself incurs does fall within paragraph (b) of class 16 Schedule 1 (or if not within paragraph (b), then within paragraph (c)). I do not consider that there is any material distinction when it comes to determining whether a contract falls within class 16 between a contract which provides only for repair or replacement and one which also provides an indemnity for costs actually incurred by the insured. In each case, the risk covered is essentially the same; it is the possibility of the equipment breaking down or malfunctioning. It is the cover, not the risk which is different in the two cases. If the equipment does break down or malfunction, then it is inevitable that the insured will need to incur cost if he is to have a set of working equipment: he will either have to pay for its repair or he will have to replace it. In my view, a contract which brings about the result which he would otherwise have to pay to achieve (ie having functioning equipment) can properly be categorised as a contract which protects him from financial loss. And this is so whether or not the insurer is obliged to pay the cost incurred by the insured if, in fact, the insured himself pays for the repair or replacement in the first instance. The contract which provides only for repair and replacement, and not for payment of any indemnity, therefore falls within paragraph (b) of class 16.

71.

That result is not, I consider, to give paragraph (b) of class 16 a strained or unnatural meaning. It would be a strange result, to my mind, if such a contract did not fall within paragraph (b) but one which provided, in addition, an obligation on the insurer to pay, in certain circumstances, the cost actually incurred by the insured would do so. Suppose, for example that the contract does contain such a payment obligation but also gives the insurer the option to effect the repair or replacement itself or at its own cost and so that the insured is not entitled to claim reimbursement unless the insurer has had the opportunity (following notification of a claim) to exercise its option. Such a contract would clearly be within paragraph (b); but, in substance, the risk covered is the same under both contracts, the risk of breakdown or malfunction.

72.

But if I am wrong in that, and a literal reading is to be adopted, so that a contract must, if it is to fall within paragraph (b), contain a provision which requires the insurer to indemnify the insured for costs which the latter has actually incurred, then a contract which provides only for repair or replacement falls, I consider, within paragraph (c). The risk covered, on this hypothesis, is not the risk of loss attributable to incurring unforeseeable expense (ie repair or replacement costs) but is the risk of having equipment which does not work. Equipment which does not work is inevitably going to be worth less than equipment which does work; and it may well be that the measure of the loss is no different, or not significantly different, from the cost or repair or of replacement if repair is impossible. Whatever the quantum of the loss, it is a financial loss.”

If he was wrong about the contracts falling within class 16 he went on to consider whether the inclusion in some contracts of an obligation to repair or replace the equipment in the event of damage was sufficient to bring those contracts within classes 8 or 9. This required the judge to decide what test to apply in order to determine whether a contract which contains different types of cover either falling into more than one class or conceivably consisting of both regulated and unregulated types of business is to be treated as governed by the class into which an identifiable part of the cover falls. This is less of a problem in cases where all the services provided under the contract are properly characterised as insurance and where the risks provided for all fall within one or more of the specified classes in the RAO. But it is much more critical in a case where only a limited part of the cover would (if it comprised the totality of the contract) be treated as regulated but the remainder falls outside what is defined as a contract of general insurance.

The FSA put forward a test of whether the contract contains an identifiable and distinct obligation that is in substance an insurance obligation. The existence of such an obligation was sufficient, they contended, to make the contract one of insurance and to determine the class of insurance it fell into. The appellants’ case was that a “principal object” test should be applied. If the regulated activity was merely subsidiary to the principal object of the contract it would not make the contract one of general insurance if it would not otherwise so qualify.

Warren J expressed certain reservations about the applicability of both tests but found it unnecessary to choose between them. At paragraph 87 of his judgment he said that:

“In my judgment, whatever test one applies, it is clear that the contracts effected by DSWC and the Partnership were insurance contracts within one of classes 8 and 9. The provision of cover for accidental loss or damage cannot be seen as so integral with or subsidiary to the provision of cover in the case of breakdown or malfunction as to result in the entire contract taking its character from the latter cover. This cover is not minor nor is it ancillary to the cover for breakdown or malfunction. Accordingly, even if the provision of cover only in the form of repair or replacement and only in the case of breakdown or malfunction does not require authorisation, the provision of cover in accordance with the standard terms and conditions does require authorisation. This conclusion, which I regard as clear, makes it unnecessary to consider whether customers generally or in particular cases, entered into binding contracts before being presented with the standard terms and conditions and, if so, the terms of such contracts. ”

The question whether the contracts which provide for repair and replacement in the event of accidental loss or damage fall within classes 8 and 9 is principally relevant to whether winding-up orders should have been made without giving the appellants an opportunity to exclude that type of risk from the contracts with their customers. The judge considered that winding-up orders were appropriate even if the contracts were only regulated by virtue of their inclusion in classes 8 and 9 and this exercise of discretion is challenged on this appeal even if the judge was otherwise right in his assessment of the application of classes 8 and 9.

The principal issue, however (and the one with which I propose to start), is whether the contracts were ones of general insurance within class 16. It is conceded by the appellants that if the judge was right about this, there can be no answer to a winding-up order because the agreements to repair and replace the customer’s equipment in the event of breakdown or malfunction comprises the irredeemable core of each of the appellant’s business.

This question is essentially one of statutory interpretation in relation to the RAO having regard to the risks covered by the relevant contracts. But it brings into play a wider argument about the intended treatment of benefits in kind insurance under the First Directive as amended and (it is said) therefore under the RAO and raises the question of whether insurance contracts which provide for benefits in kind as opposed to a financial indemnity fall into any of the classes of business other than class 18. The primary submission of the appellants is that the effect of the Amending Directive was to restrict the regulation of benefits in kind to the two types of contract now comprised in class 18. Since the cover in the present case is not assistance of the kind specified in class 18, it is argued that it is unregulated.

The judge gave this argument relatively cursory treatment because he was satisfied that the contracts fell within class 16 of the RAO. He accepted that if they were within class 16 of the Annex it must follow that they also came within class 16 of the RAO. But he considered that the scope of the Annex and the RAO were not necessarily co-extensive in each class and that a contract of insurance unregulated by the Annex could nonetheless fall within the corresponding class in the RAO. It was therefore unnecessary for him to express a concluded view about the treatment of benefits in kind under the First Directive. Had he taken a different view, he regarded the position under the First Directive as sufficiently uncertain as to require a reference to the Court of Justice.

I propose to begin by considering the overarching submission that insurance which provides exclusively for cover in the form of benefits in kind is only regulated if it falls within class 18. Ms Anderson QC, in her admirable submissions, starts with the proposition that pure benefits in kind insurance was not covered either by the First Directive or by the 1977 Regulations which gave effect to it. The First Directive and the Amending Directive have no direct effect and the governing provisions are therefore those contained in the RAO. But the appellants’ case is that the relevant provisions of the RAO have to be interpreted in accordance with the wording and purpose of the Directives and to meet the judge’s point about the scope of class 16 in the RAO they must establish that the new classes introduced by the 1977 Regulations were intended to be co-extensive.

It is therefore necessary at this point to make a slight digression in order to remind oneself about the relevant principles of conforming interpretation. These are set out in the decision of the Court of Justice in Marleasing SA v La Comercial Internacional de Alimentacion SA: C-106/89; [1990] ECR I-4135. The central theme of the decision is that national courts must construe the legislation of member states in a way which gives effect, so far as possible, to the purpose of the relevant directive. Difficulties of language may (and often do) exist in relation to the directives themselves but the conventional use of extensive recitals often provides a useful guide to what the directive was intended to do.

Even if the objectives are clear there are, of course, limits to what the process of interpretation can achieve in relation to national legislation.The judgment in Marleasing recognises this by the use of the qualification “as far as possible” and some of the difficulties were outlined by Arden LJ in her judgment in Revenue and Customs Commissioners v IDT Card Services Ireland Ltd[2006] EWCA Civ 29 in relation to the interpretation of the Value Added Tax Act 1994:

“[68] There are two different levels at which the court undertakes the task of interpretation in this case. The first level is that of the Sixth Directive, because, although that has no legal force as such in the United Kingdom, it is now well-established that the court must interpret domestic legislation in accordance with any applicable European directive. So the court has to satisfy itself as to the meaning of that underlying legislation. The second level at which the court must undertake the task of interpretation is at the level of the VATA 1994. This of course is domestic law. The former task must be carried out in accordance with the principles laid down by the Court of Justice, which is the final arbiter on what Community legislation means. The latter task, however, is conducted under the principles of domestic law but for the purpose not of interpreting the statute in the ordinary way but of fulfilling the requirement of European Union law that a national court should interpret a statute which implements a directive, so far as possible, in the light of the wording and purpose of that directive.

.....

[78] In both the cases cited above, the English courts had the advantage of a preliminary ruling from the Court of Justice. Where there is no preliminary ruling from the Court of Justice and difficulties arise because the case cannot be said to be acte clair, it may be necessary to seek a preliminary ruling from the Court of Justice. Customs & Excise seek a reference for a preliminary ruling if they are unsuccessful on this appeal. In Kobler v Austria [2004] QB 848, [2004] All ER (EC) 23, [2004] 2 WLR 976, the Court of Justice held that in special circumstances a state can be liable if the final court of appeal in a member state declines to refer a question of the interpretation of the EC treaties to the Court of Justice, and takes a wrong view of the EC law. This may lead to national courts taking a more restrictive view of acte clair in the future.

[79] The Court of Justice lays down the obligations of national courts with respect to European Union legislation. The Court of Justice has held that the national court's obligation is to interpret domestic legislation, so far as possible, in the light of the wording and the purpose of a directive in order to achieve the result pursued by the directive and thereby comply with Community obligations: see Marleasing SA v La Commercial Internacional de Alimenation SA at para 8. In this judgment, I refer to this obligation as the Marleasing principle. It is sometimes also referred to as the principle of conforming interpretation. The Court of Justice has held that the obligation may apply even if the relevant legislation was passed before the relevant Community legislation: Webb v EMO Air Cargo (UK) Ltd [1994] QB 718, [1994] 4 All ER 115, [1994] 3 WLR 941 and see S.Vogenauer, Richtlinienkonforme Auslegung Nationalen Rechts, (1997) ZEuP 158.

…..

[81] The approach described above makes it clear that, while under European Union law the member states are bound to interpret national legislation so far as possible in conformity with the wording and purpose of a directive, it is for domestic law to determine how far the domestic court can change other provisions of purely domestic law to fulfil this obligation. Thus in this situation the national court is not concerned to ask what interpretative approach is adopted by the courts of the other member states of the European Union. The question how far it can go under the guise of interpretation, and whether it can for instance adopt what would otherwise be regarded as a strained construction, is a matter for domestic law.

[82] Normally when construing domestic legislation, the English courts must find the meaning of the words which Parliament has used. In the context, however, of legislation which requires to be construed in a way which is compatible with European Union law or with the rights conferred by the European Convention on Human Rights, the English courts can adopt a construction which is not the natural one. The process, however, remains one of interpretation: the obligation imposed by the Court of Justice is only to interpret national law in conformity with a directive “so far as possible”. That raises the question when a process ceases to be that of legitimate interpretation and trespasses into the field of lawmaking that is the task of Parliament and not the courts.”

This is a difficult area of law particularly when the domestic legislation is arguably incompatible with the relevant European Union law and may require drastic surgery in order to comply. Marleasing recognised that there were limits to what could be achieved by a process of interpretation but these boundaries have been stretched in a UK context by the decisions of the House of Lords in cases such as Litster v Forth Dry Dock and Engineering Co Ltd[1990] 1 AC 546which sanctioned the reconstruction of domestic legislation in the name of conforming interpretation. It is, however, now clear that there are limits even to this process. In the analogous context of s.3 of the Human Rights Act 1998, the House of Lords has recognised that the courts are restricted to giving the relevant words a meaning which is at least compatible with the underlying thrust of the legislation: see Ghaidan v Godin-Mendoza [2004] 2 AC 557.

In this case the difficulties of interpretation are not that extreme. It is (or ought to be) common ground that the RAO includes all the classes of insurance to which the First Directive applies. The issue is whether it is more extensive than that. Class 16 in the RAO is, as explained earlier, a re-enactment in terms of s.83(1)(c)-(e) of the 1974 Act. The question which therefore arises is whether it was and remains effective to include benefits in kind insurance notwithstanding the terms of the First Directive and the amendments made to the Annex by the Amending Directive.

One can begin with the argument based on the new class 18. As mentioned earlier, Ms Anderson’s starting point is that benefits in kind insurance was not included in the First Directive or therefore in the classes of insurance in the RAO which merely replicate the provisions of the Annex. But it is unnecessary in my opinion to express any view about the treatment of benefits in kind insurance under the First Directive prior to its amendment because I accept that if the changes effected by the Amending Directive did limit the regulation of benefits in kind insurance to the classes in Article 18 then the RAO ought to be construed in a similar way except in so far as it preserves some different kind of treatment for that type of insurance. Obviously if the RAO repeats verbatim the classification contained in the Annex, one would expect the two sets of provisions to be interpreted similarly. On that premise, the argument is likely to be confined to class 16.

The unamended provisions of the First Directive are therefore principally relevant as providing the background to the introduction of class 18. Article 1 applied the directive to all the classes of insurance set out in the Annex subject to the exclusions contained in Article 2. These do not include benefits in kind insurance and there are no specific provisions in the First Directive which relate to that kind of insurance. By contrast, the provision of benefits in kind is expressly referred to in the Amending Directive. Recitals (1), (2), (3) and (8) state in terms that:

“Whereas the First Council Directive (73/239/EEC) of 4 July 1973 on the coordination of laws, regulations and administrative provisions relating to the taking-up and pursuit of the business of direct insurance other than life assurance (4), hereinafter referred to as the "First Directive", as amended by Directive 76/580/EEC (5), eliminated certain differences between the laws of Member States in order to facilitate the taking-up and pursuit of the above business;

Whereas considerable progress has been achieved in that area of business involving the provision of benefits in kind; whereas such benefits are governed by provisions which differ from one Member State to another; whereas those differences constitute a barrier to the exercise of the right of establishment;

Whereas, in order to eliminate that barrier to the right of establishment, it should be specified that an activity is not excluded from the application of the First Directive for the simple reason that it constitutes a benefit solely in kind or one for which the person providing it uses his own staff or equipment only; whereas, therefore such provision of assistance consisting in the promise of aid on the occurrence of a chance event should be covered by the above Directive, taking into account the special characteristics of such assistance;

…..

Whereas an undertaking offering assistance contracts must possess the means necessary for it to provide the benefits in kind which it offers within an appropriate period of time; whereas special provisions should be laid down for calculating the solvency margin and the minimum amount of the guarantee fund which such undertaking must possess;”

Article 1 in its amended form includes the assistance activity described in Article 1(2) (see paragraph 24 above) which can in terms consist of the provision of benefits in kind. The same applies to the extended form of assistance which can be regulated at the option of member states under Article 15 and now forms class 18(b) of the RAO.

The recitals recognise that, as a result of the First Directive, progress has been made in eliminating certain differences between the laws of member states so as to facilitate the taking up of business involving the provision of benefits in kind. The stated purpose of the Amending Directive is to eliminate the remaining differences which constitute a barrier to the exercise of the right of establishment and recital (3) seems to contemplate this being done by not excluding a type of non-life cover from the First Directive solely on the ground that it constitutes a benefit in kind.

If one stops there two things seem to emerge. The first is that benefits in kind insurance has already been dealt with by the provisions of the First Directive in relation to the elimination of the legal differences referred to (“in that area”). Absent anything else, this seems to me to indicate that benefits in kind cover was not excluded from the classes of insurance contained in the Annex if the risk it covered would otherwise fall within one or more of those classes. The second point is that the elimination of any remaining business is dealt with in recital (3) both in general and in specific terms. The general objective of not excluding insurance from the scope of the First Directive simply because it consists of the provision of benefits in kind is not achieved merely by the addition of the two classes of assistance to the Annex as class 18 unless there was already provision for most types of such insurance in the unamended Annex or it was thought that the assistance activities were the only type of benefits in kind insurance which existed.

The latter of these two alternatives seems unlikely and simply on the basis of the recitals one is left with the impression that the addition of the class 18 activities was intended to confirm that those specific types of activity which had hitherto received different treatment under national laws were to be dealt with as a recognised class of general insurance for regulatory purposes. It seems odd to exclude from regulation (or, to use the appellants’ approach, not to include in regulation) other types of benefits in kind insurance which, on the face of it, qualify under the first of the objectives set out in recital (3).

Ms Anderson does not, however, rely solely on the recitals. She submits that any doubts as to whether the regulation of benefits in kind contracts is to be limited under the First Directive to the class 18 activities are resolved by the substantive provisions of the Amending Directive. The First Directive required the insurer to submit a scheme of operations including details of the risks which it was prepared to cover and estimates of premiums and claims. Article 16(3) calculated the solvency margin on the basis of the higher of two bases: the ratio of premiums over claims or the ratio of claims over reserves. This was amended by Article 9 of the Amending Directive which replaced the claims paid basis of calculation for class 18 with one based on the cost of providing the assistance.

Two points are made about this. The first is that in the case of benefits in kind insurance a claims paid calculation makes little sense. The second is that the change to a cost of provision calculation is exclusive to class 18 which suggests that this is the only type of benefits in kind insurance included in the Annex following its amendment.

A similar point is made in relation to Article 9 which sets out what has to be included in the scheme of operations. This was amended to include a new Article 9(e) which provides for:

“estimates relating to the expenses of installing the administrative services and the organization for securing business ; the financial resources intended to cover them, and, where the risks to be covered are listed under No 18 in point A of the Annex, the resources available to the undertaking for providing the promised assistance;”

Again the change is specific to class 18.

These changes were implemented by the 1987 Regulations in relation to the RAO in terms which reflect the amended directive and which limit the changes to class 18. The claims paid basis for calculating the solvency margin remains unchanged for the other classes of insurance.

Ms Anderson submits that the overwhelming inference from these provisions is that benefits in kind insurance does not fall within the Annex and therefore the RAO unless it comes within class 18. The FSA does not contend on this appeal that it does and that seems to me to be correct. Whatever else it may be, the cover given to customers under the contracts in question in the event that their satellite equipment breaks down does not consist of assistance for persons who get into difficulties within the meaning of class 18(b). If therefore Ms Anderson is right about the effect of the First Directive it must follow that these contracts of insurance are only regulated if the RAO extends beyond the Annex and covers benefits in kind insurance under classes 16 or class 8 or 9.

The judge did not resolve these issues about the meaning and effect of the First Directive and the amendments to it. As mentioned earlier, he thought that they were sufficiently complex to require a reference. His decision that the contracts fell within class 16 of the RAO turns on his rejection of the submission that the provisions of the Annex were intended to effect a complete harmonization of non-life insurance regulation and therefore required the RAO to be construed consistently with that.

The appellants submit that the judge was wrong about this. They interpret recitals (2) and (3) of the Amending Directive as a statement that the elimination of remaining barriers to the exercise of rights of establishment is to be achieved by the regulation of class 18 benefits in kind insurance and nothing else. No other form of benefits in kind cover is included. For the reasons set out in paragraphs 48-49 above, I do not accept that. But there are other reasons which I think support the judge’s view that the classification in the amended Annex was not intended to be all embracing.

One can start with the First Directive in its unamended form. There is no doubt that its purpose was to eliminate certain differences which existed between national regulatory codes and to promote a uniform classification of non-life business. This is apparent from the second and third recitals to the First Directive. But when read in conjunction with recitals (6) and (10) quoted earlier, one is left with the strong impression that these are minimum levels of regulation which the First Directive intends to impose on a community-wide basis. There is certainly nothing in the recitals to the First Directive to suggest that regulation beyond the scope of these classes was intended to be proscribed.

Further support for this view can be found in the third non-life directive of 18^th June 1992 (92/49/EEC) which also amended the First Directive but not in a way which affects the Annex. This refers in recital (3) to the approach of the three non-life directives being to bring about “such harmonization as is essential, necessary and sufficient to achieve the mutual recognition of authorizations and prudential control systems” and in recital (8) to the third directive defining “minimum standards” but leaving a member state to “lay down stricter rules for insurance undertakings authorised by its own competent authorities”. Recital (18) also states that:

“Whereas the harmonization of insurance contract law is not a prior condition for the achievement of the internal market in insurance; whereas, therefore, the opportunity afforded to the Member States of imposing the application of their law to insurance contracts covering risks situated within their territories is likely to provide adequate safeguards for policyholders who require special protection;”

This is general language but it is only consistent in my view with each member state retaining the right to pass regulatory measures beyond those contained in the directives provided that they are not inconsistent with and do not undermine the level of control prescribed by the three directives. One important aspect of this is the absence of any attempt to lay down a universal definition of what constitutes a contract of insurance. The inclusion in the English law definition of insurance of contracts under which benefits in kind are provided to the insured remains unaffected and the RAO has therefore to be read in that context.

My conclusion therefore is that there is nothing in either the First Directive or, for that matter, in the Amending Directive to indicate that their purpose was to achieve the complete harmonization of the regulation of non-life contracts of insurance. The changes made to Article 16 of the First Directive in relation to the calculation of the solvency margin for class 18 insurers have, I think, to be looked at in the context of the inclusion of that type of business in the regulatory framework under the Directive. It does not follow that no other form of benefits in kind insurance can be accommodated. As Mr Davis QC pointed out, the capital resources requirements of other types of benefit in kind business can be calculated by valuing the benefits provided even where those benefits consist of services rather than cash.

I therefore consider that the judge was right to regard those provisions as consequential on the introduction of class 18 contracts into the Annex and not a confirmation that only benefits in kind insurance of that description come within the First Directive. But, like him, I prefer to express no concluded view on the matter. For the reasons I have given, the non-life directives should be regarded as laying down a minimum regulatory framework which does not exclude the right of national governments to extend regulation to a wider class of benefits in kind insurance. It follows that the application of the Marleasing principles of interpretation can go no further than to require the RAO to be construed so as to import the degree of regulation required under the Annex. They do not exclude anything which goes beyond that.

On that basis I turn to the question whether the contracts fall within class 16 of the RAO. I have already set out the judge’s reasons for concluding that they did. The essence of his reasoning is that the risk covered by a contract which provides for repair and replacement of the equipment and one which provides an indemnity for the costs involved is essentially the same. In both cases the risk is the breakdown of the equipment which will lead to expense on the part of the insured. The risk is therefore one of financial loss attributable to their incurring unforeseen expense (class 16(b)) or other risks (class (c)).

Ms Anderson submits that this analysis is wrong. The contracts provided for the repair or replacement of the equipment. On their true construction the risk was not loss attributable to the customers incurring unforeseen expense but the risk of breakdown or malfunction in the equipment. There is no agreement to indemnify the customers in respect of any financial loss. Neither class 16(b) nor class 16(c) can therefore apply.

The FSA’s response to this argument proceeds at two levels. Their first submission is that the RAO provides a complete code for the regulation of non-life business which encompasses every contract of insurance. As a corollary to this they also contend that class 16(c) is a catch-all provision which was intended to apply to any contracts of general insurance which do not fall within one of the other classes or within classes 16(a) or (b). It is not limited to contracts which cover the risk of financial loss.

Support for this view can be found in the current edition of MacGillivray on Insurance Law where the authors make the point that although a contract of insurance is not defined under the RAO, the function of Art 3 is to define the perimeters of regulation and no contract of insurance as such is excluded from the definition. My own view is that this is probably right and that class 16 (which differs significantly from class 16 of the Annex) was intended to be the catch-all which the FSA contends for and is not limited to residual cases of financial loss. But it is not necessary to go that far because I think that the judge was right for the reasons which he gave about the construction of the contracts in this case.

Although the cover provided for the risk of malfunction to be dealt with by the repair or replacement of the equipment, that risk was essentially a financial one. Without the cover the insured would be exposed to the cost of remedying the defect and, as Mr Davis pointed out, this risk of financial loss was the basis of the promotional material for the warranty scheme.

I therefore consider that the judge was right to hold that the warranties fell within class 16(b) and I would dismiss the appeal on that basis. There is no answer to the winding-up orders which were made. In these circumstances, it is unnecessary to consider the alternative argument that some of the warranties also fell within classes 8 or 9 and I propose to say nothing more about that.

After this judgment had been prepared and circulated for corrections in the usual way we received further submissions from the appellants in which they requested us to re-consider our judgments to take account of the possible tax consequences of our decision. In particular, it is said that the current exemption for insurance under the Sixth Directive would be compromised by a finding that there are categories of insurance business which fall within the RAO but are outside the provisions of the Annex.

I do not propose to express any view upon this nor do I think that we should re-convene the court to hear further submissions on the point. The appellants did not rely upon any of these points in support of their construction of the relevant directives or of the RAO and their introduction now would necessitate extensive further argument on points which lie outside the regulatory issues we have been asked to consider.

In the alternative, we are pressed either to give permission to appeal to the Supreme Court or to consider for the first time the making of a reference to the Court of Justice. Again, I think we should decline to do either. It is not clear to me what issue a reference would be directed to and I think this is a case in which we should leave the Supreme Court to consider whether to grant permission. Any question of a reference will then be a matter for them.

I agree.

I also agree.