Geologistics Ltd, R (on the application of) v Financial Services Compensation Scheme

On 17th June 2001, the Independent Insurance Company Limited (which I will call "Independent") was placed into provisional liquidation, provisional liquidators being appointed on that date. The question now raised in the present claim comes to this: is the Financial Services Compensation Scheme (the successor to the Policyholders Protection Board) liable, on the true construction of section 6(5) of the Policyholders Protection Act 1975, to bear the costs of solicitors, retained by a limited liability company which had taken out the relevant insurance with Independent, incurred in the unsuccessful defence of a claim for damages for personal injuries brought by an employee of that insured company?

The background facts are these. The claimant is a company called Geologistics Limited, formerly LEP International Limited. Its business includes that of global integrated logistics and transportation management services. At all relevant times it was insured in respect of, amongst other things, employers' liability by Independent. On 4th January 1997, an employee of the claimant called Mr Froggatt, who was employed as a cargo handler at the claimant's premises in Manchester, suffered an injury whilst at work. A bar weighing over one ton fell on Mr Froggatt's foot, causing him injury. He commenced proceedings for damages in the Bolton County Court on 6th July 1998. The claim for damages included a claim for loss of earnings. The claimant notified its insurers, being Independent. At that time, Independent used an informal panel of three firms of solicitors for handling claims of such a kind, being Davies Arnold Cooper (which I will call "DAC"); Berrymans Lace Mawer; and Davies Lavery. In the event, DAC were retained by Independent on behalf of the claimant on around 21st July 1998.

The Policy in question taken out by the claimant with Independent was a composite policy. Thus it did not cover solely employers' liability but extended to various other areas of liability as well. The Policy, which I gather was Independent's standard form of policy in this context, is entitled on the cover sheet "Business Liability". It provided on page 3 that Independent would indemnify the insured within the terms, exceptions and conditions of the Policy against the events set out in the operative sections and occurring in connection with the business for the relevant period of insurance. There then followed several pages of general policy definitions, exceptions and conditions. General policy conditions 7 and 8 on page 7 of the Policy read as follows:

Section 1 of the Business Policy is entitled Employers' Liability. The cover is stated in these terms:

Section 2 is entitled Public Liability. The cover there provided is this:

Section 3 indeed is entitled Products Liability. The cover there provided is:

After those sections, there is then a series of "General Policy Extensions", so-called. Paragraphs 1 and 2 of the General Policy Extensions provide as follows:

The claim brought by Mr Froggatt was defended by the claimant, DAC acting on its behalf. As was contemplated by the General Policy Conditions and as is the invariable practice in such cases, the defence in substance was conducted by the solicitors in close liaison with Independent, albeit of course DAC was acting on behalf of the claimant. It is accepted, on the facts of this particular case and on the wording of this particular Business Policy, that the claimant had a liability to pay DAC's legal costs and that such liability fell within the ambit of this particular Policy.

In due course, liability to Mr Froggatt was admitted. Quantum, however, was not. There was a trial at the Manchester County Court and in the event judgment was given in favour of Mr Froggatt on 7th February 2001 for damages in the sum of £110,650.87, including interest, with costs. It would appear that that award was very much higher than had been anticipated. The claimant accordingly appealed. Independent quite soon thereafter was placed in provisional liquidation, as I have mentioned. The appeal thereafter was pursued with the consent of Independent, by its provisional liquidators. In the event, the appeal was dismissed with costs by judgment of the Court of Appeal given on 17th April 2002.

The costs of DAC in acting in the proceedings up until 17th June 2001 -- that is, the date of the provisional liquidation -- are put at £15,710.55. The costs of DAC in acting after that date amounted, so I was told, to £8,984.81. I was told that the provisional liquidators have discharged the latter costs. As to DAC's costs of the pre-liquidation period, the claimant itself has, I was told, discharged those costs.

The claimant considered that those costs for which it was liable fell within the ambit of the Policy. That, as I have said, is not disputed in this particular case. The claimant further considered that, Independent having been placed in insolvent liquidation, the claimant was entitled to recover these costs from the Financial Services Compensation Scheme (which I will call "the Scheme") under the provisions of the Policyholders Protection Act 1975, as amended. The claimant requested payment from the Scheme accordingly, and correspondence ensued. By a reasoned decision letter of 25th July 2002 the Scheme denied that it had any legal obligation to pay such legal costs incurred by the claimant through DAC in its unsuccessful conduct of the defence of the proceedings prior to 17th June 2001. The claimant was aggrieved by such decision and commenced these proceedings, by way of claim form for judicial review, issued on 22nd August 2002. By its claim form the claimant seeks declaratory relief as to its claimed entitlement to be paid such costs by the Scheme and also seeks an order for payment.

Three points should be mentioned at this stage.

I turn then to the statutory background. By virtue of the Employers' Liability (Compulsory Insurance) Act 1969 ("the 1969 Act"), insurance against liability for employees, broadly speaking, is made mandatory. As the title to that Act states, it is:

Section 1 of the 1969 Act provides, in the relevant respects, as follows:

It follows, of course, that the claimant was required by statute to insure against liability for bodily injury or disease sustained by its employees in accordance with section 1 of the 1969 Act. It can be seen that the Business Policy which the claimant in fact took out provided significantly more extensive cover than that required by the 1969 Act itself. Indeed, even in the section of the cover relating to employers' liability, the claimant obtained cover more extensive than that required by section 1 of the 1969 Act; for example, in that the cover provided under the Business Policy extended to liability for injury caused to an employee whilst temporarily working outside Great Britain.

A few years after the introduction of the 1969 Act, and in the wake of some highly publicised collapses of certain insurance companies, the Policyholders Protection Act 1975 was passed. The long title to that Act reads as follows:

It is in my judgment clear from those provisions, including the long title, what the policy behind the 1975 Act essentially was. It was to provide a degree of financial protection to those policyholders exposed by the collapse of insurance companies (which are, after all, meant to be authorised and regulated).

Mr Edelman and Mr Rory Phillips QC (who, with Mr Fordham, appeared for the Scheme) were content that I should look, for the purposes of assessing the purpose behind the 1975 Act, at extracts from Hansard with regard to the Parliamentary debate on the Bill. I am inclined to agree with Mr Phillips that these extracts add little, if anything, to matters for present purposes. At all events, the statements of Lord Beswick, the Minister of State, Department of Industry, in the House of Lords, and of Mr Peter Shore MP, President of the Board of Trade, in the House of Commons, in effect simply confirm what is evident from the Act itself as to its purpose.

Of central relevance to the present claim are subsequent sections of the 1975 Act (as amended) and in particular section 6. Section 5(4) of the Act had provided, amongst other things, a definition by reference to the phrase "a company in liquidation" which unquestionably extends to Independent in the light of its provisional liquidation. There then follow sections 6, 7 and 8:

I should also make reference to section 15 of the 1975 Act:

I might add that the word "policy holder" is defined by section 32(2) of the 1975 Act by reference to the definition contained in section 96 of the Insurance Companies Act 1982, with a further refinement added by subsection 2(z)(a) by amendment taking effect from 15th April 2000.

One obvious feature of the 1975 Act, as appears from the sections above cited, is the distinction it draws between private policy holders -- that is to say, broadly speaking, individuals -- and other policy holders. The overall reach of the 1975 Act is, for the most part, directed at individual policyholders, as is illustrated by section 8 itself. That distinction also appears in section 6.

In section 6(4), a protection is given in wide terms to the generality of policy holders, albeit, as subsection (4) is careful expressly to state, subject to the provisions there identified. One of those provisions is subsection (5). That clearly operates to delimit the prima facie width of subsection (4) by providing that it does not apply "by reference to any liability of a company in liquidation under the terms of a policy to which this section applies arising otherwise than in respect of a liability of the policyholder which is a liability subject to compulsory insurance". If that delimitation applies, then subsection (6) takes effect in the case of a private policyholder. The drafting technique of first setting out a wide provision and then qualifying it by a limiting provision was and is in fact quite a common one and I do not myself think -- contrary perhaps to some of the submissions of Mr Edelman -- that any very great significance attaches to the use of such technique in this statute.

My attention was drawn not only to the provisions of the 1969 Act, which of course is one of the statutes expressly referred to in section 6(1) of the 1975 Act, but also to the other statutes there specifically mentioned. Thus, in the relevant respects, the Riding Establishments Act 1964, as amended by the Riding Establishments Act 1970, provides as follows:

Then I was referred to the Nuclear Installations Act 1965. That provides for a licence to be obtained in respect of a nuclear site. Section 7 of that Act sets out the duties of the licensee of a licensed site, such duties, amongst other things, requiring the licensee to secure that no occurrence involving nuclear matter, as mentioned in that section, causes injury to any person or damage to any property, and so on. In section 19 of that Act it is provided that, where a nuclear site licence has been granted in respect of any site, the licensee must make such provision (either by insurance or by some other means) as the Minister with the consent of the Treasury may approve.

Then I was referred to the Road Traffic legislation and in particular to the provisions of section 145 of the Road Traffic Act 1972 (which was itself in the relevant respects replaced by section 145 of the Road Traffic Act 1988, which latter statute was a consolidating statute, albeit with amendments) and to the provisions of section 149 of that Act. These read as follows in the relevant respects:

It is plain, I think, from each of these four statutes that the underlying policy of Parliament was to provide a degree of protection to third party victims. That is the purpose of that legislation in those respects.

I turn then to the respective submissions. Mr Edelman's submissions can be summarised in this way. He starts from the position that the Business Policy here taken out by the claimant satisfied in the relevant respects (albeit going much wider) the requirements of section 1 of the 1969 Act. That is obviously right. He goes on to submit that, simply by reference to section 6(4) of the 1975 Act, the Scheme would be liable to secure payment of the "full amount" of the liability of Independent towards the claimant as being within the class of "any policyholder" under the terms of the Policy. The full amount, he submits, prospectively includes the costs of DAC in the unsuccessful defence of the proceedings brought by Mr Froggatt just because paragraphs 1 and 2 of the General Policy Extensions are terms of the Policy and that is what they expressly provide. That, too, in my view is right. Accordingly, Mr Edelman goes on to say that the Scheme is liable to pay these costs unless such entitlement is excluded by the words of delimitation of section 6(5). With that I also agree. Thus, the essential exercise here is to assess the true meaning and effect of section 6(5). Subsection (5) involves a two-stage consideration, as I see it, with regard to the word "liability". The first reference to "liability" is "by reference to" that of the insurance company under the terms of the applicable Policy. The second reference to "liability" is "in respect of" that of the policy holder which is a liability subject to compulsory insurance, itself given a definition in subsection (3).

It is, I think, reasonably plain (and, if it be relevant, consistent with the extracts from Hansard cited to me) that the purpose here was to provide protection to policy holders -- corporate in this instance, as well as individual -- who have been compelled to take out insurance of the applicable kind. It is no doubt a by-product or consequence of that purpose that the third party victim himself is thereby given a degree of further protection: viz in knowing that the insured defendant has the ultimate backing of the Scheme in the event of its own insurer becoming insolvent. But in my view, the purpose of section 6(5), consistently with the overall purpose of the 1975 Act, is not directed at safeguarding the third party victim. Rather, it is directed at protecting those policy holders who have been compelled by Parliament to take out, at their own expense, the applicable insurance. Accordingly, while the purpose behind the 1969 Act and the Road Traffic legislation and the other two statutes mentioned in section 6(1) is to protect the victim, the purpose of section 6 is in essence to protect the policy holder. The two purposes are, of course, compatible; but they are not the same.

That being so -- and in my view it is so -- the crux of this case lies in the words "in respect of", as used in section 6(5) of the 1975 Act.

Mr Edelman, whilst rightly acknowledging that such words have to be interpreted in the light of the particular statutory context in which they are found, submits that the words "in respect of" in their ordinary and natural meaning connote some connection between two subject matters. In this context, he cited to me the decision of Boreham J in the case of Paterson v Chadwick [1974] 1 WLR 890. That was a decision on the ambit of the phrase "in respect of" as used in section 32 of the Administration of Justice Act 1970, a very different statutory context to the present. In the course of his judgment, Boreham J referred to some observations of Mann CJ in the Australian case of Trustees Executors & Agency Co Ltd v Reilly [1941] VLR 110, itself a decision on an Australian statute, the Farmers Protection Act 1940. At page 893 of the report, Boreham J said this, having referred to the fact that certain authorities had been cited to him, including the Reilly case:

Acknowledging that the statutory context of that case, as of the Reilly case, is quite different to the present, I nevertheless gain assistance from those general observations: if only because they seem to me properly to reflect what the words "in respect of" -- and I would agree with Mann CJ that they are difficult of definition -- do ordinarily convey.

On the footing that these words convey a degree of connection, Mr Edelman submits that defence costs are within the ambit of the Policy. They are connected -- indeed closely connected, he would say -- with the claim brought by Mr Froggatt, liability for which had been the subject of compulsory insurance; and it was by reason of such claim, and only by reason of that claim, that these defence costs were incurred at all. Therefore, the defence costs incurred by DAC up to 17th June 2001 arose "in respect of" a liability of the policy holder that was a liability subject to compulsory insurance. In consequence, these fall outside the delimiting provisions of section 6(5) and, accordingly, are within the protection offered by the Scheme.

In this context Mr Edelman placed much emphasis on the concession which has throughout been made by the Scheme, and from which Mr Phillips in the course of argument made clear that he did not resile -- that is, the acceptance by the Scheme that it is liable for a successful third party claimant's costs. The potential significance is this. One possible interpretation of the 1975 Act could be that it extends, and extends only, to liabilities for which the insured is compelled to insure against: see the definition in section 6(3). It is reasonably clear that section 1 of the 1969 Act does not compel an employer to insure against liability for an employee's costs of litigating a claim. Indeed, Mr Phillips, after some prompting, expressly accepted as much. Yet the Scheme accepts -- indeed, as Mr Phillips told me, it has always been the policy of the Scheme and the Policyholders Protection Board before it to accept -- that it has a liability to pay a successful third party claimant's costs. Given, then, that there is no statutory compulsion to insure against liability for such costs, that, as Mr Edelman submitted, confirms that the phrase "in respect of" -- and, as he observed, the subsection here does not even use the word "for" -- extends to matters connected with the subject matter of compulsory insurance.

I confess that I can see no convincing answer to these submissions.

Mr Phillips argued that an important element of the 1975 Act was to protect the third party victim and that is an explanation of the liability of the Scheme to pay that victim's costs. But, as I have already indicated, I do not accept that was the statutory purpose. The protection of the victim was the primary purpose of the 1969 Act, and, doubtless, the other statutes mentioned in section 6(1) of the 1975 Act, but it was not the purpose, or at least the primary purpose, of the 1975 Act, whose emphasis was protection of the policy holders in general and in particular, for the purposes of section 6, protection of policy holders (including in this instance corporate policy holders) compelled by statute to pay for taking out of certain insurances.

Mr Phillips then went on to submit that what he called the "statutory tailoring" provisions of section 6(5) of the 1975 Act remained. He submitted that Mr Edelman's submissions did not sufficiently address the question of how the line was to be drawn between those liabilities which attract full policyholder protection and those which do not. I am not much moved by that. One line that could be drawn is by confining full policyholder protection solely to those liabilities for which a policy holder is statutorily compelled to insure. But the Scheme, by its concession that it is liable for a third party claimant's costs, disclaims that. Mr Phillips nevertheless suggests that, on the Scheme's approach, a line can still be drawn. The liability extends to, but no further than, the inclusion of those costs. To support this suggestion, Mr Phillips points out that a judgment -- and I might add that his argument seems in part to be predicated on the basis that there always must be a judgment -- in favour of such a third party claimant ordinarily carries with it costs; that the insurance liability for such costs is to the same person (that is to say, the victim, who is the object of the statutory purpose behind the compulsory insurance); and that payment of such costs leaves intact the full recovery of the judgment for damages constituting the tort liability. The victim's costs are therefore, as he submits, part and parcel of the same judgment for which the tort liability is recorded and such costs are directly and integrally linked to the liability for which insurance is compulsory. That, he submits, is to be distinguished from the liability which the unsuccessful defendant insured has to his own solicitors. That sort of liability, he says, is far more indirect.

In my view, however, the suggestion that the victim's costs are sufficiently connected to the liability to be within the phrase "in respect of" but the unsuccessful defendant's costs are not sufficiently so connected is unconvincing. Those defence costs are incurred precisely by reason of this very claim which was of a kind for which insurance cover as to liability had been required. The defence costs are incurred, indeed, with the express approval of the insurance company itself. As it seems to me, these defence costs can be said to relate to and be connected with a liability required by the specified statute to be covered by insurance such that they are within the ambit of the phrase "in respect of" in section 6(5), on a fair and natural reading of the subsection.

Mr Phillips in the course of his argument referred to some interesting examples. Taking the case of the Riding Establishments Act 1964 (as amended), for instance, he posed the example of a hired horse causing, in the case of one incident, not only injury to the rider who hired the horse but also damage to the rider's car. A liability for the latter damage is not required to be the subject of insurance but liability for the former is. Can it really be said, he asks, that the liability of the Scheme extends to the latter, for which insurance is not compelled, as well as to the former, for which insurance is compelled? In my view, however, Mr Edelman (who was minded to accept that the Scheme would not in such circumstances be liable for the damage to the car) gave a convincing answer to this. He submitted that in the example given, there simply was a fortuity of temporal events. Indeed, the insurance, if any, against the damage to the car might well be in an entirely different section of the relevant Policy. The focus here, he said, is to relate the particular claim to the relevant insuring obligation. He gave an example under section 1 of this particular Business Policy itself in the present case. That, as has been mentioned, extends cover to employees temporarily working overseas, even though section 1 of the 1969 Act compels no such insurance. Thus, submits Mr Edelman, any liability under the Policy in the event of an injury to an employee temporarily overseas does not have a sufficient connection to a liability of the policy holder which is a liability subject to compulsory insurance so as to come within the ambit of the words "in respect of", as used in section 6(5). Similarly, a liability arising under the other sections of this composite Business Policy (for example relating to product liability) would not have a sufficient connection to a liability the subject of compulsory insurance to bring it within section 6(5). Such sections in the Policy happen to be included in this one composite Business Policy -- they might, indeed, have been the subject of an entirely separate policy -- but they are unrelated to that which is compulsorily required by way of insurance by statute.

The reason I accept Mr Edelman's submissions on this is essentially because, in my judgment, they rightly acknowledge that the exclusion "otherwise than in respect of" a liability of the policy holder which is a liability which is subject to compulsory insurance, is not simply to be disposed of as a matter of definition. It is also a matter of degree. That is, by reference to the terms of the particular policy in question, regard must be had to the circumstances of each case to assess whether the degree of connection is shown to be sufficient to bring the liability within (or, as the case may be, outwith) section 6(5).

I accordingly think that, on its natural and ordinary meaning, section 6(5) extends full protection to the claimant for its costs of unsuccessfully defending Mr Froggatt's claim. Those costs in my view are in effect part and parcel of that claim and are part and parcel of, and integrally linked to, the liability for which insurance cover was required under section 1 of the 1969 Act, and are within the reach of what was designed to be recovered from the Scheme under section 6(4) and (5).

That conclusion, moreover, in my view, has at least some support from a number of other matters.

Mr Phillips did in the course of his argument place some reliance on the provisions of section 151 of the Road Traffic Act 1988 (which superseded the provisions of section 149 of the Road Traffic Act 1972) taken in conjunction with section 7 of the 1975 Act. Since the principal purpose of those sections of the Road Traffic legislation, as I see it, is to focus on the position of the victim (and in particular where the insurer otherwise could avail itself of a right to avoid the motor insurance policy in question or to rely on a relevant exclusion clause) I do not think that point really bears in any significant way on the overall argument.

I also heard some argument from Mr Edelman as to the asserted impact of the case of Scher and Others v Policy Holders Protection Board [1994] 2 AC 57, as to the consequential adjustment of the definition of policy holder (by reference to the Insurance Companies Act 1982) as set out in the amendment to the 1975 Act definition, and also as to the possible relevance of the Third Party (Rights Against Insurers) Act 1930. In the circumstances, I think it neither necessary nor appropriate to express any views on those aspects of the matter.

I would like expressly to state, in view of the significance given in the arguments to the concession by the Scheme that it is liable for a successful third party claimant's costs, that in my view such concession was rightly made by the Scheme. It was rightly made, in my view, in essence precisely because it acknowledges at least to some extent (even though not to the extent that I have held appropriate) the potential reach of the phrase "in respect of", as used in section 6(5) of the 1975 Act.

In the result, I conclude that the claimant, in the events which have happened and on the true interpretation of this Business Policy and of the provisions of section 6(5) of the 1975 Act, is entitled to be paid by the Scheme its proper costs of defending the proceedings brought by Mr Froggatt in the period up to 17th June 2001 (that being the date of the provisional liquidation of Independent). I think that the reasons for the Scheme's rejection of such claim by its letter of 25th July 2002 were wrong in law. I am prepared to grant declaratory relief in favour of the claimant -- which I think can be formulated in a rather more coherent way than that currently proposed in the claim form -- accordingly.