Re Digital Satellite Warranty Cover Ltd & Ors

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…”.

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”.

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

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”.

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….”

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.

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 fulfillment of the repair or replacement obligation.

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

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

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.

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.

NDSWS: The documentation concerning NDSWS includes a mail-shot, application form and certificate as with DSWC although the wordings are slightly different. The mail-shot describes the plan benefits as including “Comprehensive Coverplan”; it refers to a call-out charge of at least £72 in the absence of any cover. It invites the customer to “enjoy the benefits of our comprehensive sky digital satellite warranty service” and asks whether the customer can “afford to be without fully comprehensive unlimited call-out cover..”.

The certificate refers near the top to “Your fully comprehensive warranty from NDSWS” and then contains a heading “Fully Comprehensive Gold Option Benefits”. It includes “Dish alignment and re-cabling” and “Remote control unit cover”.

The terms and conditions contain a paragraph (paragraph 5) dealing with “Claims”. As with DSWC, there is nothing to suggest that NDSWS will provide anything other than repair or replacement. Exclusions include damage due to “Lightning, Fire, Water/Flood, Accidental, Vandalism, Theft, Spillage or use or Spray Polish and Faults occurring from Mains supply returning”. These exclusions go wider than those in the (later) terms and conditions in relation to DSWC. But even these are not exhaustive. For instance, there is no exclusion for storm damage (other than damage caused by lightning) to a satellite dish nor is cable damage caused by the dastardly chewing rodent.

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”.

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.

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”.

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.

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.

For completeness, I should mention the Value Added Tax (“VAT”) position of DSWC although I do not consider that anything ultimately turns on this for present purposes. DSWC was originally registered for VAT and charged VAT on payments made by customers for the warranty cover provided by it. Sometime during 2010, DSWC appears to have reached the view that its business was not properly subject to VAT. Instead, it was insurance business which ought properly to be subject to Insurance Premium Tax (“IPT”). It accordingly applied to be de-registered for VAT. The application to de-register was allowed and de-registration took place in October 2010. DSWC was registered for IPT in November 2010.

Mr Tamlyn does not concede that either DSWC or the Partnership has carried on business which requires authorisation under FSMA. However, he does make this concession: if (contrary to his submissions) the contracts entered into by his clients would require authorisation if they went no further than creating an obligation to repair and replace in the same way as a manufacturer’s warranty with no more (ie no cover for other risks, including in particular accidental damage) then his clients do not oppose the making of winding-up orders in respect of DSWC and the Partnership. This concession is entirely realistic. It recognises that the entirety of their businesses would have been in contravention of the general prohibition in section 19 FSMA in spite of warnings from the FSA that authorisation was required.

The Law

The relevant Directives

The domestic legislation to which I will come in due course largely reflects (in so far as relevant) the provisions of the First Council Directive 73/239/EEC (“the First Directive”) and the Council Directive 84/641/EEC (“the Amending Directive”) amending the First Directive. The First Directive does not effect a total harmonization of the regulation of direct insurance (other than life assurance) throughout what was then the European Community. But it did effect a measure of co-ordination such that business which fell within its scope was to be regulated in each Member State.

The primary objective of the First Directive can be seen from its recitals and contents. They are summarized by Kerr LJ in Phoenix General Insurance Co of Greece SA v Halvanon Insurance Co Ltd [1988] 1 QB 216 at 255G as being to achieve a uniform classification of non-life insurance businesses and of insured risks for the purposes of the supervision of insurers with a view to ensuring their solvency and proper administration. In other words, there is a substantial element of consumer protection to be found in the Directive and not simply the establishment of uniform treatment across the Community.

I should mention some of the recitals and substantive provisions which demonstrate Kerr LJ’s summary:

The Amending Directive is concerned particularly, but not exclusively, with what it refers to in the heading as “tourist assistance”. The third recital explains that, in order to eliminate the barrier to the exercise of the right of establishment referred to in the second recital (ie different provisions in different Member States relating to the provision of benefits in kind), it should be specified that an activity is not excluded from 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, concluding “therefore such provision of assistance consisting in the promise of aid on the occurrence of a chance event should be covered by [the First Directive]….”. The ninth recital refers to transitional provisions, noting that some are “necessary in order to permit undertakings providing only assistance to adapt themselves to the application of the First Directive”. The assumption underlying the Amending Directive would appear, from these recitals, to be that there was direct insurance business (namely the provision of assistance) which did not already fall within the First Directive. It is to be noted that the fifth recital excludes roadside assistance from the scope of the Amending Directive.

Article 1 replaces Article 1 of the First Directive so that it would, by the new Article 1(1), henceforth concern “direct insurance business, including the provision of assistance referred to in paragraph 2”. The new Article 1(2) describes the relevant assistance as “assistance provided for persons who get into difficulties” while travelling or away from home. It consists in undertaking “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…”. The aid may consist of the provision of benefits in cash or in kind; and benefits in kind may be effected by means of staff and equipment of the person providing them.

Article 2 of the Amending Directive adds to the exclusion specified in Article 2 of the First Directive certain roadside assistance in the event of accident or breakdown of a road vehicle namely an on-the-spot breakdown service for which the undertaking providing cover uses, in most circumstances, its own staff and equipment and/or the conveyance of the vehicle to the nearest convenient repair location.

Article 14 adds a new class 18 to the Annex to the First Directive namely “Assistance for persons who get into difficulties while travelling, while away from home or while away from their permanent residence”. And Article 15 gives Members States an option to go further. It may make provision of assistance for those who get into difficulty subject to the arrangements introduced by the First Directive and thus require authorisation for assistance contracts not within the new class 18. But the inclusion of this Article in the Amending Directive is not to affect the possibilities for classification laid down in the Annex for activities which obviously come under other classes.

It will be noticed that I have not referred to any definition of insurance, contract of insurance or direct insurance. This is because the First Directive does not contain any definitions of these concepts.

Domestic legislation

The statutory provisions which now give effect to the requirements of the First Directive (as amended) are now to be found in FSMA and regulations made under that Act, the Financial Services and Markets Act 2000 (Regulated Activities ) Order (2001 SI 2001/3544 )(“RAO”).

FSMA

Section 19 FSMA contains the general prohibition. No person may carry on a regulated activity in the UK or purport to do so unless he is an authorised person or an exempt person. None of NDSWS, DSWC or the Partnership has ever fallen within those exceptions. Indeed, the Partnership could never have put itself in a position to carry out insurance business (which is itself a regulated activity) since only corporate bodies are capable of being authorised: see paragraph 1 Schedule 6 FSMA. By section 23 FSMA contravention of the general prohibition is a criminal offence; but it is a defence for the accused to show that he took all reasonable precautions and exercised all due diligence to avoid committing the offence.

Section 22 FSMA states that an activity is a regulated activity for the purposes of FSMA if it is an activity of a specified kind, that is to say specified in an order made by the Treasury, which is carried on by way of a business. Section 22(2) introduces Schedule 2 which makes further provision in relation to regulated activities. By paragraph 1, the matters with respect to which provision may be made under section 22(1) in respect of activities (ie the activities which may be specified by the Treasury) are described in general terms in Part I of the Schedule. These activities include buying and selling investments or offering or agreeing to do so (as principal or agent); and in the case of an investment which is a contract of insurance, that includes carrying out the contract. By paragraph 10, the matters with respect to which provision may be made under section 22(1) in respect of investments are described in general terms in Part II of the Schedule. They include, under paragraph 20, rights under a contract of insurance.

As with the First Directive, there is no definition of insurance or contract of insurance.

RAO

The RAO contains within the definitions in Article 3, a definition of “contract of insurance”: it means "a contract of long-term insurance of a contract of general insurance”. A “contract of general insurance” is any contract falling within Part I of Schedule 1. The paragraphs of the Schedule reflect to a considerable extent the classes contained in the Annex to the First Directive. Each of the paragraphs commences with the words “Contracts of insurance”. I mention four paragraphs:

Article 4 is the first provision in Part II. It provides that the provisions of that Part specify kinds of activity for the purposes of section 22. Accordingly, any activity so specified which is carried on by way of business and relates to an investment of a kind specified by any provision of Part II is a regulated activity.

Contracts of insurance are specified investments under section 73 FSMA. Article 10 RAO specifies that effecting or carrying out a contract of insurance as principal is a regulated activity. Accordingly, the effecting or carrying out of a contract of insurance which falls within any of the paragraphs of Schedule 1 will, if done by way of business, be a regulated activity.

There is excluded from Article 10(1) and (2) certain sorts of motor vehicle breakdown insurance as set out in Article 12. It is not necessary to go into the detail of Article 12. I only say that the contract must be one under which the benefits provided are exclusively or primarily benefits in kind in the event of accident or breakdown of a vehicle and which contained the terms mentioned in paragraph 2 which relate to repairs at the place of accident or breakdown and removal to the nearest or most appropriate repair location or to the driver’s home or certain other specified locations.

Contract of insurance

As I have said, there is no definition of “contract of insurance” in the First Directive, the Amending Directive or FSMA. But RAO does contain a relevant definition, namely of “contract of general insurance” which takes the reader to Schedule 1. Each paragraph of Schedule 1 commences with the words “Contracts of insurance” as already pointed out, but a “contract of insurance” is in turn defined as a contract of long term insurance or a contract of general insurance. One is left, therefore, without a definition (other than a circular one) of the meaning of “Contracts of insurance” in each paragraph. Accordingly, whether one is dealing with the Directives or domestic legislation, one has to look more widely to understand what is meant by a “contract of insurance”.

At common law, the starting point in considering the meaning of a contract of insurance is the decision of 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”

This suggests strongly to my mind that a contract of insurance does not have to provide for the payment of a sum of money. Mr Tamlyn submits to the contrary, suggesting that what Channell J had in mind in the discussion leading to his summary (as quoted) was the sort of contract which gives an insurer an option to repair or reinstate but did not envisage a case where there could be no obligation to pay money at all.

I reject his submission. In my judgment, a contract which provides cover for risk in the shape of a consideration other than money, and in particular an obligation to repair or replace, is, at common law, capable of being an insurance contract. Indeed, Channell J’s own reasoning is inconsistent with Mr Tamlyn’s submission when, at p 663, the judge referred (as pointed out by Megarry V-C at p 93 of the Medical Defence Union case below) to a contact of insurance as one where “you secure to yourself some benefit, usually but not necessarily the payment of a sum of money”. The conclusion is supported by the approach of Templeman J in Department of Trade & Industry v St Christopher Motorists Association Ltd [1974] 1 WLR 99 in which he based his decision on the proposition that contracts of insurance are not confined to contracts for the payment of money, but could include a contract for some benefit corresponding to the payment of money. The case concerned the provision of a chauffeur when the insured was unable himself to drive whether due to disqualification or injury. The judge, after referring to Channell J’s decision in the Prudential Insurance case, said this at p105A-C:

“That definition, including Channell J's careful pronouncement that there must either be the payment of a sum or some corresponding benefit, seems to me to meet the present case and particularly so when, in substance, there seems to me to be no difference between the defendant company paying a chauffeur on the one hand and on the other hand agreeing to pay to the individual member a sum of money which would represent the cost to him of providing himself with a chauffeur in the event of his being disabled from driving himself. I cannot see any difference in logic between the two and therefore I see no reason why, in the present case, the arrangement made by the defendant company should not amount to insurance.”

Further support can be found in the decision of Megarry V-C in Medical Defence Union Ltd v Department of Trade [1980] 1 Ch 82 in which he summarised (following Channell J) the elements of a contract of insurance as follows:

Mr Tamlyn submits that Megarry V-C also decided that the mere provision of services would not render the contract a contract of insurance unless, perhaps, the putative insurer paid, or was obliged to pay, a third party for the provision. It is true that, at pp 94 to 95, the judge saw a formulation of the “something” as an obligation to provide services as both too wide and too narrow as he explains. But what the judge actually said was not quite what Mr Tamlyn submits he decided. In my view, it is clear that he intended to include money or money’s worth as included in the “something”, in which context, the provision or repair services or a replacement item is clearly money’s worth.

Reference was made to the decision of Rattee J in Re Sentinel Securities [1996] 1 WLR 316. I do not think that it adds anything to the debate about the extent to which the provision of services can bring a case within the concept of a contract of insurance. It is relevant, however, in re-affirming that it is right to look at the substance of the transaction in order properly to categorise it. This reflects what has long been the law as succinctly stated, for instance, by Buckley LJ in In re Law Guarantee Trust and Accident Society Limited, Liverpool Mortgage Insurance Company’s Case [1914] 2 Ch 617 CA at 631 b-c:

“The true effect of the contract is to be ascertained, I think, not upon a scrutiny of the terms used but upon an examination of its effect.”

In the light of these authorities, the contracts entered into by the respondents are, in my judgment, clearly contracts of insurance at common law. This would be so even if they contained no more than cover for breakdown or malfunction. There can be no doubt that the second and third elements of Channell J’s description are satisfied: it is uncertain whether the equipment will break down or malfunction in the period of cover and the insured, as owner, clearly has an insurable interest. The provision of a repair and replacement service represents money or money’s worth, so that the third element is satisfied too. The position is a fortiori on the facts given that the actual contracts include cover for events other than breakdown or malfunction assuming that such cover includes at least the cover provided for in the successive standard terms and conditions which I have addressed above.

So far as European Union law is concerned, the most helpful description of what is regarded as a contract of insurance is to be found in the judgment of the Court of Justice in Card Protection Plan v Customs and Excise Commissioners (Case C-349/96) [1999] 2 AC 601. The relevant passage is quoted by Lord Slynn of Hadley in his speech in the House of Lords when the case returned there: see [2002] 1 AC 202 at p 210C to p 211B:

“The court in its judgment (Case C-349/96) [1999] 2 AC 601 621 et seq noted that "insurance transactions" and the concept of insurance are not defined either in the Sixth VAT Directive or in Council Directive 73/239/EEC (the First Council Directive on direct insurance other than life insurance) but said, at p 625:

‘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 concept of a contract of insurance therefore appears to include a contract where the cover provided is not cash but services. It is true that the Court refers to services in the form of the provision of assistance in kind of the type listed in the Annex (as amended by the Amending Directive) but there is no reason to think that it is restricted by that. For instance, if a Member State exercises the option given by Article 15 of the Amending Directive, there is no reason to think that the contracts falling within the extension would not also be contracts of insurance. Or if further categories of assistance were added to the Annex, there is no reason to suppose that they are not already contracts of insurance even if they are not already within one of the classes of the Annex.

It is also to be noted that the Court refers to the Sixth Directive (ie the sixth VAT Directive). The relevant provision of that Directive was Article 13(B)(a) which provided for exemption of “insurance and reinsurance transactions”. The statement at the end of [18] cuts both ways; “insurance” is the same for both the First Directive and the Sixth Directive. It follows that anything which is insurance within the Annex is insurance within the First Directive. It also follows that anything which is insurance within the Sixth Directive is insurance within the First Directive although not necessarily within the Annex. The point is that the concept of insurance in European Union law may go wider that than the classes described in the Annex. It is surely the case that the type of assistance contract found in class 18 of the Annex was an insurance contract within the scope of the Sixth Directive; and this is so whether or not it was comprised in some other class in the Annex before being placed in class 18; these sorts of contract did not become entitled to VAT exemption only as a result of the Amending Directive.

In my judgment, what I have said in relation to insurance contracts in paragraph 49 above in relation to the application of common law applies equally to the application of European Union law. Accordingly, a contract providing a repair or replacement service in relation only to breakdown or malfunction is capable of being a contract of insurance and, a fortiori, the same applies to a contract containing the terms and provisions of the successive standard terms and conditions of the respondents.

Contracts of insurance within the Annex or Schedule 1 RAO

The question then is whether those types of contract fall within Schedule 1 RAO. In answering that question, I find it helpful to consider the Annex at the same time because, if such contracts fall within the Annex, then it is clear that they also fall within Schedule 1. However, even if they do not fall within the Annex, it does not follow that they do not fall within Schedule 1.

A contract which provides for a repair and breakdown service only in the event of breakdown or malfunction can only fall within the Annex if it is within class 16: such cover cannot, in my view, fall within class 8 or 9 since this sort of cover is not cover against damage at all. The same applies in relation to paragraphs 8, 9 and 16 of Schedule 1.

The question then is whether such a contract falls within the heading “Miscellaneous financial loss” in the Annex or RAO. Mr Davis submits that such cover does fall within class 16 of the Annex as “other forms of financial loss” and within paragraph 16 of Schedule 1, either under paragraph (b) or (c). The argument in relation to paragraph (b) is that, absent the cover, there is a risk that the insured would incur unforeseen expense in the form of repair or replacement costs; the risk of their incurring such a loss is obviated by the cover and it matters not whether the way in which that risk is met is by way or repair or replacement rather than payment of money. Alternatively, the case falls within paragraph (c) as a risk not covered by other provisions of Schedule 1. Paragraph (c) is a wide “sweeping up” provision and, although the risks covered must be “financial loss”, there is a sufficiently close connection between the risk of breakdown or malfunction and the risk of expense for the contract to fall within it.

Similarly, in relation to class 16 of the Annex, such cover is properly to be seen as some “other financial loss”.

Mr Davis in fact goes further; he says that class 16 and paragraph 16(c) are “catch-all” provisions which cover all sorts of insurance contracts which do not fall within the classification of risks in the different classes of insurance set out in other classes specified in the Annex or other paragraphs of Schedule 1 (as the case may be).

Mr Tamlyn submits that the sort of cover which I am now considering simply cannot properly be described as financial loss at all. The risk covered is the risk that the equipment will break down or malfunction. That risk is not a risk of financial loss at all. That conclusion is supported when it is remembered that the obligation of the purported insurer is only to repair or replace and never to pay money (except perhaps, I would remark by way of damages for breach of contract, but that is something entirely beside the point).

He also submits that the provisions of Schedule 1, and in particular, paragraphs (b) and (c) of paragraph 16, should be construed restrictively so as to bring within the scope of regulation only types of contract which clearly fall within those provisions. This is because breach of the general prohibition in section 19 FSMA is a criminal offence and penal provisions are not to be found in the absence of clear language. The principle on which he relies is dealt with in Bennion on Statutory Interpretation 5^th ed) in Part XVII. It is referred to as “the principle against doubtful penalisation” which requires strict construction of penal enactments.

This principle is, no doubt, an important principle of public policy. But a penal enactment will not, as Bennion explains on p 828, be given a strict construction if other interpretative factors weigh more heavily in the scales. For instance, Browne-Wilkinson V-C in Re Lo-Line Electric Motors Ltd [1988] Ch 477 rejected the submission that the word “director” in the Company Directors’ Disqualification Act 1986 should be strictly construed because the Act contained penal sanctions; the issue of construction was to be approached on the ordinary basis because the paramount purpose of the disqualification is the protection of the public: see Morritt LJ in Secretary of State for Trade and Industry v Deverell [2001] Ch 340.

In the present case, one of the central purposes of FSMA and RAO is to regulate insurance business both for the protection of the public and to implement the requirements of the First Directive as amended. The First Directive itself demonstrates that its purposes include not only harmonization across Member States but also protection of the consumer: see in particular the third and tenth recitals. In those circumstances, a restrictive construction is not called for simply because certain conduct incurs penal sanctions. I propose to apply ordinary canons of construction to the interpretation of Schedule 1 RAO.

There is one further authority which is of assistance in addressing the scope of paragraph 16 of Schedule 1; it is Re Cavalier Insurance Co Ltd [1989] 2 Lloyd’s Rep 430. In that case, Knox J considered equivalent provisions under the Insurance Companies Act 1974 as amended by the Insurance Companies (Classes of General Business) Regulations 1977. He held that the extended warranties did not fall within the equivalent of paragraph 9 of Schedule 1 (‘Damage to Property’) for which the insurance company in question was authorised, and it was common ground that they therefore fell within the equivalent of paragraph 16 of Schedule 1, ‘Miscellaneous financial loss’, for which the company in question was not authorised. Mr Davis submits that the contracts in that case were in substance materially identical to the cover plans sold by NDSWS, DSWC and the Partnership; and also submits that part of the ratio of the case is that the business in question was therefore unauthorised and illegal.

Mr Tamlyn submits that the case does not support the FSA’s position at all and is entirely distinguishable. It is of some importance, in the light of his argument, to see what the contracts in that case actually provided. The policies written by Cavalier were of four types, Service Plans 1, 2, 3 and 4. Plans 1, 2 and 3 were similar in that they all covered repair and replacement costs (my emphasis) including components and parts. Plan 4 was different and contained this provision in the description of “How Service Plan works for you” (see p 433 col 1, half way down):

“When something goes wrong phone the Service Plan Emergency Number…. And we’ll recommend a qualified engineer in your area. We’ll reimburse you or pay the bill direct, minus the standard £15 service charge per claim.”

A similar plan was called “Homecare Policy” (see the foot of the same column). Cavalier agreed “to indemnify the Insured for costs incurred respecting parts and labour in the event of Fire/lightning or malfunction breakdown….”. Cavalier was also entitled, where an appliance was unusable after a malfunction, to repair or replace it.

In that case, the critical question was what classes of insurance the contracts were to be placed in. In that context, Knox J (following the decision of the Court of Appeal in the Phoenix General Insurance Co Ltd case) considered that the proper approach to the problem of placing an insurance contract within the appropriate class for authorisation purposes was to construe the wording of the cover provided and decide which is the appropriate class. I see no reason to differ from that approach, although I think that little turns on this point. The judge identified the question for him as whether insurance against the costs incurred for labour, repairs and replacements parts in the event of electrical or mechanical failure or breakdown of an insured appliance was on its true construction insurance against loss of or damage to the appliance. He answered that question in the sense that the cover was not for loss or damage. It was then common ground that the contracts fell within class 16.

Given that the insurance was expressed to be in respect of the costs of repair or replacement, it is not surprising to find that it was common ground that the case fell within class 16. Mr Tamlyn says that it is entirely different where the contract is not an indemnity against the cost of repairs or replacement but only obliges the putative insurer to repair or replace at its own cost. He could fairly observe that paragraph 16(b) Schedule 1 appears to focus on loss attributable to the incurring of expense. But that is not what contracts of the type now under consideration provide: rather, they oblige the insurer to take steps (repair or replacement) which prevent any need to incur expense.

In that context, I should note an observation of Knox J (see p 442 col 1 towards to the bottom of the page) as part of his discussion about whether the insurance in that case fell within class 9 or class 16:

“….while I accept that the fact that the cover is described in terms of –

…..the company will indemnify the insured against the full costs incurred for labour, repairs and replacement parts…..”

is far from conclusive that financial loss is the subject of the insurance, nevertheless that formulation is consistent with the construction which I prefer. It is of course true that any risk in relation to property belonging to the insured person can be rewritten in terms of an indemnity to the insured against the cost of making good the relevant loss or damage. The true nature of the risk insured against should not be allowed to be obscured by any such verbal formula. In my judgment the critical factor in this case is that the risk insured against is not on its true construction one which falls within class 9 and not that it is identifiable as a separate type of financial loss separately identified in class 16.”

It appears to me that one thing which the Judge is saying in that passage is that a contract in respect of any risk in relation to property which does fall within one of the classes will inevitably have a financial component; the risk could be expressed as an indemnity against costs incurred. The corollary is that, if the risk is not within any of the classes other than class 16, it can nonetheless be seen as cover in respect of financial loss.

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

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.

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.

I reach these conclusions whether or not such contracts fall within the Annex to the First Directive. If they do fall within the Annex, then the almost inevitable conclusion is that they also fall within Schedule 1 RAO since it cannot sensibly be suggested that RAO was not intended to regulate all the types of business which were covered in the Annex. However, if such contracts do not fall within the Annex (and they could only fall within class 16), it does not necessarily follow that they do not fall within class 16 in Schedule 1.

There is, perhaps, some doubt whether such a contract does fall within class 16 of the Annex to the First Directive. Thus Mr Tamlyn submits that such a contract is not one in relation to “other forms of financial loss” under the heading “Miscellaneous financial losses”. But here the analysis seems to me to be the same as that which I have conducted in relation to class 16 in Schedule 1 RAO.

There is, however, another argument. A contract of insurance can only fall within the Annex at all, and in particular within class 16, if it provides cover in the form of an indemnity, and that a contract which provides only for repair or replacement is not within any of the classes save to the extent that such a contract can be brought within class 18. Support for this suggestion can be derived from the Amending Directive which appears to assume that contracts for the provision only of benefits in kind would not have fallen within the First Directive: see the third recital as described at paragraph 28a. above. I doubt very much that that the suggestion is correct. For instance, a contract for payment of the replacement cost of a vehicle destroyed by fire is clearly within class 5; it would be very surprising to me, at least if the contract did not fall within class 5, if the insurer’s only obligation was to replace the vehicle.

Nonetheless, the answers to the points addressed in the preceding two paragraphs are not entirely certain. If it were necessary to know the answers, the questions would probably need to be the subject matter of a reference to the Court of Justice. However, the third recital is an express recognition that different Member States had different provisions relating to benefits in kind and that the provisions of the First Directive were not determinative in identifying the domestic law of a Member State. Accordingly, even if the sort of contract which I am currently considering is not within the Annex to the First Directive, the Amending Directive is, it seems to me, an acceptance that the position could be different under the domestic law of a Member State; and for the reason which I have given, I consider that to be the case in the United Kingdom.

My judgment, therefore, is that all of the contracts entered into by NDSWS, DSWC and the Partnership fell within class 16 Schedule 1 RAO and that, in effecting them and carrying them out, each of those entities was acting in breach of the general prohibition.

If that conclusion is wrong, then contracts subject to the standard terms and conditions which I have examined above nonetheless contained cover which, if standing alone, would have brought the contracts within class 8 or class 9 of Schedule 1 RAO. There may be doubt about the actual terms of contracts entered into by the respondents, terms which depend on the content of conversations between customers and salespersons; but what cannot be doubted is that the cover effected included at least that which was provided by the standard terms and conditions.

Such cover included the following:

Mr Tamlyn says the principal cover to be found in the contracts is in respect of breakdown and malfunction (which, on the hypothesis now under consideration were not contracts of insurance giving rise to regulated business) and that the inclusion of the additional cover just identified does not turn the contracts into contracts of insurance within RAO. It is true, of course, that the additional cover is very circumscribed; the exclusions in the standard terms and conditions are, in all case, wide. Nonetheless, the additional cover is extensive in the case of DSWC and the Partnership, covering as it does accidental damage. In the case of NDSWS, the additional cover is not so wide

There is disagreement about the correct approach to categorisation of the contracts. The contracts clearly provide distinct elements of cover namely repair or replacement (i) in the event of breakdown or malfunction and (ii) on the occurrence of certain other events eg accident in the case of the contracts entered into by DSWC and the Partnership. Mr Davis’s approach is to look at the contract to establish whether it provides cover for a risk which falls within any of the classes in Schedule 1 RAO. If it does (save perhaps in a case where the cover is properly to be seen as ancillary to some other contractual obligation which falls outside those classes or is not insurance business at all), then the putative insurer requires authorisation to conduct the relevant class of business.

In deciding whether a contract requires authorisation, the test propounded by the FSA in most cases is whether the contract contains “an identifiable and distinct obligation that is, in substance, an insurance obligation”: see the FSA’s Perimeter Guidance (PERG) 6.6.7(1). This test is to be applied in deciding whether a contract which contains both insurance and non-insurance elements is to be classed as a contract of insurance. A similar test would, a fortiori, apply in determining which class or classes of insurance the contract falls into; if distinct elements of the insurance fall into different classes, then authorization to carry out business in each class will be required.

Mr Tamlyn, in contrast, says that the correct approach is to apply a “principal object” test. He relies on a passage in MacGillivray on Insurance Law (11^th ed) at section 1-008 and the cases cited in footnotes 27 and 28. Accordingly, he submits that the principal object of the contracts was to provide cover in the event of breakdown or malfunction (which on the hypothesis under consideration did not require authorisation) and that the inclusion of other cover did not turn the contracts into ones requiring authorisation.

The “principal object” test may or may not be the appropriate test when it comes to deciding whether elements of insurance bring a contract containing both insurance and non-insurance elements within the concept of a contract of insurance. But even assuming that it is, it may not, in reality, differ much from the approach of the FSA. The “principal object” test cannot require, in every case, that a single principal object be identified. A contract may have two important elements, albeit that one is more significant than the other but it would not be right to categorise the nature of the contract by reference only to the more important element. What the “principal object” test is surely getting at is that there is to be a found a principal object where the other elements are either “ancillary” or “minor” (to use descriptions found in the Card Protection Plan case) to a main objective of providing cover in the case of breakdown or malfunction or, to use other words, where those elements are “integral with” or “subsidiary to” a main object.

The FSA’s approach is to identify discrete elements. When it comes to determining whether a contract which contains both insurance and non-insurance elements is a contract of insurance requiring the insurer to be authorised, a strict application of such a test could result, as is pointed out in MacGillivray, in contracts of insurance being found where the insurance element is insubstantial. It may or may not be right to go that far. I rather doubt that it is, especially given the acceptance by the FSA that an ordinary manufacturer’s warranty provided as part of a sale agreement does not give rise to a contract of insurance. Further Part C of the Annex to the First Directive makes express provision for certain ancillary risks. So, it seems to me at least, the FSA’s statement in the Perimeter Guidance has to be tempered to some extent.

I add this. Where the entire contract is concerned with insurance business which does fall within one class or another, the “principal object” test is not, in my view, in principle the correct test. Instead the correct approach is, essentially, the approach of the FSA: it is to identify the different discrete elements with the result that authorisation is required for each class of business appropriate to each discrete element. If there is a qualification to that, it is only that authorisation for one class is sufficient to permit conduct of business of another class where that business is ancillary to the authorised class in the sense that Part C of the Annex to the First Directive envisages. I do not suggest that Part C, either expressly or by implication, is incorporated into RAO; but it provides a satisfactory analogue for determining the scope of any qualification. There is much to be said for applying the same approach where a contract consists exclusively of insurance business even where some of that business viewed in isolation does and some does not require regulation (eg in the present case where, under the hypothesis now under consideration, cover in respect only of breakdown and malfunction does not require the insurer to be authorised but provision of accident cover does require authorisation).

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 position is less clear in the case of NDSWS. There is more in the argument that the additional cover is not of such significance that its provision required NDSWS to be authorised. On balance, I reach the same conclusion as in relation to DSWC and the Partnership. The mail-shots and the certificate (see paragraphs 16 and 17 above) lend considerable support to the conclusion that, whatever the general terms and conditions include, customers would have been under the impression that they had comprehensive cover which would include, at least, accidental damage, particularly in relation to the satellite dish and cabling and the remote control unit. On the evidence as it stands, I would infer that contracts were regularly made on the basis of those documents without reference to the standard terms and conditions. NDSWS has not put in evidence to rebut that inference. Accordingly, I would conclude that in many, if not all, cases, contracts did include accidental cover.

My conclusions, therefore, are these. Even if the contracts entered into by each of NDSWS, DSWC and the Partnership for repair and replacement only covered breakdown or malfunction, they would be contracts falling within class 16 Schedule 1 RAO. Accordingly, all of their business comprised the effecting of contracts of insurance for which they required authorisation. Their businesses have been consistently conducted in breach of the general prohibition in section 19 FSMA.

If that is wrong, a contract on the standard terms and conditions to which I have referred are contracts of insurance in the light of the additional cover which is provided, with the same result. This is clearly so in the cases of DSWC and the Partnership, but less clearly so in the case of NDSWS. In that last case, I would infer on the evidence presented that many contracts were in fact entered into on terms which included cover for accidental loss or damage and which were insurance contracts falling within classes 8 or 9. Again, authorisation was required in the absence of which NDSWS consistently acted in breach of the general prohibition.

Given the conclusion in paragraph 77 above, Mr Tamlyn concedes that winding-up orders should be made on the FSA’s petitions in respect of DSWC and the Partnership. That concession was, in my view, properly made. It seems to me that a breach of the general prohibition in relation to the entirety of the business carried out, especially in the light of clear warnings from the FSA that such business was a breach of the prohibition, leads to the conclusion that it is in the public interest that the entities be wound up.

I would add that this conclusion is reinforced by reference to the factual evidence demonstrating how the businesses have been conducted. I do not rely on it in reaching the conclusion that winding-up orders should be made and for that reason I do not propose to go into that evidence, which would result in considerable lengthening of this already long judgment.

Mr Tamlyn has not formally conceded that the same result should follow if there has been a breach of the general prohibition only by reason of the provision of additional cover. However, I can see no difference in principle. Each and every contract was made in breach of the general prohibition even where it was necessary for the FSA to rely on the element of additional cover to demonstrate that breach. The consistent conduct of the businesses of DSWC and the Partnership in breach of the general prohibition is a serious matter which justifies the making of a winding-up order in relation to each of them. If it were necessary to rely on the additional cover to demonstrate a breach, I would nonetheless consider it appropriate to make winding-up orders even if Mr Tamlyn were unwilling to extend his concession.

Mr Tamlyn does not act for NDSWS and cannot therefore make any concession on its behalf. However, as I have said, I regard the concession which he has made as properly made on behalf of his clients. There is no material distinction, when it comes to a breach of the general prohibition by reason of the provision of cover in respect of breakdown and malfunction only, between the positions of NDSWS on the one hand and DSWC and the Partnership on the other hand. Accordingly, I consider it appropriate to make a winding-up order in relation to NDSWS as well. Further, the additional cover provided by NDSWS, albeit that it was more restricted than the additional cover provided by DSWC and the Partnership, gave rise to a consistent and wholesale breach of the general prohibition. I would consider it appropriate to make a winding-up order if it were necessary to rely on the provision of this additional cover alone as the relevant breach of the general prohibition. Again, that conclusion is supported by the factual material in evidence.

I am not going into that material save to mention these factors which are relied on by the FSA:

The inference, Mr Davis submits, is that this represents continuing activity on the part of NDSWS, a matter which would fall to be investigated by a liquidator. I agree.

Conclusion

I will make winding-up orders on each of the Petitions.