Supreme Court rules that repair or replace warranties covering consumer goods are contracts of insurance
03 April 2013
This Supreme Court decision is of significant consequence to companies providing warranties for consumer goods. In the case In the case of Digital Satellite Warranty Cover Ltd & anr v Financial Services Authority  UKSC 7, 13 February 2013, the court held that an extended warranty contract providing benefits in kind in exchange for a periodic payment was a contract of insurance for the purposes of the Financial Services and Markets Act (Regulated Activities) Order (SI 2001/544). In arriving at its decision the Supreme Court held that there was no restriction on particular national legislation, that implements a European Directive, providing for more extensive regulation than required by the relevant Directive.
Two companies (the Warranty Sellers) sold extended warranty contracts to satellite TV customers under which, in exchange for a periodic payment, they agreed to repair or replace satellite dishes, boxes and other equipment in the event of breakdown or physical damage. The Warranty Sellers' obligations were limited to the repair and replacement of equipment; there was no obligation on them to pay money to their customers.
The Financial Services Authority (FSA) applied to wind up the Warranty Sellers under s367(1)(c) of the Financial Services and Markets Act 2000 (FSMA), on the basis that they were carrying on a regulated activity in contravention of the general prohibition in s19 of FSMA and neither of the Warranty Sellers were authorised or exempt persons. The particular regulated activity the FSA alleged was being carried on was the effecting and carrying out contracts of insurance under Article 10 of the Regulated Activities Order (SI 2001/544). Schedule 1 Part 1 of the Regulated Activities Order sets out 18 classes of contracts of insurance which fall within the Article 10 Regulated Activity.
The High Court and the Court of Appeal found that the extended warranty contracts were contracts of insurance at common law. This aspect of those judgments was not appealed to the Supreme Court. The Warranty Sellers instead sought to argue that, even if the warranties were contracts of insurance at common law, they were not within the 18 classes of insurance contract prohibited by the Regulated Activities Order and therefore were not contracts of insurance for the purposes of the FSMA regulatory regime.
The High Court and the Court of Appeal had found that the extended warranty contracts fell within Class 16, Miscellaneous Financial Loss, which covers:
"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 on;
(b) risks of loss to the persons insured attributable to their incurring unforeseen expense;
(c) risks which do not fall within sub-paragraph (a) or (b) and which are not of a kind such that contracts of insurance against them fall within any other provision of this Schedule."
The Warranty Sellers argued that the relevant UK legislation was enacted to give effect to the First, Second and Third EC Council Non-life Directives (the Directives), and the first 17 of the 18 classes of insurance in Schedule 1 to the Regulated Activities Order substantially corresponded to the 17 classes identified in the Directives. The Warranty Sellers argued that as the classes identified in the Directives did not extend to contracts of insurance providing benefits in kind, in transposing the Directives into national law, Member States were not entitled to regulate either wider or narrower classes of non-life insurance business than encompassed by the Directives. Therefore the classes of insurance set out in the Regulated Activities Order should be read as applying only to contracts of insurance providing pecuniary benefits. The Warranty Sellers argued that as the extended warranty contracts only provided for benefits in kind, they should not therefore be caught by the Regulated Activities Order.
The Warranty Sellers acknowledged that the Directives did not prevent Member States from regulating wider categories of insurance contracts, but argued that they could not do so in the legislation that transposed the Directives and by redefining the classes of insurance contract set out in the Directives. Lord Sumption, with whom Lord Neuberger, Lord Mance, Lord Clarke and Lady Hale agreed, rejected this argument, in particular the proposition that by specifying certain classes of insurance, the Directives preclude Member States from regulating wider in the same legislative provisions that transpose the directive.
Lord Sumption held that "it is in my view clear that the Directive is concerned only to prescribe what kinds of business national law must regulate and not what other kinds of business it may regulate. Still less is it concerned with the legislative technique that Member States may employ to regulate other kinds of business to which the Directive ex hypothesi does not apply."
Lord Sumption's decision sets out a detailed analysis of the history of EU non-life insurance regulation, encompassing the First, Second and Third Non-Life Directives of 1973, 1988 and 1992. He noted that the object of the First Non life Directive was to impose certain uniform principles of authorisation and regulation on insurance business in the identified classes, but not on any business falling outside those classes. The Second and Third Non life Directives then introduced a passporting regime for insurers authorised in one Member State to carry out any of the defined classes of insurance in other Member States. He thus identified that the Directives were concerned with the harmonisation of insurance regulation and authorisation for insurers, for the insurance business in the defined classes across the EU. He found no basis or rationale in the Directives as to why the EU legislator would have intended to prevent member states imposing their own authorisation regime on types of insurance business outside the classes defined in the Directives. The Directives are concerned with what Member States must do in relation to the defined classes of insurance, not what they can or cannot do in relation to other classes of insurance.
Lord Sumption agreed with the High Court and the Court of Appeal that the extended warranty contracts fell within class 16(b) (or if not within 16(c)) in Schedule 1 Part 1 of the Regulated Activities Order, stating that a contract which brings about a result that the insured would otherwise have to pay to achieve (ie the repair of satellite equipment) was one providing insurance against the risks of incurring unforeseen expense. It did not matter whether this result was achieved through reimbursement of the costs incurred or the provision of a benefit in kind.
The decision that class 16 in Schedule 1 Part 1 of the Regulated Activities Order covers agreements to provide benefits in kind is of significant consequence to companies providing warranties for consumer goods. In particular Class 16(c), "risks which do not fall within sub-paragraph (a) or (b) and which are not of a kind such that contracts of insurance against them fall within any other provision of this Schedule", would appear to catch any agreement to provide a benefit in kind on the occurrence of certain events and for the payment of periodic sums. Any company offering such warranties with its products is now faced with the choice of incurring the time and costs of becoming authorised to carry out insurance business, or ceasing to offer such warranties. Further, any company that has been doing so to date without authorisation is now at risk of action from the FSA. The decision also provides clarity that Member States are not limited to a rigid transposition of minimum harmonisation directives, but may regulate further and more widely than the European regime in the same legislative instrument.
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