Insurance: Claims did not arise “under” the policy
The Financial Services Compensation Scheme (FSCS) does not have to compensate policyholders for the legal costs they were awarded after taking legal action against an insurer that became insolvent before paying them, the Court of Appeal has ruled.
Overturning the High Court, appeal judges reinstated the FSCS’s decision that compensation for unpaid £3.3m in litigation costs and £784,000 of post-judgment interest did not fall within the scope of the policy and therefore the scheme.
The policyholders own long leases in a development in Manchester acquired between 2007 and 2010, some on an off-plan basis. On purchasing the leases, they were each issued with building guarantee insurance by Zurich Insurance.
They made claims after the development suffered from serious defects, which Zurich declined.
Proceedings were issued in March 2015 but three months later, during the course of the proceedings, Zurich’s liabilities were transferred to another entity, East West Insurance Company Ltd (EWIC).
The litigation culminated in a 2019 Court of Appeal decision in favour of the policyholders, who were awarded £9.7m plus VAT and 92.5% of their costs.
EWIC paid the £9.7m but then went into administration without paying the VAT, statutory interest on the judgment debt or costs (except a payment on account).
The policyholders sought compensation from the FSCS, which agreed that the VAT element was covered but declined to cover EWIC’s other defaults. This was because they were not claims “under” the policies but rather were pursuant to statute and a court order respectively.
The policyholders were granted permission for judicial review and Dexter Dias KC, sitting as a deputy High Court judge, last year quashed the decision on the grounds that the interest and costs were “integral to, part and parcel of or sufficiently connected to” a claim covered by the FSCS.
Falk LJ expressed sympathy for the position the policyholders found themselves in, given that much of the compensation sought was “represented expenditure which the policyholders had to incur to establish that the insurers were in the wrong”.
The development “remains unusable”, she noted too.
The rules that governed the FSCS required the claim to be a “protected claim” – that is, one “under” a protected contract of insurance. The judge said the natural and ordinary meaning of “under” the contract “means just that”.
She explained: “It would cover amounts owed under the terms of the contract, but not other amounts the entitlement to which derives not from the contract but from some other source, such as a court order or statute.”
The judge continued: “However unfair it may appear to the policyholders, we have no discretion to award compensation. Instead, we are obliged to apply the rules to the facts… in my view the [FSCS rules] cannot properly be construed in a way that would extend to the costs and interest owed by EWIC.”
Concurring, Lady Justice Andrews also expressed sympathy for the “blameless” policyholders, adding that “the upshot of confining the ambit of the scheme to what is recoverable under the policy may well be that in future, those in a similar position to these policyholders will be loath to take the financial risk of pursuing recalcitrant insurers through the courts, as they may spend more in costs than they ultimately recover if the insurer (or its successor) subsequently runs into financial difficulty”.
Lord Justice Popplewell also agreed.
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