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Scope of Protection to Guernsey Branch Policyholders under UK Legislation

Scope of Protection to Guernsey Branch Policyholders under UK Legislation

Introduction

  1. We have been asked to consider whether the holders of ELAS policies that were issued through the Guernsey branch will have the protection from the statutory scheme operating in the UK which provides compensation in the event of the insolvency of an UK insurance company. The current scheme was established by the Policyholders Protection Act 1975 ("PPA"), and is operated by the Policyholders Protection Board in accordance with the provisions of that Act. Various amendments to the PPA were included in the Policyholders Protection Act 1997 ("PPA1997"), but many of these have not yet come into force. For present purposes it is the terms of the unamended PPA which govern protection that is currently available. However, the provisions of the PPA 1997 have been incorporated into the new compensation scheme to be established under the Financial Services and Marketing Act 2000, which comes into force on 30 November 2001. The scheme will be known as the Financial Services Compensation Scheme. It is the new scheme which will apply in the event of any insolvency after 30 November 2001. So far as we are aware there is no prospect that ELAS will become insolvent before that date (if at all). However, for the sake of completeness we will first look at whether the PPA protection applied to the policies issued through the ELAS Guernsey branch from 1990, when the branch opened, to date.

     

    The Policyholders Protection Act 1975 ("the PPA")

  2. The PPA provides two criteria that have to be met before the protection of the PPA applies. The first, under Section 3(1) is that the insurance company in question must be an authorized insurance company. The second, under Section 4(1) is that the relevant policy of insurance was a UK policy at the material time.

  3. Dealing first with Section 3, subsection 3(2) provides that an insurance company is an authorised insurance company for the purposes of the PPA if it is authorised under section 3 or 4 of the Insurance Companies Act 1982 to carry on insurance business of any class in the United Kingdom. ELAS is authorized to carry on insurance business in the United Kingdom and we have little doubt that this first criteria is met.

  4. The second criteria is less straightforward. Under Section 4(2) of the PPA, a policy of insurance is a UK policy for the purpose of Section 4(1) if, "at any time when the performance by the insurer of any of his obligations under the contract evidenced by the policy would constitute the carrying on by the insurer of insurance business of any class in the United Kingdom". This definition does not make it clear whether a policy issued through a Guernsey branch by ELAS would be a UK policy or not.

  5. The issue is not straightforward, and has been considered at length by the courts. The case which considered these issues most fully is the Ackman and Scher v PPB case, which went to the House of Lords in 1993. The declaration that was made by the House of Lords is as follows:

     

    "A policy is a United Kingdom policy if, had any of the obligations under the contract evidenced by the policy been performed at the relevant time, such performance would have formed part of an insurance business which the insurer was authorised to carry on in the United Kingdom, whether or not such obligations would have been performed in the United Kingdom".

  6. It is not entirely clear from this Judgment whether the fact that ELAS is authorised to carry on business in the UK is in itself sufficient to bring all of its business within the protection of the PPA.

  7. The insurers involved in Ackman and Scher v PPB did not operate through a branch outside the UK, and the House of Lords did not consider the question of the protection afforded by the PPA to business conducted by a UK authorised company through an overseas branch. The main focus of the House of Lords appears to have been whether or not the protection of the PPA falls away if the assured is situated, and therefore claims are to be settled, outside the United Kingdom. The House of Lords concluded that the fact that a claim was to be settled outside the UK did not preclude protection under the PPA.

     

  8. It does not seem to us to be entirely straightforward, however, to apply the declaration made by the House of Lords in circumstances where policies are issued by an overseas branch. We do consider that it is arguable that provided the insurer in question is authorised in the UK all of the business carried out by that company is covered. However, it appears to us that it could also validly be argued that the PPA does not apply to the policies issued by a UK authorised company if they are issued as part of a business which is conducted outside the UK.

     

  9. Under the first, wider, interpretation, the PPA clearly covers policies issued through the Guernsey branch by virtue only of the fact that ELAS is authorised in the UK. It would appear that this may have been the conclusion reached by ELAS as expressed in their letters to you dated 5 March 2001 and through HECM Customer Services in their letter to you undated but received by you on 10 August 2001. They have concluded that all of the ELAS business is eligible for protection. These letters are based on the conclusions drawn by their internal solicitor who thinks that all ELAS business, including its branch business is covered, but the business of any subsidiaries outside the UK would not be eligible for cover (see the ELAS Internal Memorandum from David Carruthers dated 27 February 2001).

     

  10. We are not confident, however, that the issue turns on UK authorisation alone. It is certainly also arguable that the PPA protection will only be available if the Guernsey branch policies were issued as part of the ELAS UK business, in other words it will not be available if the policies were issued as part of a separate overseas business which was not part of the UK business.

     

     

  11. This interpretation which gives rise to a more limited test is supported by the comments of Lord Donaldson in the Ackman v Scher case in the Court of Appeal. Lord Donaldson does expressly deal with the circumstances of a UK authorised company that does business both in this country and abroad, although he does not specifically refer to business operated from an overseas ‘branch’, as such. He does not conclude that if the company is authorised in the UK, all of its business is necessarily covered. On the contrary, he considers that an authorised UK insurance company could have a separate and distinct overseas insurance business, whose policyholders would have no claim to the board's assistance or protection. Although Lord Donaldson does not mention overseas ‘branch’ business, we suggest that what he describes as ‘distinct and separate overseas business’ may in practice be operated from an international branch. He goes on to say that whether any particular contract of insurance was effected as, or its performance would constitute, part of the authorised insurers' UK business or of their overseas business would be a question of fact.

  12. Under this second interpretation, therefore, we suggest that one would need to look at all of the facts surrounding the operation of the Guernsey branch business to determine whether or not it was a separate and distinct business from the ELAS UK business. One would need to look, for example, at where the policies were issued, where the underwriting decisions were made, and where claims were processed.

  13. On the facts as we currently understand them, in particular that applications for policies were processed in the UK, most if not all of the Guernsey branch policies were sent to the policyholders from the UK, and payments were made from the UK (albeit via the Guernsey branch) from a single with-profits fund, it seems likely to us that the Guernsey branch policies were part of the UK business and not part of a separate and distinct overseas business. Whilst our examination of the facts of the operation of the branch has not been exhaustive, on the basis of the information currently available it seems strongly arguable that under this more limited test, the PPA should cover the Guernsey branch policyholders.

  14. We prefer the second interpretation to the first, particularly in the light of the words of the PPA Section 4(2) itself, which make no reference to the authorisation of the business, only to the carrying on of business in the UK. It seems to us that an interpretation which concludes that business which is not part of the UK business (even if it is the business of a company authorised in the UK) is covered by the PPA is stretching the words of the statute too far. Furthermore, under the first, broader interpretation, Section 4(2) adds very little, if anything, to Section 3 which provides that it is only the policies of a UK authorised company which are covered.

  15. In any event, we conclude that under both the wider and the narrower interpretation, it is strongly arguable that the Guernsey branch policyholders are covered by the protection afforded by the PPA.

     

    Financial Services and Marketing Act 2000

  16. We have explained above that one of the issues that was addressed by the courts in the Scher Ackman case is whether protection was only available to assured who were in the UK. It was argued on behalf of the insurers that if the claim was to be paid outside the UK the PPA did not apply. The Court did not accept this interpretation of the PPA, as explained above. It appears, however, that the Government took the view subsequently that the Court’s interpretation of the PPA was too wide and that protection should only be available to policyholders resident in the UK, the Channel Islands and the Isle of Man. This is the decision that is reflected in the Policyholders Protection Act 1997, which amends the PPA 1975, although it is not yet in force. These amendments would have the effect of narrowing the protection which the court decided should be available under the PPA 1975, to policyholders resident in the UK, the Channel Islands and the Isle of Man.

  17. Although the relevant parts of the Policyholders Protection Act 1997 are not yet enforced, they have effectively been adopted in the Financial Services Compensation Scheme ("FSCS") which is due to take effect when the relevant provisions of the Financial Services and Markets Act are commenced, at midnight on 30 November 2001 (‘N2’).

  18. The FSCS ‘final’ draft text provides that a protected contract of insurance is a contract of insurance issued through an establishment in the UK, another EEA State, the Channel Islands or the Isle of Man. However, it further provides that where the contract of insurance is issued through an establishment in the Channel Islands, the risk is only protected if the risk is situated in the UK, Channel Islands or Isle of Man. Where the policyholder is an individual, the risk is situated where the policyholder has his habitual residence at the date when the policy commenced.

  19. It therefore appears that the policyholders who obtained their ELAS policies through the Guernsey branch will, under the provisions as they currently stand of the proposed new Financial Services Compensation Scheme, only be eligible for protection if they were resident in the UK, Channel Islands or Isle of Man when the policy commenced.

Norton Rose 11 October 2001