Documents: 11/10/2001 - Scope of Protection to Guernsey Branch Policyholders under UK Legislation
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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")
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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.
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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.
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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.
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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".
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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.
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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.
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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.
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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).
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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.
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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.
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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.
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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.
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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.
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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
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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.
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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').
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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.
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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.