Facts
Between 2001 and 2005, Whiteley Insurance Consultants unlawfully
issued insurance contracts to about 81,000 policyholders. Cover was
ostensibly issued on behalf of named or unnamed underwriters. In
reality, the firm either had no authority from the named
underwriters, or the underwriters did not exist.
Most of the policies were for travel insurance. Following
complaints, the Financial Services Authority investigated and on
26th April 2005 presented a petition for the firm to be wound
up. Liquidators were appointed on the same day.
The liquidators received notices of possible claims from 5,422
policyholders, which included claims for travel losses, for return
of premiums and for the cost of alternative insurance cover. The
liquidators applied to the court for directions on how these should
be dealt with.
Regulatory background
When an insurer goes into liquidation, a policyholder with an
unpaid insurance claim is in the same position as any other
creditor and must prove the debt by submitting details to the
liquidators.
Under the Insurers (Winding Up) Rules 2001, claims arising from
events occurring before liquidation but which have not fallen due
for payment or which were not notified until after the liquidation
will be valued according to actuarial principles and assumptions
determined by the court.
Where no loss has arisen by the liquidation date, the policy
itself is given a value under the rules. This varies according to
the type of policy but, in the case of general insurance for a
fixed term, the value is generally based on a return of part of the
premium proportionate to any unexpired period of cover.
In the case of Whiteley Insurance Consultants, however, the
situation was complicated by changes to the regulatory regime
during the relevant period. How individual claims would be handled
would depend on whether the policy was issued before or after 14th
January 2005.
Before that date, there was no requirement on the firm to be
authorised to carry on business as an insurance intermediary under
the Financial Services and Markets Act 2000 (FSMA). Effecting and
carrying out contracts of insurance as principal, however, would be
a breach of the general prohibition against unauthorised persons
carrying out regulated activities under section 19 of the
Act.
Breach of the prohibition is an offence (s.23). Under section
26, the insurance contract is unenforceable against the
policyholder, who is entitled to recover the premium paid under the
agreement and compensation for any loss sustained as a result of
paying that premium.
But if the court is satisfied that it would be just and
equitable in the circumstances, it can allow the contract to be
enforced or the money paid to be retained (s. 28). In exercising
this discretion, it will take into account a number of factors,
including whether the person carrying out the regulated activity
reasonably believed he was not contravening the general
prohibition.
From 14th January 2005, the firm had to be (and was) authorised
as an insurance intermediary. This meant that the unauthorised
issue of policy documents was a contravention of FSA rules, but not
a breach of the prohibition.
Judgment
Looking at the pre-January 2005 polices, the judge was satisfied
that the firm had been effecting and carrying out contracts of
insurance "as principal" in breach of the general prohibition.
Although ostensibly acting as agent for underwriters, it was
effectively conducting itself as an insurer, receiving premiums and
paying claims.
The policyholders could, therefore, choose between enforcing
their policies or recovering the premium and claiming compensation
under section 26. If a policyholder chose a return of premium,
however, he would have to repay any claims under the policy already
paid by the firm.
The judge concluded that the liquidators could assume that any
policyholder whose claim had been paid, or whose claim arose out of
events occurring before the liquidation, would opt for enforcing
the policy rather than recovering premium, as the claim would
probably be worth more.
All other policyholders were entitled to a return of premium.
This would be more than they would get under the winding up rules,
where a valuation would reflect only part of the premium
proportionate to any unexpired period of cover.
These policyholders would not, however, have an additional claim
for compensation. Section 26 provides compensation for loss
"sustained… as a result" of parting with the money. Arguably, this
might cover a claim for loss of interest on the money paid. But if
premiums had not been paid to this firm, they would have been paid
to another insurer for similar travel cover. The policyholders had
suffered no loss.
The judge also concluded that the liquidators could assume the
court would not exercise its discretion to allow the firm to retain
premiums. On the evidence, it was clear that the husband and wife
team running the firm knew or ought to have known they were
breaching the general prohibition.
The later policies
Policies issued after 14th January 2005 contravened FSA rules
but did not breach the general prohibition because by then the firm
was an authorised insurance intermediary. The policies were
therefore fully enforceable and there was no statutory entitlement
to a return of premium.
In certain cases, a claim for damages can be brought by someone
who has suffered a loss as a result of a contravention (s.20). But
again, the judge concluded that it would be difficult for these
policyholders to show they had suffered a loss when they would have
paid an equivalent amount of premium for another travel policy.
Where the policyholder had a claim payable before the
liquidation date, that claim was provable in the liquidation in the
normal way.
Claims arising from events occurring before the liquidation
could in this case be valued under the rules relatively easily,
without the need for actuarial principles and assumptions.
Policies still in existence at the date of liquidation would be
given a value that reflected a proportion of the premium for any
unexpired period of cover.
The judge dismissed a suggestion that the winding up rules only
applied to authorised insurers. By defining "insurer" as any person
effecting or carrying out contracts of insurance, the rules clearly
focus on the business actually being carried out, rather than
whether or not the person was authorised.
Commentary
This is the first time the court has been asked to consider the
effect on policyholders of a breach of the general prohibition
against an unauthorised person carrying out an insurance-related
regulated activity. The judgment is likely to provide useful
guidance for future liquidation cases where an agent has acted
without authority.
