Court of Appeal finds in favour of FSCS on scope of the Policyholder Protection Rules (PRR)

Tamsin Hyland explores the recent judgment of JR (On the application of Manchikalapati v FSCS [2023] EWCA Civ 1006) and its relevance to insurance policy wording.

Background

The Court of Appeal has upheld an appeal by the FSCS from a High Court decision to grant an application for JR against FSCS following FSCS's refusal to compensate a policyholder for an insolvent insurer's failure to meet its liabilities.

The insurer, East West insurance Company Ltd, had paid a judgment sum and a costs award but went into administration without paying the VAT, statutory interest on the judgment debt and some residual costs. The FSCS discharged the VAT but declined compensation for interest and costs on grounds that these sums did not fall within the scope of the Policyholder Protection Rules (PRR). The policyholder was out of pocket by approximately £4m.

Why this is worth a read

The Court of Appeal judgment is a useful recitation of the origins of the FSCS scheme and its objective, namely to secure "an appropriate degree of protection … for policyholders" by paying "compensation… to claimants in respect of claims made in connection with …a regulated activity carried on… by relevant persons". It is however not an absolute protection and in particular the judgment highlights how the statutory framework empowers the FSCS as scheme provider to restrict the types and scope of claims to be compensated.

In response to the FSCS's refusal to compensate, the policyholders successfully argued at first instance that their claim fell within the PRR because the claim for interest and costs was "in respect of " a protected claim, even if not actually a protected claim. The Judge at first instance held that the claims were not protected claims either in their own right or, on the basis that as claims owed "under contract", they therefore nonetheless fell within the scope of "protected claims".

FSCS's successful appeal turned on the interpretation of key phrases within the FSMA and PRR quoted above. It will not be lost on the reader that these connective phrases are also ubiquitous within insurance policy wordings. The latter ("in connection with") in particular, is routinely considered as representing a low bar in terms a nexus, that need not be direct, between two operative concepts. Whilst this judgment was not directly concerned with the interpretation of insurance policy wordings, (rather the statutory regime in which they operate) there is nonetheless a relevance for those preparing insurance policy wordings.

The leading judgment of Lady Justice Falk (here) reminds us that exploring the meaning of any contractual language has to be undertaken through the lens of the provisions as a whole and in a manner that breathes life to the overall purpose of the framework in which it sits. The result must also be squared away as making commercial sense. Crucially, in searching for meaning of wording, the deployment of stock language in different contexts within the same document will be drawn into orbit as part of that analysis. In my last article, I observed that in the case of Allianz Insurance plc v University of Exeter it was argued, albeit unsuccessfully, that the absence of language in one provision that was deployed in an analogous context elsewhere in a wording, could be construed as imparting an implied meaning that was not expressly provided for in the wording.

So, once again, the take away for those drafting insurance policy wordings and associated literature is that we need to keep in mind the method used by the various Justices in reaching their findings on interpretation when deciding how we draft. With the current focus quite rightly on how wordings can further the Consumer Duty and the need to deliver good outcomes for customers, consistency can be a good thing as for the reader, repetition of certain phraseology can bring clarity, simplify a document and aid intelligibility. As ever, there are two sides to a story. Consistency as a drafting device can have implications, not necessarily good or bad, but implications nonetheless.