Reinsurance E-Alert

When there is Insurance but no Insurer: the undoing of Whiteley Insurance Consultants

Re Whiteley Insurance Consultants (also known as Kingfisher Travel Insurance Services (a firm)) [2008] All ER

In a recent decision the Chancery Division had to consider for the first time the effect of sections 20, 26 and 28 of the Financial services and Markets Act 2000 (FSMA). Those provisions regulate agreements entered into in breach of the FSMA, and provide a statutory remedy to the innocent contracting party as against the party in default, in this case Whiteley Insurance Consultants (WIC). The decision also illustrates how the Financial Services Authority (FSA) readily takes drastic action against insurance professionals who are in serious breach of the rules.

Background

WIC carried on business as an insurance intermediary in its own name and under the name Kingfisher Travel Insurance services, promoting most of its policies through tavel agents and financial advisers. WIC was acting as agent for a number of underwriters. Between 2001 and 2005, WIC issued a number of travel policies on behalf of named underwriters without due authority from those underwriters. WIC also issued policies on behalf of un-named and non existent underwriters (referred to as "Panel of Insurers" in the policies). It is estimated that unauthorised policies were issued to approximately 81,000 policyholders, affecting as many as 123,000 travellers. WIC managed the unauthorised policies as if it were the insurer: collecting and retaining premium, considering and even paying claims out of its own funds.

The FSA received complaints and investigated WIC. Having uncovered the scam, on 26 April 2005 the FSA used its power under section 367 of the FSMA to issue a winding up petition to the High Court, which was granted on 15 June 2005. Mr Whiteley was subsequently prohibited by the FSA from performing any function related to a regulated activity, and a disqualification order for a period of 12 years was made against him under the Company Directors Disqualification Act 1986. In its final notice concerning Mr Whiteley, the FSA stated "the severity of the ongoing risk posed by Mr Whiteley to consumers and to the market generally is such that it is necessary (…) for the FSA to exercise its power to make a prohibition order against Mr Whiteley".

The Proceedings

The liquidators applied to the Court for directions as to how they should deal with the deceived policyholders. The position was made more complex by the fact that policies were issued under two separate regulatory regimes: before (the "Earlier Period") and after (the "Later Period") the implementation of the Insurance Mediation Directive in January 2005. During the Earlier Period, WIC was entitled to act as agent of underwriters without specific authorisation, and therefore the breach it had committed was issuing policies whilst not being an "authorised person". This was contrary to the well know prohibition to do so under section 19 of the FSMA (the "General Prohibition"), the breach of which is an offence. From January 2005, WIC had to be authorised to carry out insurance mediation activities. WIC became authorised, but to act as intermediary only, and therefore WIC's breach in the Later Period was to act outside the scope of its authorisation. The distinction was consequential for the policyholders, as set out below.

The Decision

The critical aspects of the Court's decision are as follows:

1. Because it conducted itself as the insurer on all unauthorised policies, it was "inescapable" that WIC was effecting (i.e. entering into new business) and carrying out (i.e. performing) the insurance contracts as principal, and was liable on them to the policyholders.

2. The Earlier Period. Section 26 of the FSMA, which governs a breach of the General Prohibition, renders the relevant policies unenforceable against the policyholders, but otherwise valid. Thus it is up to the policyholders to elect between enforcing their policies, or rely on their right under section 26(2) to recover "money or other property paid" (i.e. premium paid) and "compensation for any loss sustained (…) as a result of having parted with it". The Court however took the view that policyholders had suffered no "loss" from having paid premium as they would in any case have sought cover from alternative insurers. This meant notably that no interest was payable on premium paid, as it could not be argued the monies would have been used more fruitfully.

3. The Court considered arguments put forward by creditors that it should use its discretion under section 28 to allow WIC to keep premiums, notably because policyholders had enjoyed the benefit of a policy enforceable by them. The Court was unconvinced, pointing out WIC may well not have been able to meet all claims. Also, Mr Whiteley was well aware that he was contravening the General Prohibition (knowledge being the statutory criteria for the Court to consider under the FSMA).

Thus policyholders from the Earlier Period could either make a claim under their policies, or recover premium paid.

4. The Later Period. Section 20, which applies when someone acts outside the scope of its authorisation, makes the insurance contract neither void nor unenforceable. Section 20 allows policyholders to recover any loss suffered, but not to premium. As above the Court found policyholders had suffered no loss since they would have obtained insurance elsewhere. This reasoning also prevented the policyholders from seeking compensation under common law.

Thus policyholders from the Later Period could only make a claim under their policies, but not recover premium (except in the case of policies continuing when WIC were wound up, where there may be a claim for the costs of obtaining alternative cover for the unexpired portion of the policy).

Comments

It is interesting to note that policyholders from the Later Period, after the Insurance Mediation Directive was implemented, ended up being worse off. The aim of the directive was to protect consumers by requiring people selling insurance to obtain authorisation from the FSA. In this case, not only did the process of authorisation fail to prevent WIC from continuing to issue unauthorised policies, but it has denied subsequent policyholders the chance to recover their premium. This is because the FSMA was drafted on the premise that acting outside the scope of activities permitted by the FSA is a lesser breach than acting without authorisation at all. On the positive side, the fact that WIC was registered with the FSA certainly enabled the FSA to investigate and act more efficiently once the scam was discovered.