Retailers providing “extended warranties” or “repair agreements” may find themselves “undertaking insurance businesses without FSA authorisation”.
In the three cases involving Digital Satellite Warranty Cover Ltd (“DSW”) and the Financial Services Authority (“FSA”), it was held that its extended warranty contracts were held to be insurance.
Businesses should consider carefully whether their “extended warranties” or “repair agreement” or similar products could be construed as insurance and if so, what they need to do to ensure they are in line with legislation.
Retailers providing “extended warranties” or “repair agreements” or similar might think that authorisation to undertake financial services pursuant to the Financial Services and Markets Act 2000 (“FSMA”) is unnecessary.
However, just because a product does not have the name, form or appearance of an insurance policy doesn’t stop it from being insurance in substance.
This is a key message in the three cases involving Digital Satellite Warranty Cover Ltd (“DSW”) and the Financial Services Authority (“FSA”).
The FSA had petitioned the court to wind up DSW on the grounds that it was undertaking insurance business without FSA authorisation in breach of FSMA sections 19 and 22. Such a breach is a criminal offence and allows the FSA (soon to be split into the Prudential Regulation Authority and Financial Conduct Authority) a range of remedies.
As set out in the Supreme Court’s judgment, DSW’s business:
“consisted of selling and performing extended warranty contracts under which, in consideration of a periodic payment, they contracted to repair or if necessary replace satellite television dishes, digital boxes and associated equipment in the event of breakdown or malfunction or, in certain cases, physical damage”.
It is worth remembering that DSW had no statutory obligations in relation to the above equipment by reason of sale of goods legislation.
At first instance, DSW had argued that its contracts were not insurance. On its appeals, DSW argued that its contracts fell outside the framework of EU and UK legislation governing the regulation of non-life insurance.
The trial and appeal courts held that the essential proposition as to what constitutes a contract of insurance is in Prudential Insurance Co v Inland Revenue Comrs  2 KB 658:
“A contract of insurance ... must be a contract for the payment of a sum of money, or for some corresponding benefit such as the rebuilding of a house or the repairing of a ship, to become due on the happening of an event, which event must have some amount of uncertainty about it, and must be of a character more or less adverse to the interest of the person effecting the insurance.”
The Supreme Court rejected DSW’s arguments, holding that DSW’s contracts fell within both the above common law test as to insurance and the regulatory framework of classification – in particular, the statutory category known as “Miscellaneous financial loss”: “… risks of loss to the persons insured attributable to their incurring unforeseen expense ...”
As a result of the DSW line of cases, businesses should consider carefully whether their “extended warranties” or “repair agreement” or similar products could be construed as insurance. If the products could be insurance, retail businesses should consider how they can bring themselves into compliance with the UK’s regulation of insurance business.