Insurance – Compensation scheme – Liability – Respondent policyholders seeking compensation from appellant scheme following administration of insurer – Appellant agreeing to pay VAT liability but not judgment debt interest and litigation costs – High Court allowing respondents’ application for judicial review – Appellant appealing – Whether costs and interest within “protected claim” – Whether claim for interest and costs “in respect of” claim – Appeal allowed
The respondent policyholders were a group of individuals and estates of deceased persons who owned long leases in a development at New Lawrence House in Hulme, Manchester. On purchasing the leases, the respondents were each issued with an insurance policy which was intended to cover structural defects. The policies provided “building guarantee insurance” as referred to in the Policyholder Protection Rules (PPR).
The development suffered from serious defects which led to the respondents making substantial claims under the policies. The insurer declined the claims and the respondents issued proceedings which resulted in two Court of Appeal judgments in their favour.
In the course of the proceedings, there was an insurance business transfer scheme under which the insurer’s liabilities were transferred to another entity which agreed to pay the judgment debt but went into administration without paying the VAT and statutory interest on the judgment debt or the respondent’s legal costs.
The respondents sought compensation from the appellant compensation scheme, which agreed that the VAT element was covered by the PPR but declined to pay compensation for the other defaults. The respondents made a successful application for judicial review.
The judge concluded that the claim fell within rule 3.1(2) since the claims for interest and costs were “integral to, part and parcel of or sufficiently connected to” a protected claim. Therefore, the respondents were entitled to compensation under the PPR, even though they were not claims under a protected contract of insurance and so not protected claims: [2022] EWHC 2228 (Admin). The appellant appealed.
Held: The appeal was allowed.
(1) The PPR which dealt with insurance-related compensation and formed part of the Prudential Regulation Authority (PRA) Rulebook were made by the PRA. Parliament had no direct role in the creation or amendment of the PPR, and there was no requirement to lay them before parliament under any procedure. Beyond what was laid down in the Financial Services and Markets Act 2000 as to the overall requirements of the scheme, it did not make sense to analyse the PPR in terms of parliamentary intention.
Although the PPR were intended to create legally enforceable rights and obligations for the appellant, insurers and policyholders alike, they were drafted by a regulator for use both by policyholders and by industry participants as well as by the appellant. They were intended to be comprehensible by a non-lawyer and to produce a workable scheme. They had to be construed with that in mind.
Subject to those qualifications, it was right to apply broadly similar principles to those applicable in construing a statute, substituting the intention of the body charged with making the rules, read in the light of the statutory scheme pursuant to which the rules were made. Applied to the PPR, the question was what, objectively, the rule maker must be taken to have intended by the words used in their context, having regard to the purpose of the rules and in the light of the relevant provisions of the 2000 Act.
(2) It was important to bear in mind that the scope of the rules had direct implications not only on the rights of claimants but on the position of others, in particular in relation to levies imposed on insurers to fund the scheme. Ultimately it was the actual wording of a provision that governed any decision as to its effect. The PPR should be read as a whole, taking a holistic and iterative approach, so that a preliminary view on one provision could be tested by reference to other relevant provisions. A provision should be construed in the light of its overall purpose on the basis that it was intended to produce a practical and commercially sensible result. The rules should be taken to be grounded in reality and the court should keep in proportion any drafting infelicities: Re Lehman Brothers International (Europe) (No 2) [2010] EWCA Civ 917; [2011] 2 BCLC 184 and Official Receiver v Shop Direct Finance Company Ltd [2023] EWCA Civ 367 applied. R (Geologistics) v Financial Services Compensation Scheme [2004] 1 WLR 1719 distinguished.
(3) The judge was right to conclude the costs and interest were not owed “under” a contract of insurance. They were amounts due pursuant to a court order and pursuant to statute. The natural and ordinary meaning of “under” the contract meant just that. It would cover amounts owed under the terms of the contract, but not other amounts the entitlement to which derived from some other source, such as a court order or statute.
It could not be distorted to encompass such other amounts, and the inclusion of a reference to “civil liability” did not render that permissible. There was no reference in the PPR to securing full protection, and it was clear from the scheme of the legislation that that was not contemplated.
(4) Rule 9.1 of the PPR defined “protected claim”, and it expressly applied only to claims “under” the relevant contract. The incorporation of the words “in respect of” via the definition of claim could not overcome that clear, and obviously intended, limitation. Given that the costs and interest were not owed “under” the policies, those amounts therefore could not fall within the definition of “protected claim” and the judge was correct in declining to hold otherwise.
The correct interpretation of the definition of “claim” required the words “in respect of” to be read as having a narrower meaning, namely as “for” or “for the payment of”.
Although the language of rule 3.1(2) was not the same, there was a sufficient similarity in the way the words were used to provide some indication that they should not be interpreted differently.
Other provisions of the rules provided additional support for the interpretation that, in rule 3.1(2), “in respect of” meant “for” or “for the payment of”, and not “integral to, part and parcel of or sufficiently connected to” as found by the judge. Of particular significance were rules 16 to 20 dealing with the calculation and payment of compensation, especially rules 17, 19 and 20. Accordingly, the PPR could not properly be construed in a way that would extend to the costs and interest owed by the insurer.
Richard Handyside KC, James Cutress KC and Laurentia de Bruyn (instructed by Dentons UK and Middle East LLP) appeared for the appellant; James Drake KC and Douglas Grant (instructed by Walker Morris LLP) appeared for the respondents.
Eileen O’Grady, barrister
Click here to read a transcript of R (on the application of Manchikalapati and others) v Financial Services Compensation Scheme
