Joseph Aitken V. Financial Services Compensation Scheme Limited

JurisdictionScotland
JudgeLord Drummond Young
Date30 May 2003
Docket NumberCA139/02
CourtCourt of Session
Published date30 May 2003

OUTER HOUSE, COURT OF SESSION

CA139/02

OPINION OF

LORD DRUMMOND YOUNG

in the cause

JOSEPH AITKEN

Pursuer;

against

FINANCIAL SERVICES COMPENSATION SCHEME LIMITED

Defenders:

________________

Pursuer: MacSporran; Thompsons

Defenders: Upton; Burness, W.S.

30 May 2003

[1] The pursuer was formerly employed by Monktonhall Colliery Limited. On 7 July 1996 he sustained an injury in the course of his employment. Monktonhall had taken out insurance with Independent Insurance Company Limited for the period from 9 June 1996 to 30 June 1997, the policy in question being known as a Business Liability Policy. The policy included employers' liability insurance as required by the Employers' Liability (Compulsory Insurance) Act 1969. On 9 May 1997 Monktonhall went into liquidation. Thereafter the pursuer raised an action in the Court of Session against Monktonhall and its liquidator for reparation in respect of his injury. By interlocutor dated 6 July 1999 the Court awarded the pursuer damages of £22,500, which included interest to that date, and expenses. The Independent was found liable in expenses as dominus litis.

[2] Thereafter the pursuer made a claim against the Independent based on his rights as statutory assignee of Monktonhall in terms of section 1(1) of the Third Parties (Rights against Insurers) Act 1930. The Independent sought to rely upon an alleged excess clause in the contract of insurance to deduct the first £25,000 from such a claim. The pursuer raised a commercial action against the Independent for declarator that he was entitled to the benefit of the policy and payment of the full sum decerned for in the Court's interlocutor of 6 July 1999, without deduction. On 16 January 2001 the Court granted decree of declarator, and awarded the pursuer the taxed expenses of process. On 12 February 2001 the Independent paid the principal sum. On 26 June 2001 the Auditor of Court taxed the pursuer's expenses. The relevant decree, for the sum of £4,992 together with extract dues of £27, was extracted on 20 August 2001. Meanwhile, however, on 17 June 2001 joint provisional liquidators had been appointed to the Independent. The Independent is insolvent, and consequently the pursuer now seeks payment of the award of expenses in his favour from the defenders. To that end, he has raised the present action, in which he concludes for declarator that the defender is obliged, in terms of section 6 of the Policyholders Protection Act 1975, as amended, to secure that a sum equal to the full amount due to him under the extract decree dated 20 August 2001 is paid to him. He further concludes for payment of the amount contained in that decree, a total of £5,019.

[3] The defenders exercise functions under the Policyholders Protection Act 1975. That Act set up a body known as the Policyholders Protection Board, which was charged with responsibility, broadly speaking, for satisfying claims under insurance policies against insurance companies that had gone into liquidation or had had provisional liquidators appointed. The Policyholders Protection Board ceased to exist on 2 March 2002, in consequence of section 416(3)(b) of the Financial Services and Markets Act 2000 and article 2(4) of the Financial Services and Markets Act 2000 (Commencement No 7) Order 2001 (SI 2001/3538). Provision was made for the transfer of the Board's liabilities after it ceased to exist. In relation to the present case, any liability that exists towards the pursuer has been transferred to the defenders. That is the result of article 9(1) and (2) of the Financial Services and Markets Act 2000 (Transitional Provisions, Repeals and Savings) (Financial Services Compensation Scheme) Order 2001 (SI 2001/2967), which transfers such liabilities to a person described as a "scheme manager". In the case of the Independent, the defenders are the scheme manager.

[4] It follows that, if the pursuer is to have a valid claim against the defenders, he must demonstrate that he would have had a valid claim against the Board under the Policyholders Protection Act 1975. The purpose of the material sections of that Act is set out in the long title, which is in the following terms:

"An Act to make provision for indemnifying (in whole or in part) or otherwise assisting or protecting policyholders and others who have been or may be prejudiced in consequence of the inability of authorised insurance companies carrying on business in the United Kingdom to meet their liabilities under policies issued... by them, and for imposing levies on the insurance industry for the purpose".

The functions of the Board under the Act, which have devolved upon the defenders in the circumstances of the present case, are described in section 1(2); they are responsible for taking the measures provided for by sections 6 to 16 for the purpose of indemnifying or assisting policyholders who have been prejudiced in consequence of the inability of an insurer to meet liabilities under policies issued by them. The first substantive provision is section 6, which is in the following terms:

"(1) This section applies to any policy which satisfies the requirements of any of the following, that is to say --

...

(b) section 1 of the Employers' Liability (Compulsory Insurance) Act 1969..."

The policy effected by Monktonhall with the Independent was intended to satisfy the requirements of section 1 of the Employers' Liability (Compulsory Insurance) Act 1969, and consequently it fell under section 6. That section continues:

"(3) In this section 'a liability subject to compulsory insurance' means any liability required under any of the enactments mentioned in subsection (1) above to be covered by insurance...

(4)... it shall be the duty of the Board to secure that a sum equal to the full amount of any liability of a company in liquidation towards any policyholder or security holder under the terms of any policy or security to which this section applies is paid to the policyholder or security holder as soon as reasonably practicable after the beginning of the liquidation.

(5) Subsection (4) above does not apply by reference to any liability of a company in liquidation under the terms of a policy to which this section applies arising otherwise than in respect of a liability of the policyholder which is a liability subject to compulsory insurance.

(6) ... it shall be the duty of the Board to secure that a sum equal to ninety per cent of the amount of any liability of a company in liquidation towards a private policyholder under the terms of any policy to which this section applies, being a liability arising otherwise than in respect of a liability of the policyholder which is a liability subject to compulsory insurance, is paid to the policyholder as soon as reasonably practicable after the beginning of the liquidation".

The scheme of section 6 is accordingly that liabilities which are the subject of compulsory insurance are to be paid in full, but only 90 per cent of other liabilities is to be paid. Section 13(3) of the Act is a "pay when paid" provision; the Board is not required to make a payment until it has funds available for that purpose. Section 15 of the Act deals with insurance companies that have had provisional liquidators appointed but are not actually in liquidation. It provides as follows:

"(1) An authorised insurance company, not being a company in liquidation, is a company in provisional liquidation for the purposes of this section if a provisional liquidator has been appointed in respect of the company under section 135 of the Insolvency Act 1986...

(2) A policyholder is eligible for assistance under this section

...

(b) if he is a policyholder in respect of a general policy... of a company in provisional liquidation which was a United Kingdom policy at the time when the provisional liquidator was appointed.

(3) In a case where it appears to the Board to be desirable to do so, the Board may

(a) make payments to or on behalf of policyholders who are eligible for assistance under this section, on such terms (including any terms requiring repayment, in whole or in part) and on such conditions as the Board think fit..".

Thus if a company is in provisional liquidation the defenders have a discretion as to whether to make payment of any liability of the company in question. In the present case the Independent is only in provisional liquidation; no winding up order has yet been made. It is not at present certain whether this state of affairs will continue. I was informed by counsel for the defenders that, if the Independent remains in provisional liquidation, and the defenders accordingly have to exercise their discretion under section 15, they will have regard to any claims that would have fallen under section 6 had the company been wound up. For that reason, even if no winding up order is made, the existence or otherwise of a section 6 claim is significant and does not present a question of merely academic importance.

[5] The wording of section 6(4) makes it clear that it is only the liabilities of the insolvent insurance company that are to be indemnified by the defenders. It is accordingly of critical importance to identify whether any claim made against the defenders falls within the terms of a relevant insurance policy. In the present case, as mentioned above, Monktonhall had effected a policy covering employers' liability with the Independent. In that policy, the Independent agreed as follows:

"In consideration of the payment of the premium the Independent Insurance Company Ltd (the Company) will indemnify the Insured [Monktonhall] within the terms Exceptions and Conditions of this Policy against the events set out in the Sections operative (specified herein) and occurring in connection with the Business during the Period of Insurance...".

Section 1 of the policy, dealing with employers' liability, provided as follows:

"In the event of Bodily Injury caused to an Employee ... arising...

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