Re Whiteley Insurance Consultants (a.k.a. Kingfisher Travel Insurance Services) (a firm)
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Between 2001 and 2005, Whiteley Insurance Consultants unlawfully issued insurance contracts to about 81,000 policyholders. Cover was ostensibly issued on behalf of named or unnamed underwriters. In reality, the firm either had no authority from the named underwriters, or the underwriters did not exist.
Most of the policies were for travel insurance. Following complaints, the Financial Services Authority investigated and on 26th April 2005 presented a petition for the firm to be wound up. Liquidators were appointed on the same day.
The liquidators received notices of possible claims from 5,422 policyholders, which included claims for travel losses, for return of premiums and for the cost of alternative insurance cover. The liquidators applied to the court for directions on how these should be dealt with.
When an insurer goes into liquidation, a policyholder with an unpaid insurance claim is in the same position as any other creditor and must prove the debt by submitting details to the liquidators.
Under the Insurers (Winding Up) Rules 2001, claims arising from events occurring before liquidation but which have not fallen due for payment or which were not notified until after the liquidation will be valued according to actuarial principles and assumptions determined by the court.
Where no loss has arisen by the liquidation date, the policy itself is given a value under the rules. This varies according to the type of policy but, in the case of general insurance for a fixed term, the value is generally based on a return of part of the premium proportionate to any unexpired period of cover.
In the case of Whiteley Insurance Consultants, however, the situation was complicated by changes to the regulatory regime during the relevant period. How individual claims would be handled would depend on whether the policy was issued before or after 14th January 2005.
Before that date, there was no requirement on the firm to be authorised to carry on business as an insurance intermediary under the Financial Services and Markets Act 2000 (FSMA). Effecting and carrying out contracts of insurance as principal, however, would be a breach of the general prohibition against unauthorised persons carrying out regulated activities under section 19 of the Act.
Breach of the prohibition is an offence (s.23). Under section 26, the insurance contract is unenforceable against the policyholder, who is entitled to recover the premium paid under the agreement and compensation for any loss sustained as a result of paying that premium.
But if the court is satisfied that it would be just and equitable in the circumstances, it can allow the contract to be enforced or the money paid to be retained (s. 28). In exercising this discretion, it will take into account a number of factors, including whether the person carrying out the regulated activity reasonably believed he was not contravening the general prohibition.
From 14th January 2005, the firm had to be (and was) authorised as an insurance intermediary. This meant that the unauthorised issue of policy documents was a contravention of FSA rules, but not a breach of the prohibition.
Looking at the pre-January 2005 polices, the judge was satisfied that the firm had been effecting and carrying out contracts of insurance "as principal" in breach of the general prohibition. Although ostensibly acting as agent for underwriters, it was effectively conducting itself as an insurer, receiving premiums and paying claims.
The policyholders could, therefore, choose between enforcing their policies or recovering the premium and claiming compensation under section 26. If a policyholder chose a return of premium, however, he would have to repay any claims under the policy already paid by the firm.
The judge concluded that the liquidators could assume that any policyholder whose claim had been paid, or whose claim arose out of events occurring before the liquidation, would opt for enforcing the policy rather than recovering premium, as the claim would probably be worth more.
All other policyholders were entitled to a return of premium. This would be more than they would get under the winding up rules, where a valuation would reflect only part of the premium proportionate to any unexpired period of cover.
These policyholders would not, however, have an additional claim for compensation. Section 26 provides compensation for loss "sustained… as a result" of parting with the money. Arguably, this might cover a claim for loss of interest on the money paid. But if premiums had not been paid to this firm, they would have been paid to another insurer for similar travel cover. The policyholders had suffered no loss.
The judge also concluded that the liquidators could assume the court would not exercise its discretion to allow the firm to retain premiums. On the evidence, it was clear that the husband and wife team running the firm knew or ought to have known they were breaching the general prohibition.
The later policies
Policies issued after 14th January 2005 contravened FSA rules but did not breach the general prohibition because by then the firm was an authorised insurance intermediary. The policies were therefore fully enforceable and there was no statutory entitlement to a return of premium.
In certain cases, a claim for damages can be brought by someone who has suffered a loss as a result of a contravention (s.20). But again, the judge concluded that it would be difficult for these policyholders to show they had suffered a loss when they would have paid an equivalent amount of premium for another travel policy.
Where the policyholder had a claim payable before the liquidation date, that claim was provable in the liquidation in the normal way.
Claims arising from events occurring before the liquidation could in this case be valued under the rules relatively easily, without the need for actuarial principles and assumptions.
Policies still in existence at the date of liquidation would be given a value that reflected a proportion of the premium for any unexpired period of cover.
The judge dismissed a suggestion that the winding up rules only applied to authorised insurers. By defining "insurer" as any person effecting or carrying out contracts of insurance, the rules clearly focus on the business actually being carried out, rather than whether or not the person was authorised.
This is the first time the court has been asked to consider the effect on policyholders of a breach of the general prohibition against an unauthorised person carrying out an insurance-related regulated activity. The judgment is likely to provide useful guidance for future liquidation cases where an agent has acted without authority.