The recent case of Re Digital Satellite Warranty Cover Ltd [2011] EWHC 122 (Ch) considered the meaning of 'insurance business' within of the Finance Services and Markets Act 200 ('FSMA').
Section 19 of FSMA imposes authorisation requirements on persons who carry on regulated activities (including general insurance business) within the United Kingdom. A variety of criminal and civil sanctions follow for failing to obtain such authorisation including the right for the Financial Services Authority ('FSA') to petition for a winding up order. In the present case, the FSA presented three winding up petitions in respect of companies who offered extended warranty cover to people who had purchased satellite television equipment on the basis that they were carrying out and effecting insurance business without authorisation. The defendant companies said that the warranties were not insurance contracts as they provided repair or replacement of the equipment which was not the same as indemnifying for the cost of repair or replacement.
Judgment
Warren J held that the companies were entering into contracts which were capable of being insurance contracts because the protection offered ultimately relieved the customer of the liability to pay for repairs or replacement which amounted to an indemnity for financial loss. Accordingly, the judge held that all of the companies should be wound up.
Comment
Extended warranties, such as those referred to in the present case, are extremely common in the retail market. These types of warranties are often called 'service contracts' as they provide an extended period of repair and maintenance service for a product which would otherwise require the customer to pay for the repair or purchase a new product in the event of mechanical fault or breakdown. Service contracts are not commonly referred to as contracts of insurance, however, this case seriously calls the legitimacy of such arrangements into question and it will be interesting to see what steps, if any, service contract providers take to ensure that they are FSA compliant in light of this decision.
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