On 5 September 2023 the Court of Appeal (Popplewell, Andrews, and Falk LJJ) handed down judgment in Manchikalapati & Ors v The Financial Services Compensation Scheme  EWCA Civ 1006.
The appeal raised an important point of construction of the Policyholder Protection Rules (“PPR”). The PPR set out the extent to which compensation is required to be paid to insurance policyholders for claims against insurers who are unable (or likely to be unable) to pay. The FSCS is obliged to administer the policyholder protection scheme (the “Scheme”) in accordance with the PPR.
The case arose out of an insolvent insurer’s failure to meet its liabilities to the Respondent Policyholders (the “Policyholders”) for post-judgment interest and litigation costs. The Policyholders own long leases in a development in Hulme, Manchester, known as New Lawrence House. On purchasing their leases, they were each insured under a policy of building warranty insurance. The development suffered from serious defects. The Policyholders’ claims under the policies resulted in litigation against the insurer culminating in two Court of Appeal judgments in their favour. The insurer paid the judgment debt but entered into administration before it had paid statutory interest, or the Policyholders’ legal costs. The Policyholders therefore sought compensation from FSCS.
FSCS considers that the PPR require a policyholder’s claim against the insurer to be a “protected claim”, namely one under a protected contract of insurance, in order for it to be compensable. By a decision on 6 May 2021 (the “Decision”), FSCS therefore declined to pay compensation to the Policyholders for their claims which were not ones under any contract of insurance, but rather were (1) for 8% statutory interest, and (2) for litigation costs to be assessed pursuant to a court order.
A judicial review of the Decision was heard below by Mr Dexter Dias KC. The Judge quashed FSCS’ Decision and concluded that there was a second class of claims payable under the PPR which were not “protected claims” (i.e. claims under a protected contract of insurance), but rather were claims “integral to, part and parcel of or sufficiently connected to” a protected claim. He held that the Policyholders’ claims were compensable under the PPR on this basis, even though they were not claims under a protected contract of insurance and not therefore “protected claims“.
Following a detailed analysis of the PPR, the Court of Appeal unanimously held that the Judge was wrong to hold that this second purported class of compensable claims exists. The Court held that, properly construed, the PPR require that the claim be a “protected claim” (i.e. one under a protected contract of insurance) in order to be compensable The Court of Appeal therefore allowed the appeal and reinstated the FSCS’s decision.
The judgment of the Court of Appeal is available here.