Lessors may have assumed that, except where their lease includes a product that is clearly labelled as "insurance", they will not be carrying out an insurance activity that should be regulated under the terms of the Financial Services and Markets Act 2000 (Regulated Activities Order 2001) (RAO).
However, the recent case of Re Digital Satellite Warranty Cover Limited (finally decided by the Supreme Court earlier this year) shows that this may not be true. This case, demonstrates the breadth of the insurance definition in the RAO and its potential effect.
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In this case certain businesses provided extended repair warranties for satellite television equipment.
The Financial Services Authority (as it was then) sought to wind up those businesses on public interest grounds, as they were carrying out a regulated activity (i.e. the provision of insurance) while not being either authorised or exempt.
To a layman the repair warranty in question would not seem to be "insurance" – the contract resulted in the provision of benefits-in-kind and not financial redress.
In the initial hearing the High Court judge repeated the key elements of an insurance contract set out in Medical Defence Union Limited v Department of Trade (1980):
– The contract must provide that the assured must be entitled to something on the happening of some event;
– The event must be one which involves some element of uncertainty;
– The insured must have an insurable interest in the subject matter of the contract.
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By GlobalDataThe court found the "something" referred to above included "money or money’s-worth", and therefore the warranty contract in question was one of insurance and was also regulated under the RAO. This judgment was upheld in the two subsequent appeals.
The judgment may well set alarm bells ringing for lessors whose contract terms provide replacement items following a breakdown or where the lessor or lessee may be relying on the manufacturer’s extended warranty following a breakdown (although it should be noted that the current regulatory body suggests that a supplier’s "normal" warranty regarding, for instance, quality of goods supplied, should not be caught under the RAO).
Helpfully, for those lessors entering into contract hire arrangements, which frequently contain repair warranties as a matter of course, the current regulatory body has provided examples of arrangements which it believes are "less likely" to be contracts of insurance.
These include arrangements where:
– There is a genuine prepayment for services to be rendered in response to a future contingency;
– The provider undertakes to provide periodic maintenance of goods and facilities; and
– In consideration of an initial payment, the provider will provide services on the occurrence of future contingency, provided that the services are paid for by the recipient at a commercial rate.
The message, as ever, is that insurance or "insurance-like" contracts need to be considered carefully: lessors and suppliers cannot assume merely that because they are not paying financial compensation that their contracts will not be caught and they will not be required to be regulated.
Sam Yardley is a partner in the Asset Finance Group at Watson, Farley &
Williams
