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Aitken v. Financial Services Compensation Scheme [2003] ScotCS 160 (30 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 out of and in the course of his employment by the Insured the Company will indemnify the Insured in respect of Compensation for such Bodily Injury arising out of such events".

"Compensation" was defined in the general policy definitions as "all sums which the Insured shall be legally liable to pay as compensation", other than punitive damages. The general policy extensions included an extension dealing with claimants' costs and expenses. In terms of that extension, the Independent agreed as follows:

"The Company will provide indemnity against legal liability for all costs and expenses recoverable by any claimant in connection with any claim to which the indemnity expressed in Sections 1, 2 or 3 applies".

A further extension dealt with defence expenses; it provided that the Independent would provide indemnity in respect of legal expenses incurred with their consent in relation to any matter that was the subject of an indemnity under Section 1 of the policy. It is clear in my opinion that the insured's own legal expenses in defending an action for personal injuries brought by an employee were intended to be covered by the latter extension; the former extension was intended to deal with expenses recoverable by a claimant, which would obviously exclude the insured's own expenses.

[6] Against the foregoing background, I was asked to decide two questions of law. The first was whether, if the pursuer's averments were taken pro veritate, the sum due to the pursuer under the extract decree dated 20 August 2001 fell within the terms of section 6(4) of the 1975 Act. That in turn depended upon whether it was, in terms of section 6(4), "a sum equal to the full amount of any liability" of the Independent "towards any policyholder... under the terms of any policy" to which section 6 applies. The second question was whether, if the first question were answered in the affirmative, any obligation of the defenders to make payment extended to the whole sum in question, or whether in terms of subsections (5) and (6) of section 6 it was restricted to 90 per cent of that sum.

[7] On the first of these questions, counsel for the defenders submitted that the crucial question was whether the liability under the decree for judicial expenses was a liability of the insurer to the policyholder under the terms of the policy. He submitted that it was not such a liability. The policy was one of indemnity insurance; that was clear from its terms. Under such a contract, the insurer agrees to pay a sum that the insured has been obliged to pay to a third party, in this case an employee. It was crucial that the insured should be under a legal liability to that third party. The obligation to pay legal expenses, however, had never been a legal obligation of the insured, Monktonhall; it was only a liability of the insurer, the Independent, in respect of an action brought against the insurer by the third party, the present pursuer. Consequently the obligation to pay the pursuer's expenses could not be the subject of a contract of indemnity insurance. A description of a contract of indemnity insurance was found in Hardy Ivamy, General Principles of Insurance Law, 6th edition, at page 9, and the report of the Law Commissions on the Third Parties (Rights against Insurers) Act 1930, at paragraph 1.9. In any event, the wording of the general policy extension dealing with expenses excluded the pursuer's present claim. That extension applied to legal liability for expenses recoverable by a claimant "in connection with" any claim to which the basic indemnity for compensation applied. The expenses in question in the present case had been awarded in a claim made not against the insured but against the insurer. Thus they were not incurred "in connection with" any claim for compensation against the insured. On the nature of an award of expenses, reference was made to Maclaren, Expenses, at pages 3-4 and Maxwell, Practice of the Court of Session, at page 609. Counsel further submitted, in support of his general arguments, that the words of the Act should be given their natural or ordinary meaning unless that produced a result that appeared contrary to the intention of the statute: Pinner v Everitt, [1969] 1 WLR 1266, at 1273C-D per Lord Reid. That was not the case on his construction of section 6. In addition, he submitted that payments made under the Policyholders Protection Act 1975 were funded by levies which were imposed on the insurance industry; consequently, because the Act imposed a levy, it was a charging statute and should therefore be construed strictly. Reference was made to Beal, Legal Interpretation, 3rd ed, at pages 491 and 498, and Craies, Statute Law, 7th edition, at page 116.

[8] Counsel for the pursuer accepted that, in order to succeed on the first question, the pursuer must bring himself within section 6(4) of the 1975 Act. He referred to Scher v Policyholders Protection Board, [1994] 2 AC 57, where the Court of Appeal had defined the expression "any liability... under the terms of any policy" in wide terms. Counsel further stated that, to bring himself within section 6(4), the pursuer relied solely on the general policy extension dealing with claimants' costs and expenses that is quoted at the end of paragraph [5] above. He submitted that the wording of that extension did not state that the Company would indemnify the Insured, but rather that the Company would provide indemnity against legal liability for all expenses recoverable by any claimant; that should be contrasted with the wording of Section 1, which did specify that the Company would indemnify the Insured. The expression used in the extension was wider, the defenders asked the Court to read into that provision the words "of the Insured", but those words were not used. The decree for expenses fitted the wording of the extension; in particular, it was a liability that arose "in connection with" a claim to which the indemnity expressed in Section 1 applied. It was not necessary for the purposes of the extension that the expenses in question should be awarded against the Insured; all that was required was that there should be a legal liability for expenses in connection with a claim to which the indemnity in Section 1 applied.

[9] In my opinion the sum due to the pursuer by Independent in terms of the decree of 20 August 2001 does not fall within the terms of section 6(4) of the 1975 Act. The result is that the defenders have no liability to pay that amount.

[10] For liability to exist under section 6(4) three requirements must be satisfied. First, there must be a liability of an insurance company, in this case the Independent. Secondly, that liability must exist towards a policyholder of the company or the statutory assignee of the policyholder under the Third Parties (Right against Insurers) Act 1930; in this case these were Monktonhall and the present pursuer respectively. Thirdly, that liability must arise "under the terms of" a policy to which section 6 applies. The first two of these requirements are clearly satisfied. The decree for expenses of 20 August 2001 imposed a liability on the Independent, and it was granted in favour of the pursuer, the statutory assignee of the policyholder. The third requirement raises more complex issues, however. Monktonhall's policy with the Independent was one to which section 6 applied; thus the important question is whether the liability for expenses can be said to arise "under the terms of" the policy.

[11] The critical feature of the policy is in my opinion the fact that it is an indemnity policy. An indemnity policy is one where the amount recoverable is measured by the extent of the insured's pecuniary loss: see Hardy Ivamy, op cit, at page 9. All contracts of insurance other than life insurance, personal accident insurance and sickness insurance are of this type. Broadly speaking, two categories of pecuniary loss may be covered by such a contract. The first is physical or economic loss sustained directly by the insured. The losses covered by contracts of fire insurance fall into this category, and it is also an important aspect of contracts of marine insurance and general property insurance. The second category is a loss that the insured suffers through a legal liability to pay compensation to a third party. The losses covered by third party motor insurance are an obvious example of this category, as are the losses covered by the public liability provisions of property or business insurance. Whichever kind of loss is involved, however, the critical feature of an indemnity policy is that the insurer is obliged to indemnify the insured for a loss that the latter has sustained, and the insurer's liability is measured by the amount of that loss.

[12] The primary liability of the insurer under the present policy was to indemnify the insured according to the terms of the policy against certain specified events; the relevant wording is found in the first of the provisions quoted in paragraph [5] above. Thus the primary obligation of the insurer was to make good certain categories of loss suffered by the insured. The category of loss that is relevant for present purposes is employers' liability. This was dealt with in Section 1 of the policy, whose terms are set out in paragraph [5] above. That provision makes it clear once again that the cover provided by the policy is that the insurer will indemnify the insured in respect of compensation for bodily injury sustained by an employee in the course of his employment by the insured. Before this provision can operate, therefore, the insured must sustain a legal liability to pay compensation to one of its employees, and the obligation of the insurer is to make good the amount of that liability. Legal expenses are covered by the part of the policy dealing with general policy extensions; once again, the relevant wording is set out in paragraph [5] above. In this case, too, the insurer's obligation is to "provide indemnity against legal liability for all costs and expenses recoverable by any claimant". The word "indemnity", which echoes both the primary obligation in the policy and the wording of Section 1, is in my opinion of crucial importance. That word makes it clear that, before the insurer is under any liability to meet a claimant's expenses, a loss must have been sustained by the insured. Moreover, that loss must consist of a liability to pay expenses recoverable by a claimant against the insured; that is clear from the wording of the extension in question, in particular the words quoted in this paragraph.

[13] The present case concerns a liability of the insurer to pay the expenses of the pursuer in an earlier action raised by the pursuer as statutory assignee of the insured. That action was brought to enforce the policy of insurance between Monktonhall and the Independent. The claim was brought directly against the insurer, and involved enforcement of the insurer's own obligations. When the decision on the merits went against the insurer, the resulting liability in expenses was a liability of the insurer itself, as the unsuccessful party in the litigation. In these circumstances, it is first necessary to identify the loss that is involved in the finding of expenses. In my opinion that loss should be regarded as arising directly out of the finding in expenses. The making of an award of expenses lies in the discretion of the court: MacLaren, Expenses, page 4. Thus the obligation contained in such an award comes into existence solely as a consequence of the court's decree; there is no pre-existing right to any payment. On that basis it is clear that the loss is the insurer's, because the award is against the insurer alone. It follows that no loss has been sustained by the insured. Consequently there cannot be any indemnity in favour of the insured, because a loss on the part of the insured is necessary before any such indemnity can exist.

[14] Counsel for the defender presented a second argument, based on the terms of the general policy extension dealing with claimants' expenses. This was to the effect that the award of expenses made against the Independent was not incurred "in connection with" any claim for compensation against the insured. As presented, the argument assumed that the extension in question applied only to expenses in an action against the insured, not the insurer. In my opinion that is correct, although the reasoning that supports the result must be based on more than the terms of the extension. The crucial point is that the extension only provides indemnity against legal liability for expenses recoverable by a claimant. It is clear in my opinion that it was not intended to provide an indemnity in respect of the insured's own legal expenses. Those expenses were the subject of the further general policy extension described in paragraph [5] above, and the fact that they are dealt with specifically by that extension seems clearly to exclude them from the extension for claimants' expenses. Any action to enforce the policy, however, must be by either the insured or the insured's assignee; no one else would have title to sue on the contract of insurance. Thus, apart from the statutory assignation effected by the Third Parties (Rights against Insurers) Act 1930, the present pursuer would have had no title to sue on the insurance policy. It follows that the principle expressed in the maxim assignatus utitur jure auctoris applies: the right of an assignee to enforce an obligation is, in general, merely that of his cedent. Thus an assignee is unable to assert any right that would not have been available to the cedent. In the present case that applies in particular to the right to recover expenses; the pursuer as statutory assignee of the insurance policy could not have had any rights greater than those of the original insured, Monktonhall. The insured, however, is limited to an indemnity against the legal expenses of the claimant in any action against the insured. The pursuer's action against the insurer does not fall into that category; for the purposes of expenses it must be treated as an action by the insured's representative against the insurer. Thus it does not fall within the terms of the policy extension dealing with claimants' expenses.

[15] I have arrived at the above views on the basis of the construction of section 6 of the Policyholders Protection Act 1975 and the insurance policy effected by Monktonhall with the Independent. In approaching the Act, I have attempted to give effect to the ordinary meaning of the words of section 6. To that extent, I consider that the principle stated by Lord Reid in Pinner v Everett, supra, at [1969] 1 WLR 1273 C-D, applies: "In determining the meaning of any word or phrase in a statue at the first question to ask all this is what is the natural or ordinary meaning of that word or phrase in its context in the statute?" Lord Reid goes on to state that it is only if that meaning leads to a result that cannot reasonably be supposed to have been the intention of the legislature that it is proper to look for some other possible meaning of the word or phrase. In the present case I do not consider that the construction that I have adopted is in any way contrary to the intention of the legislature. That intention was to provide a form of statutory reinsurance for the liabilities of insurance companies under the terms of policies issued by them. Consequently it is essential to the scheme that any reinsurance liability should be the subject of indemnity under an insurance policy. In the present case the pursuer has failed to demonstrate that his entitlement to expenses from the Independent fell under the terms of the policy issued by the Independent. Counsel for the defenders further submitted that, because the 1975 Act imposed a levy, it was a charging statute, and must accordingly be strictly construed. In my opinion there is some force in that submission, but I consider the words of section 6 to be sufficiently clear without the need to have regard to the principles that apply to the construction of charging statutes.

[16] Counsel for the pursuer submitted that the defenders' construction of the general policy extension for claimants' costs and expenses involved reading in the words "of the Insured", which were not there. In my opinion that is not correct. The pursuer's claim fails on two grounds. In the first place, it fails because the loss involved in the finding in expenses is that of the insurer, and a loss of the insurer cannot be the subject of an indemnity policy. In the second place, it fails because it is not for expenses recoverable by a claimant, in the sense in which that word is used in the extension in question. The expenses are rather those of insured's assignee, who enjoys the same rights as the insured. A finding of expenses in favour of the insured, however, cannot be the subject of the indemnity in the relevant general policy extension. Neither of these reasons involves reading any additional words into that extension. I should also notice the case of Scher v Policyholders Protection Board, supra, to which the pursuer's counsel referred. In my opinion that decision has no bearing on the present case. Counsel for the defenders relied on the declaration granted by the Court of Appeal (found at [1994] 2 AC 78H-79A), which provided that the words "any liability... under the terms of any policy" as used in section 8(2) of the Act should be construed in wide terms. The terms of the declaration, however, make it clear that any such liability must be consequent upon an event "designated by the policy" as giving rise or capable of giving rise to a liability on the part of the insurer. The expression "designated by the policy" indicates that the liability in question must arise under the terms of the policy. In my opinion that is clear from the plain words of section 6(4). The reason that I have held the pursuer's claim to fail is that I do not consider that it involves a liability consequent upon an event designated by the policy as giving rise to a liability of the insurer. The claim rather falls outwith the cover provided in the policy.

[17] For the foregoing reasons I am of opinion that the first question of law that I was asked to decide must be determined in the defenders' favour. The sum due to the pursuer under the extract decree of 20 August 2001 was not a liability of the Independent to a policyholder under the terms of a policy of insurance to which Section 6 of the 1975 Act applies. It follows that the sum due to the pursuer under that extract decree does not fall within section 6(4) of the 1975 Act. On that basis the second question that I was asked to decide, namely whether any obligation to make payment extended to the whole amount of the decree or merely to 90 per cent of it, does not arise. In case I am wrong in my conclusion on the first question, however, I should express a view on the second question.

[18] The answer to the second question depends on the terms of subsections (3), (5) and (6) of Section 6 of the Policyholders Protection Act 1975. The terms of those subsections are quoted in paragraph [4] above. Subsection (3) defines the expression "a liability subject to compulsory insurance" as meaning a liability that is required under certain statutes, including the Employers' Liability (Compulsory Insurance) Act 1969, to be covered by insurance. Subsection (5) provides in effect that subsection (4) does not apply to liabilities other than those subject to compulsory insurance; the wording is, however, somewhat convoluted. In cases where insurance is not compulsory, subsection (6) provides that the Board are to secure that a sum equal to 90 per cent of the amount of the liability is paid to the policyholder. That liability has devolved upon the defenders in the manner described in paragraph [3] above. The critical question is accordingly whether insurance in respect of liability for legal expenses is compulsory. Employers' liability insurance is compulsory under section 1(1) of the Employers' Liability (Compulsory Insurance) Act 1969. This is in the following terms:

"... every employer carrying on any business in Great Britain shall insure, and maintain insurance, under one or more approved policies with an authorised insurer or insurers against liability for bodily injury or disease sustained by his employees, and arising out of and in the course of their employment in Great Britain in that business...".

It is unnecessary for present purposes to consider whether the expenses of a personal injuries action would fall within the terms of this subsection. The present action concerns the expenses of an action brought by an employee as statutory assignee of his employer in order to enforce the terms of the employer's insurance policy. That action was against the insurer, and the liability in expenses was that of the insurer. In my opinion such a liability cannot fall under section 1(1) of the 1969 Act. That section relates to insurance against liability for bodily injury or disease. Such a policy, however, would not normally cover the possible liability in expenses of the insurer in a action to enforce the policy, because the insurer would be liable for those expenses in any event. Thus it would be pointless to provide cover for such expenses in the policy. The result is that it is not compulsory to insure against such expenses, and any claim against the defenders would accordingly be limited to 90 per cent of the Independent's liability.

[19] For the foregoing reasons I answer to the first question of law is in the negative, and my answer to the second is that any liability would be restricted to 90 per cent. In view of the answer to the first question, I consider that the appropriate course is now to dismiss the action.