We previously reported on the first instance decision of Re Digital Satellites Warranty Cover (see our previous blog here). Digital Satellites Warranty Cover Limited (DSWCL) and Satellite Services (SS) (the Appellants) were in the business of selling extended warranties to satellite television customers. The warranties in question did not contain any obligation on the Appellants to pay money to their customers in any circumstances and were for the repair and replacement of defective equipment, cabling etc.

An appeal was brought by the Appellants against the first instance judgment of Mr Justice Warren who had found that DSWCL and SS had acted in breach of the general prohibition under Section 19 of the Financial Services Markets Act, 2000 (FSMA).  As a consequence of his finding, Warren J had ordered that the Appellants be subject to winding-up orders. The sole issue for the Court of Appeal, was whether the business of the Appellants consisted of the making of contracts of general insurance within the meaning of Article 3(1) of the Financial Services and Markets Act 2000 (Regulated Activities Order) 2001 (the RAO).

Warren J had held that the warranties fell within paragraph (b) of class 16 of Schedule 1 to the RAO (Miscellaneous financial loss) and that it did not matter that cover was provided by means of “repair or replacement” as opposed to the provision of an indemnity.

Delivering the leading judgment of the court, Lord Justice Patten rejected counsel for the Appellants’ submissions that on a “true construction the risk was not loss attributable to the customers incurring unforeseen expense but the risk of breakdown or malfunction in the equipment [and that] there is no agreement to indemnify the customers in respect of financial loss.” Patten LJ held that Warren J’s reasons as to the construction of the warranties was correct and he was therefore right to hold that the warranties fell within paragraph (b) of class 16. Although the warranty provided for repair and replacement, the risk was essentially a financial one as, without the cover, the insured would be “exposed to the cost of remedying the defect [and] this risk of financial loss was the basis of the promotional material for the warranty scheme.”

As a result, the appeal was dismissed and there was no defence to the winding-up orders. In addition, the Court of Appeal refused the Appellants permission to appeal to the Supreme Court.