In a recent English High Court case, the Court held that two businesses and a partnership (the Businesses) had, by offering extended warranties covering satellite television equipment, been selling insurance products without authorisation from the UK’s Financial Services Authority (FSA).

Facts
The Businesses had been providing extended warranty contracts to customers as soon as their original warranty for the equipment expired.  Under the terms of the extended warranties, the Defendants would, at no cost to the customer, either repair or replace the satellite equipment.

Lawyers for the Businesses argued that they could never be made pay money to their customers and so the contract could not be an insurance contract.  This argument was based on the idea that the contract was one for services only and so couldn’t be a contract of insurance.

They also argued that the contract did not cover miscellaneous financial loss as the risk that was covered was the risk that the equipment would break down and not that financial loss would occur.

Decision
The Court disagreed with these arguments.  Responding to the first argument, the Court said that there was no material difference between repairing or replacing the goods or providing money to allow those goods to be repaired or replaced.   The Court used broadly the same line of thought in deciding that the product being sold by the Defendants was, therefore, insurance cover for “miscellaneous financial loss”. The Court then concluded that the FSA was therefore acting in the public interest by seeking to have the Businesses wound up.

Comment
This is an English decision and is therefore a persuasive authority only but it should act as a reminder of the very fine lines that exist between providing insurance cover and providing a warranty.  The case also shows the serious consequences that an error on this point can have.

Contributed by Grant Murtagh, John Larkin.