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FOS: No jurisdiction to determine D&O complaint

The Financial Ombudsman Service did not have jurisdiction to hear a complaint from an individual “Insured Person” under a D&O policy as he was not a “consumer” for the purposes of the FOS eligibility criteria. 

The Court has recently taken a stricter view of the jurisdiction limits of the Financial Ombudsman Service in the recent judicial review decision in Bluefin Insurance Services v Financial Ombudsman Service[i]. Jacquetta Castle and Jamie Barton consider this decision and the practical points arising from the Judgment.

The Administrative Division of the High Court has recently ruled in favour of insurance broker, Bluefin, on application for judicial review of a decision made by the Financial Ombudsman Service to accept jurisdiction on a complaint.

Facts

Background to FOS complaint

In 2007, Bluefin placed D&O cover for Betbroker Ltd, an online gaming company. Wayne Lochner was a director of Betbroker and as such fell within the definition of an “Insured Person” under the D&O policy.   

Proceedings were commenced against Mr Lochner, together with his co-directors, in September 2011. The wrongful acts alleged against Mr Lochner related to allegedly dishonest misrepresentations made by him during fundraising meetings in early 2008 with an asset management company, which ultimately invested £500,000 in Betbroker on behalf of its investor clients.  In August 2008, Betbroker was placed in administration.  The claims were disputed and subsequently settled, at a loss to Mr Lochner.

Mr Lochner sought indemnity from his D&O insurer, AIG Europe Ltd (then Chartis Europe Ltd), but was refused cover on the grounds that the insurer had not received any notice of a claim or of a circumstance likely to give rise to a claim, prior to the expiration of the policy on 8th September 2008.  Mr Lochner contended that he had indeed notified his brokers, Bluefin, of the potential claim against him before the end of the policy period but that Bluefin failed to pass this notification on to AIG.

Complaint to FOS and subsequent judicial review

In 2012, Mr Lochner complained to FOS, alleging that he would have been protected by and thus indemnified under the policy but for Bluefin’s failure to notify the insurer of the potential claim against him.

In order for FOS to have jurisdiction over the complaint, Mr Lochner had to qualify as an “eligible complainant” under the (now) FCA Handbook.  The Handbook set out various categories of “eligible complainants” and these included the category of "consumer" (see DISP 2.7.3R).  The term "consumer" is defined in the Glossary as "any natural person acting for purposes outside his trade, business, or profession".  Bluefin had argued that Mr Lochner did not fall within the definition of a consumer since the subject matter of his complaint was wholly concerned with the potential loss arising from lack of insurance cover in respect of a liability which he had incurred in the course of his trade, business or profession.  The Ombudsman did not agree and relied on the fact that the claim was against Mr Lochner personally and the complaint concerned a loss of policy benefits that would go to him as an individual.  As a result, FOS concluded that Mr Lochner was a consumer and was therefore eligible. 

Bluefin launched a claim for Judicial Review, contending that eligibility was a question for the court to decide and that FOS had erred in law in making its decision. 

In deciding the application, the Administrative Division of the High Court (Wilkie J) considered the following issues:

  1. Was the decision whether Mr Lochner was acting as a consumer a question of precedent fact for the Court to determine regardless of the FOS assessment?  In other words, if Mr Lochner did not satisfy the threshold requirement of being a consumer, FOS would have no jurisdiction since none of its statutory powers would be engaged.  The question was whether this pre-condition must be objectively made out before the tribunal could have jurisdiction or whether it was a question for FOS, alone, to decide.

  2. If the issue was for FOS, did the Ombudsman misdirect herself in law in reaching her decision?

  3. If the issue was for FOS and she directed herself correctly in law, was the Ombudsman's decision irrational in the Wednesbury sense? (i.e. was the decision so unreasonable that no reasonable person acting reasonably could have made it?).

Findings

The judicial review application succeeded and the High Court granted an order quashing FOS's decision to entertain the complaint made by Mr Lochner against Bluefin.

In the course of considering the application, the court engaged in a fascinating (but for insurers’ main purposes largely irrelevant) discussion of the juridical principles to be applied where public authorities exercise jurisdiction which is dependent upon the establishment of an objective fact.  The court concluded that the question as to whether a complaint satisfies the eligibility criteria for the FOS regime is a matter of “precedent fact” to be decided by the Courts and is not (as FOS maintained) a question for FOS to determine.

So far as insurers are concerned, what the court had to say with regard to the definition of the term “consumer” is of more immediate interest.  

A natural person complaining in connection with a D&O policy arranged to protect him from personal liabilities is not a “consumer” for these purposes.  The subject matter of Mr Lochner’s complaint was wholly concerned with the potential loss arising from lack of insurance cover in respect of a liability which he had incurred in the course of his trade, business, or profession. The fact that, under the D&O policy, he was a beneficiary in respect of his personal loss and that he had therefore made his complaint to FOS in his personal capacity in respect of that personal loss, could not be considered to be sufficient to cause him to fall within the definition of a consumer: "a person acting for purposes outside his trade, business or profession".  The judge therefore held that Mr Lochner’s complaint to FOS was inextricably linked with his trade, business, or profession, in respect of which he was potentially personally liable for alleged wrongful acts. The other connected point was that the date for deciding eligibility (i.e. whether he was a consumer) was the date of the complaint.

The Judge drew an important distinction between a D&O policy and other types of group protection policies, such as a private health insurance policy under which a claim could be made as a consumer.  Such a policy 

protects the members of the group against risks which are intrinsically private – principally to a person's health and physical well-being. The contrast with a policy that only covers an individual against professional or business liabilities is clear”.

Another interesting point is that it was conceded  by Bluefin that Mr Lochner’s wife, who was also a named Insured person, would have qualified as a “consumer" had she made a claim against the policy in respect of loss suffered from her husband’s Wrongful Acts.

Comments

This case is interesting for two main reasons.

In the first place, the court took a restrictive view of FOS’s jurisdiction and this at a time when FOS is experiencing an ever increasing volume of complaints and when the flexibility of its approach is seen by many as an advantage.  FOS had stressed that the objective of the Ombudsman Scheme in Section 225(1) FSMA is to achieve an independent resolution of disputes quickly and with the minimum formality. FOS argued that this purpose would be frustrated if threshold eligibility became a matter of “precedent fact” to be determined by the courts with the consequence that this gateway issue might be taken as a preliminary issue in many cases.  Wilkie J did not agree and considered that the question of eligibility, which he described as “hard-edged fact”, should be determined by the courts.  It will be interesting to see whether the decision will present insurers with an additional tool they can use to oppose the jurisdiction of FOS and whether FOS’s concerns will turn out to have substance. 

The second point of interest is this.  There is little or no decided case law in this country on D&O insurance (with the odd unmemorable exceptions such as the Privy Council case of New Zealand Forest Products v New Zealand Insurance Co Ltd on allocation).  The Bluefin case arose in an E&O context rather than a straight coverage claim.  However, in view of the complete dearth of homebred authority, it is interesting to see the English courts addressing issues involved in Side A cover and the subtleties of D&O wordings.  Wilkie J’s observations on the relationship between Mr Lochner’s personal liabilities and his liabilities as director provide a useful insight into the nature of the D&O product.  Mr Lochner was insured as a director of Betbroker and he was covered in respect of those liabilities that he might incur while discharging that role.  At the same time, his personal liability was to some degree coextensive with that of his business.  The case may also be useful when considering the issue in an insuring clause of whether a director is acting in his capacity as such.

It is not known whether this decision will be appealed. 

Contact

For further information please contact Jacquetta Castle on 020 7220 5226 or Jamie Barton on 02076454352.

[i] R (on the application of Bluefin Insurance Services Ltd) v Financial Ombudsman Service [2014] EWHC 3413 (Admin)]  

 

By Jacquetta Castle and Jamie Barton

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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