The Financial Services Compensation Scheme (FSCS) is facing a potential £60m bill to cover legal costs of corporate policyholders of insolvent insurers after losing a Court of Appeal case.
The Court ruled to uphold a previous judgement brought by city law firm Davies Arnold Cooper (DAC) on behalf of Independent Insurance policyholder GeoLogistics Limited.
DAC successfully argued that the FSCS's refusal to pay pre-liquidation legal costs was illegal and that the FSCS was responsible for providing corporate policyholders legal fees and disbursements as a result of an insurer's insolvency.
Following the ruling, the FSCS should now pay all post-liquidation costs associated with corporate insureds with compulsory insured claims such as employers' liability.
The FSCS could end up facing a bill of up to £60m from existing insurance insolvencies going through the Schemes of Arrangement.
DAC's case, originally heard in March 2003, was based on questioning the purpose and restrictions of the Policyholders Protection Act 1975. DAC was representing a former corporate insured of Independent Insurance, GeoLogisitics Ltd, to recover it's legal fees incurred prior to the Independent going into provisional liquidation in June 2001.
DAC challenged the FSCS's decision to refuse to pay GeoLogistics in respect of legal costs and expenses incurred by its solicitors in defending an employers' liability claim. GeoLogistics will now be reimbursed for its pre-liquidation legal costs incurred on its behalf in defending the claim made against it.
DAC partner Gerald O'Mahoney said: “The decision is also far reaching for the insurance industry as a whole, as it sets a precedent for existing as well as future cases involving insolvent insurance companies, such as Chester Street Insurance, formerly Iron Trades Insurance.
“The FSCS's liability to meet legal costs in respect of the various insurance insolvencies currently going through Schemes of Arrangement could reach anything up to £60m.”
