Across Australia’s business landscape, regulators are wielding their sword through an increasing number of investigations and penalties. From workplace safety issues to climate disclosure failures and misleading products, firms are being held to account, including individual directors. The penalties can run into millions of dollars and their insurability can be a major issue for firms and their insurers. According to global broker Marsh, whether insurance will cover these penalties “is frequently far from clear.”
“The indemnification and insurability of penalties and corporate offences is an evolving area of law,” said Dean Carrigan (pictured), a Sydney-based consultant with global law firm Clyde & Co.
He said that while the actual penalties and fines are unlikely to be insurable, associated legal costs from investigations or proceedings relating to the fines may be indemnifiable. “Public policy is likely to prohibit indemnity of fines or penalties in many circumstances, particularly where there is a criminal breach of law,” said Carrigan.
For example, the Corporations Act 2001 and the Insurance Contracts Act 1984 prohibit insuring against certain penalties in Australia. Some of the legal arguments behind this legislation and public policy include:
Carrigan said the definition of a fine or penalty in the statutory liability coverage section of a policy also determines if a policy responds to a penalty. However, there can be a catch.
“There is a strong argument that providing indemnity in certain circumstances where wrongdoing has been committed, would be against public policy and, as such, would not be enforceable,” he said.
Carrigan said, in these circumstances, even when a policy wording provides coverage for directors and officers liability there may also be a clause in the statutory liability coverage section of the policy itself, for example, that excludes loss on account of any claim arising from a ‘wilful breach’.
However, some experts say where an unlawful act does not involve intention, it may not always be against public policy to provide indemnity against it that would cover fines and penalties.
“It may be possible to have coverage in respect of damages awarded in circumstances of pure negligence and where no criminal sanction is involved,” said Carrigan.
He said the impact of an illegal act on the right to cover can depend on the purpose of criminal prohibition, the balance of public policy factors and proportionality between the wrongdoing and a civil sanction. “There is also a distinction between criminal acts and strict liability offences,” said Carrigan.
Also, in some jurisdictions in Australia, including New South Wales, Western Australia and Victoria, it is an offence for a person to provide or receive the benefit of insurance or indemnification for penalties imposed for workplace health and safety offences.
For manslaughter offences, the insurance implications are clearer.
“As of 2024, and indemnification of penalties for body corporates and individuals related to this offence is prohibited - however, it is legal to cover legal costs incurred in defending relevant proceedings,” said Carrigan.
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