What comfort insurance in a changing regulatory regime: AICD Review

Friday, 01 February 2002


    Shane Crocker discusses proposed changes to the Crimes Act 1958 in Victoria, what it and other legislation indicate for companies and how insurance may alleviate some of the cost. While there are other proposed legislative changes, the one receiving most attention is the Crimes (Workplace Deaths and Serious Injuries) Bill, currently before the Victorian Parliament and likely to be dealt with in the autumn sitting.

    There has been substantial debate surrounding the Bill and its implications for companies, their directors and officers. The Crimes Bill The Bill proposes changes to the Crimes Act 1958, Dangerous Goods Act 1985, Equipment (Public Safety) Act 1994, Occupational Health & Safety Act 1985, Magistrates Court Act 1989 and Accident Compensation Act 1985. The Government's stated purpose for the Act is:

    • to create criminal offences of corporate manslaughter and negligently causing serious injury by a body corporate in certain circumstances; and

    • to impose criminal liability on senior officers of a body corporate in certain circumstances; and

    • to increase penalties in health and safety legislation; and

    • to make other miscellaneous amendments to health and safety legislation.

    Corporate manslaughter will carry a penalty of up to $5 million for the company while negligently causing serious injury will carry a penalty of up to $2 million. A company can be prosecuted if the accumulated action, or inaction, of some of its directors and officers amounts to negligence. Negligence can only apply if the company conduct involves "such a great falling short of the standard of care that a reasonable body corporate would exercise in the circumstances; and such a high degree of death or really serious injury that the conduct merits criminal punishment for the offence". For the purpose of negligently causing serious injury, a similar measure applies, however the conduct need only involve a high risk of serious injury. These offences are intended for extreme circumstances and it will therefore be necessary for gross negligence to be proved. Mere negligence will not be enough. The liability of directors and officers is derivative subject to the above being proved against the company. For such to apply it must also be proved that the director or officer:

    1. was organisationally responsible for the conduct, or part of the conduct, of the company in relation to the offence; and

    2. in performing or failing to perform his or her organisational responsibilities, materially contributed to the offence by the company; and

    3. knew that, as a consequence, there was a substantial risk that the company would engage in conduct that involved a high risk of death or really serious injury. It must also be proved that having regard to the circumstances known to the director or officer, it was unjustifiable to allow that substantial risk to exist. If all elements are established then the director or officer will be guilty of an indictable offence carrying the following:

    • For corporate manslaughter; imprisonment for up to five years or a fine of up to $180,000 or both.

    • For negligently causing serious injury; imprisonment for up to two years or a fine of up to $120,000 or both. Regulatory regime

    The changes proposed under the Bill are reflective of a changing regulatory attitude in Australia.

    There are also changes proposed for the Trade Practices Act, which will increase penalties for some offences. Regulators are more actively flexing their muscles, with investigations and prosecutions by ASIC and the ACCC increasing dramatically in recent years. And the courts are supporting the regulators by continuing to increase penalties. Changing legislation and attitude by regulators and the courts indicate a tougher regulatory regime for Australian companies and their directors and officers. Companies and directors and officers need to improve their management of the risks that can lead to breaches of legislation. They should consider methods to reduce exposure to those risks and where possible transfer them to insurance. Insurance alone cannot provide a solution to all of the risk exposures brought about by a more stringent regulatory regime of investigations and prosecutions. There are however some classes of insurance that may provide some comfort. Statutory liability insurance Liability insurance policies, such as directors and officers (D&O) liability insurance, professional indemnity insurance, commercial liability insurance and umbrella liability insurance, generally exclude cover for fines and penalties, because the insurer's intention is to protect against liability for compensation or damages.

    There has long been a perception that such insurance is against public interest as fines and penalties are imposed as a deterrent. The fines dealt out under the Crimes Bill arise out of gross negligence; therefore it would be against public interest for insurance to protect against such fines. However many Acts of Parliament, for the purpose of penalty provisions, do not differentiate between negligence or carelessness on one hand and dishonesty or recklessness on the other. A good example is the civil penalty provisions of the Corporations Law. Some Acts also impose strict penalty provisions on companies and individuals, regardless of their direct involvement in an actual breach. Companies, directors, officers and employees therefore face the possibility of being penalised for an innocent and unintentional contravention of an Act. Under the civil penalty provisions of the Corporations Law, for example, a maximum penalty of $200,000 can be imposed upon directors and officers for any one contravention.

    The intention of statutory liability insurance is to provide protection against liability to pay penalties where there has been an inadvertent or unintentional breach of an Act. The insurance will not provide protection where there has been a willful breach, dishonesty, fraud or gross negligence or recklessness. In some cases insurers will also pay legal defence costs, but only if there are reasonable grounds for defence. The enforceability of such policies is yet to be tested in Australia. Supplementary legal expenses insurance One certainty under a more stringent regulatory regime is that directors, officers and companies are now more than ever before likely to require legal representation at a prosecution, inquiry (criminal or otherwise), investigation, examination or other proceeding. Supplementary legal expenses insurance was introduced by a small number of insurers a few years ago to complement the cover provided by D&O liability insurance, with cover extending to representation costs. The insurance will cover legal expenses only and does not provide any cover for consequent fines or penalties or awards of damages.

    The agreement of insurers to pay legal costs under this insurance is predicated upon there being reasonable grounds for defence. Meaning that there has to be a good chance of success in avoiding or reducing liability. Directors & officers liability insurance In the current insurance market many D&O Liability Insurance policies provide directors and officers with cover for their personal cost of legal representation at a prosecution, inquiry, investigation or examination. For such cover to be provided it is usual for attendance to be legally compelled and that the prosecution, inquiry, investigation or examination involves the affairs of the company. Some policies also require the allegation of a "wrongful act" as part of the prosecution, inquiry, investigation or examination before the insurance will respond. There are also policies that provide cover for fines and penalties that are insurable at law. Most however specifically exclude cover for all fines and penalties. D&O liability insurance covers the personal liability of a company's directors and officers. They provide no cover for legal representation costs incurred by the company itself. Directors and officers need to ensure that they understand the terms and conditions of their policy, as no two are identical. Conclusion A new regulatory regime is developing in Australia that requires directors and officers to focus their attention on compliance with the regulatory requirements particular to their business. The failure to comply can result in criminal prosecutions involving imprisonment or fines and penalties or both. Insurance cannot provide protection against the consequences of actions that involve morally reprehensible behavior. There are however insurance solutions to assist with the defence of innocence and the cost of fines and penalties that are the result of inadvertent and unintentional breaches of legislation. Directors and officers should consider these solutions and understand the terms and conditions of their own D&O liability insurance and the additional covers that are available.

    * Shane Crocker is senior insurance and risk consultant with Strategic Insurance & Risk Solutions, an independent insurance and risk consulting firm. The latest guide on D&O insurance is now available through AICD publications.

    Key Points

    • The Crimes (Workplace Deaths and Serious Injuries) Bill and other legislative changes indicate a tougher regulatory regime in Australia.

    • Insurance alone won't counter all risks brought about by this regime, but may provide some comfort.

    • D&O insurance may provide cover for costs associated with investigation or prosecution, depending on the specific policy.

    • Statutory liability insurance will cover fines and penalties resulting from inadvertent breaches of legislation.

    • Supplementary legal expenses insurance will cover some company costs in relation to an investigation or prosecution. Such costs are not covered by D&O insurance.

    • Directors and officers should understand exactly what their insurance covers them for.


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