Insurance Commentary: Katherine Czoch
Like all representations made by businesses, claims regarding the impact of carbon pricing must not mislead or deceive or be capable of doing so. To avoid falling foul of the Australian Consumer Law, all claims relating to any cost pass-through once the carbon price comes into effect on 1 July 2012 must be both justifiable and capable of being substantiated. This is especially so in the case of indirect costs, where much more ambiguity arises.
In certain circumstances, the ACCC or ASIC may pursue pecuniary penalties and other personal orders against directors and officers of companies who are involved in the making of misleading claims in relation to the cost impact of the carbon price. Insurers could see a rise in claims on Directors' and Officers' Liability Policies with directors and officers seeking cover for such penalties and defence costs. This is particularly so because the Australian Consumer Law prohibits companies from indemnifying directors and officers for such liabilities.
When the carbon price is introduced on 1 July 2012, many businesses will face increased costs. As a result, businesses may choose to pass that increase onto consumers. However, under Australian Consumer Law businesses will need to be very careful how they go about doing so. While businesses are generally under no legal obligation to explain price increases to consumers, they must ensure that when they attribute price increases to the carbon price, their claims are both reasonable and substantiated. In this regard, the ACCC will play a significant role in ensuring that businesses do not mislead consumers about the effects of the carbon price.
Essentially, this will involve the examination of the basis for which a carbon claim is made and the impression which the claim creates to the consumer. Consequently, a business needs to consider carefully their circumstances and be sure that carbon price claims can be justified. A recent situation that fell foul of the ACCC involved businesses in the solar panel industry claiming that the carbon price would increase electricity costs by 40 per cent per year, when government estimates put the increase in the first year of the scheme at less than 10 per cent.
Misleading and deceptive claims
The main provisions in the Australian Consumer Law are sections 18 and 29(1)(i). Both sections prohibit a person from engaging in conduct that is misleading or deceptive or likely to mislead or deceive, with the latter section specifically dealing with representations concerning the price of goods or services. Under the legislation, the main issue is to determine what exactly is a false or a misleading representation. Ultimately the questions are whether a statement or action of a business is contrary to fact (that is, false) or something that has or could have affected the belief of a consumer.
The ACCC will play a significant role in ensuring that businesses do not make false or misleading claims about the carbon price increasing costs. The ACCC has powers under the Australian Consumer Law and has been given specific funding to carry out these powers, which includes an enforcement role against businesses who contravene the law. Central to this role will be the power to issue "substantiation notices". Though a direct comparison is not possible, by way of analogy, during the 18 months after the introduction of the GST in 2000, the ACCC carried out about 3,000 formal investigations of businesses and received over 35,000 complaints from consumers. Whether a similar situation arises here remains to be seen.
What can businesses do? - underwriting considerations
Step one for businesses will be to ensure that they have a compliance program in place, especially for sales and marketing staff. A system to capture all sources capable of substantiating any price increases to be attributed to carbon price increases (whether direct or indirect) will also be vital. This will include retaining all relevant invoices and statements by energy and gas suppliers, invoices and statements by input suppliers, invoices and statements by transport companies, information from industry associations, information from Government and projections from business advisors as to the likely price impact. The use of credible (and justifiable) business calculators can also be included in any such system. In some cases, businesses may decide to have their carbon cost pricing model audited by appropriate external advisors.
Businesses must also be mindful to ensure that they distinguish between cost increases that are a result of a pass-through of direct costs (for example, where the cost associated with the carbon price increase is clearly identified and itemised on supplier invoices and passed on to a consumer) and those which are a result of an indirect cost increase (such as those arising from increased electricity prices, higher working capital costs or bad debt amounts as a percentage of turnover). Obviously in the case of indirect costs, businesses will need to ensure that they are able to properly substantiate those costs that are passed on and attributed to the carbon price increase, which may be a difficult undertaking in some instances.
Business with a solid compliance plan will be at much lower risk of breaching the Australian Consumer Law and its directors and officers less likely of having claims brought against them.
Proceedings initiated by the ACCC against Directors and Officers
It is likely that the ACCC will take a very active role in investigating and enforcing the provisions of the Australian Consumer Law. On 14 November 2011, the ACCC released A Guide to Business about lawful and unlawful claims on the effect of the carbon price and this has been supplemented by the recent release of 5 "Business Snapshot" guidance papers which aim to provide assistance to businesses in substantiating claims made in relation to carbon price increases.
For misleading representations in breach of section 29(1)(i) of the Australian Consumer Law, the ACCC may take action against directors and officers of companies who have been directly or indirectly, knowingly concerned in a breach of the provision in any way. For individuals, pecuniary penalties may be awarded of up to $220,000 and the ACCC may also seek orders disqualifying the directors or officers concerned from managing corporations for a period the court considers appropriate.
Can directors and officers be indemnified?
There are two sources of indemnity usually available to directors and officers. The first in an indemnity from the company, usually pursuant to a deed of indemnity and the second is a directors' and officers' liability insurance policy.
Section 199A of the Corporations Act already prohibits a company from providing an indemnity (other than for legal costs) to directors and officers for a liability which is:
- owed to the owed to the company
- for a pecuniary penalty order or a compensation order
- owed to someone other than the company and arising out of bad faith
Indemnity for defence costs is usually permitted providing that it is repaid if there is a finding in respect of the matters for which indemnity is prohibited by section 199A.
In addition to the above prohibitation, section 229 of the Australian Consumer Law now also makes it an offence for a company to indemnify its directors and officers for:
- a liability to pay a pecuniary penalty under section 224 of the Australian Consumer Law
- defence costs if the director or officer is found to have such a liability.
Presently, despite the prohibition on indemnifying the liabilities of directors and officers discussed above, it is open to companies to take out D&O liability policies with coverage for these events unless such coverage is prohibited by sections 199B and 199C of the Corporations Act.
Importantly, those provision prohibit a company from paying premium for insurance of a director or officer against a liability (other than defence costs) arising out of conduct involving a wilful breach of duty in relation to the company. Whilst the provision can arguably be circumvented by directors and officers paying their own premium, it remains to be seen if the Australian Consumer Law introduces any similar obstacles to insurance on public policy grounds.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.