Australia: Insuring against risk - will a directors' and officers' insurance policy cover the risk of a breach of WHS provisions?

Last Updated: 19 November 2012
Article by Tebony Justins

Author's Note: The discussion below is general and will be subject to the exact terms of the insurance policy in question and the exact parameters of the offending circumstances.


Under contemporary legislative schemes, directors and officers are subject to the risk of substantial criminal or civil penalties for acts that may be far removed from themselves, merely by virtue of their position. A recent example of this in the context of employment and safety law is the heightened responsibility and penalty regime imposed on officers of "persons conducting a business or undertaking" under harmonized workplace health and safety legislation.

There is a persistent risk inherent in holding a position as director or officer. This risk is recognised in high salaries. To some extent the company can mitigate the risk through purchasing appropriate insurance policies, however Corporations Act 2001 (Cth) sections 199A, 199B and 199C prohibit a company from providing its directors and officers with indemnity or insurance to protect against a range of specific liabilities. Of course, no insurance policy is of use when a jail sentence is contemplated.

To the extent that the company does not, or is unable to insure against the risk of certain liability actions, the residual risk will be reflected in the directors' and officers' remuneration. A director or officer can then purchase their own insurance policies to cover this risk. Direct purchase by an individual of D&O Policies will not fall foul of Corporations Act 2001 (Cth) sections 199A, 199B and 199C.

D&O Policies generally recognise public policy and validity issues through two types of clause: Dishonesty and Fraud Exclusion Clauses, and Hammer Clauses.


The general form is that the policy will not respond where the offending circumstance was wilful, dishonest, fraudulent, malicious, or otherwise conducted with criminal intent.

However, the clause/exclusion will only apply to the extent that the conduct has been established as such by an express admission, Court judgment or other final adjudication.

An insurance provider will generally fund litigation up to the point where a final determination falls within these types of conduct.

Any funds advanced to cover legal fees up to this point will generally then become a debt owed by the insured to the insurer. It will be a purely commercial decision as to whether the insurer will seek to recover these amounts.


The discussion above illustrates a potential perverse incentive, whereby a director or officer is compelled to expend a disproportionate amount of insurance money to defend a relatively minor penalty, or risk having to bear the cost themselves if found liable/guilty.

A hammer clause allows the insurance company to step in over the wishes of the policy holder and make a commercial decision to settle the matter where settling will incur less expenditure than defending the matter.

The Courts generally uphold the validity of hammer clauses, partly because they promote the efficient resolution of Court proceedings.

Therefore, when a matter is settled under a hammer clause, the D&O policy will remain valid despite the adverse finding.


There are competing public policy considerations that support the legality and enforceability of D&O Policies. Further, most contemporary D&O policies have already been structured to avoid falling foul of the adverse public policy considerations.

Structuring an appropriate risk mitigation scheme is vital to protect against personal liability and is often a balancing act between competing considerations.

While there is value in consulting with a legal professional on the ultimate legality and enforceability of your company's risk mitigation scheme, it is not time to panic.

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.

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Tebony Justins
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