In recent years, there has been an expansion of policy coverage for claims concerning exposure to statutory liability. For a while, insurers have provided defence costs cover in regulatory actions, such as Australian Securities and Investments Commission (ASIC) proceedings, but rarely indemnified policy holders for statutory penalties.
It is now common for management liability policies to extend cover to their insured for penalties imposed under a statute for a civil offence. Common examples include offences under the Competition and Consumer Act 2010 (Cth) (Competition and Consumer Act) and the ASIC Act 2001 (Cth).
However, whether insurers should extend cover under management liability policies for criminal fines where offences are dealt with by criminal courts is highly contentious.
This article examines common coverage issues and examines the commercial and public policy considerations surrounding granting indemnity to an insured for criminal fines and penalties.
Management liability policies often express cover for statutory liability in terms that are difficult to understand. In determining whether cover should be granted for a claim involving statutory liability, there are often tricky exclusions and semantic distinctions to interpret and assess. These usually centre around the distinction between a "fine" and a "pecuniary penalty".
Policies usually exclude cover for "fines and penalties" in the definition of "loss". However, cover for statutory liability is usually contained in an automatic extension whereby the definition of "loss" is extended to include "statutory liability", which is defined as "pecuniary penalties awarded against an insured for a civil offence". The definition of "statutory liability" in relation to occupational health and safety claims and claims relating to the discharge or escape of pollutants is limited to strict liability offences.
Essentially, cover is usually provided for civil offences and pecuniary penalties, but cover for "fines" is excluded.
Policies limit cover for statutory liabilities that insurers are "legally prohibited from paying". As a general rule, insurers have never provided cover for criminal offences as it is contrary to public policy. But does this mean insurers are "legally prohibited" from doing so? Can and should insurers cover penalties and fines for criminal conduct?
CIVIL V CRIMINAL AND STRICT V ABSOLUTE LIABILITY
The issue of policy cover for statutory liability turns on the classification of the relevant penalty or offence into the following categories:
- Civil pecuniary penalties
- Criminal fines and sanctions
- Strict v absolute liability offences.
The distinction between a "'fine" and "pecuniary penalty" is often a difficult one to make. However, essentially a "fine" is imposed as a punishment for a criminal offence where the court has a back door to ferry offenders straight to jail. In contrast, "pecuniary penalties" are awarded by civil courts.
Therefore, in order to attract cover, a statutory liability claim must fall within the definition of a civil offence where the punishment is a pecuniary penalty, or in occupational health and safety and environment claims it must be an offence of strict liability.
The distinction at law between strict liability and absolute liability offences is that strict liability offences are subject to a defence of honest and reasonable mistake. There is no defence open to an insured for an offence of absolute liability, unless the enabling legislation provides one. The only qualification is that the offence is subject to the requirement of "reasonable practicability". A good example of an absolute liability offence is a failure to maintain or provide a safe system of work under the Occupational Health and Safety Act 2004 (Vic) (OHS Act), which is an indictable offence subject to a substantial fine (section 21). Therefore, absolute liability offences are often criminal in nature.
It is difficult to classify penalties under pieces of legislation such as the OHS Act and the Environment Protection Act 1970 (Vic) as civil pecuniary penalties as they are prosecuted and determined within the criminal jurisdiction. These types of penalties are more correctly categorised as criminal fines. A criminal fine falls outside the cover provided by management liability policies due to the definition of "statutory liability" and persuasive policy considerations.
PUBLIC POLICY CONSIDERATIONS
Civil pecuniary penalties play a key role in promoting general and specific deterrence for regulatory bodies such as the Australian Competition and Consumer Commission and ASIC. Proceedings under the Competition and Consumer Act imposing pecuniary penalties for conduct that constitutes an unfair practice or is unconscionable are dealt with in the civil jurisdiction of the courts. Cover is usually granted for these types of proceedings, subject to the usual exclusions relating to intentional, reckless or grossly negligent conduct. This has important implications in the market due to the increase in regulatory proceedings. This is especially so for small businesses, which would go under if it were not for their insurer providing defence costs cover and cover for substantial pecuniary penalties (up to AU$1.1 million for each contravention, in relation to a body corporate under section 21 and 22 and section 224 of the Australian Consumer Law 2010 (Cth)). They could certainly not defend a regulatory action to judgment without statutory liability cover. Although there are some policy considerations against granting indemnity for civil pecuniary penalties (eg deterrence), it is clear from the wording of management liability policies that it is the intention of underwriters to provide such cover and they are not legally prohibited from doing so.
However, it is a different story for criminal fines. Criminal sanctions are imposed for a number of reasons, including retribution, deterrence and rehabilitation. It is not the intention of the criminal law for insurers to indemnify offenders for fines and penalties imposed as a result of an offence committed. If indemnity was granted then none of the aims of the criminal law could ever be achieved. Indemnity for a criminal offence can be seen as a "moral hazard" that negates the incentive of directors and/or companies to behave in accordance with the law.
A contract to indemnify an insured against criminal liability should be classified as illegal if the offence is one which can only be, or in fact is, committed with guilty intent. The position is less clear and is highly contentious where the offence is one of strict liability and the conduct of the offender is morally innocent.
It is certainly arguable that insurers are "legally prohibited" from providing cover for criminal fines, such as those imposed under the OHS Act, as to do so will undermine the fundamental public policy considerations that underlie the criminal law.
Despite this, in the current market, insurers have made commercial decisions to extend statutory liability cover to criminal fines (for example fines imposed for breaches of the OHS Act), unless the insured has behaved in a reckless manner.
Current management liability policies usually provide their insured with cover for civil pecuniary penalties. Arguably, cover can be provided for fines of a criminal nature. All cover is subject to the usual exclusions relating to intentional, reckless and grossly negligent conduct of the insured. Indemnity issues are often contentious, especially where on the face of it the insured expects that cover will be granted for a penalty or fine imposed under a statute. However, when you delve deeper there are complicated indemnity and public policy considerations at play that need to be carefully assessed to determine whether or not an insurer is "legally prohibited" from providing cover.
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