Australia: Indemnifying against WHS penalties: The Ferro Con case

Can you indemnify against WHS penalties?

It is widely accepted that insurance policies that purport to indemnify against criminal penalties are void against public policy. However, in an era where we are witnessing increased scrutiny of company officers and harsher penalties for white collar crimes, it is little wonder that there has been a steady increase in insurers offering, and organisations and individuals taking up, such policies. Unsurprisingly, this trend has flowed into the WHS arena where, under the new model WHS Act, companies can face penalties of up to $3 million for the most serious offences, while individuals are staring at penalties of up to $600,000 (not to mention up to 5 years jail), whether in their capacity as PCBUs or officers. And unless the legislature takes steps to prohibit such arrangements, there is no reason to think that insurers will stop offering to provide indemnity for a premium.

What effect does indemnification have on sentencing?

The issue was most recently brought into the public eye in a decision handed down by the Magistrates Court of South Australia in Hillman v Ferro Con (SA) Pty Ltd (in liquidation) and Anor [2013] SAIRC 22.

The facts

In July 2010, a rigger was killed by a falling beam after a fabric sling supporting the beam snapped while he was attempting to lower the beam into position. The rigger's employer, Ferro Con (a specialist steel erection business), was charged with a breach of s 19(1) of the Occupational Health, Safety and Welfare Act 1986, having failed to ensure so far as was reasonably practicable that the rigger was safe while at work. Ferro Con's sole director and "responsible officer" (for the purposes of the Act), Mr Maione, was charged with a breach of s 61 of the Act, having failed to take reasonable steps to ensure Ferro Con's compliance with its statutory safety obligations; which failure contributed to Ferro Con's offence. Both defendants pleaded guilty.

Higher penalties imposed in sentencing because of the insurance policy

In sentencing the offenders, Industrial Magistrate Lieschke was scathing of Mr Maione's decision to call on a general insurance policy that Ferro Con had in place, which included indemnification of its director for fines imposed for criminal conduct. While IM Lieschke accepted that Mr Maione had genuinely expressed regret and remorse in respect of the incident, he was strongly of the view that an expression of regret, remorse and an intention to alter behaviour assumes genuine acceptance of criminal responsibility and a preparedness to accept the full consequences of wrong-doing as determined by the course of justice. Accordingly, he held that Mr Maione's and Ferro Con's actions in seeking indemnity from their insurer:

  • amounted to positive steps to avoid having to accept most of the legal consequences of their criminal conduct as determined by the course of justice;
  • undermined the Court's sentencing powers by negating the principles of both specific and general deterrence;
  • sent a message to employers and officers that with insurance cover for criminal penalties for WHS offences there is little need to fear the consequences of offending, no matter how serious; and
  • were so contrary to a genuine acceptance of the legal consequences of criminal offending that they dramatically outweigh the benefits to the justice system of an early guilty plea or statement of remorse.

Importantly, however, the Court recognised that it had to accept that indemnity for criminal penalties cannot of itself be considered an aggravating factor in the sentencing process (because the insurer is not a defendant in the proceedings) – it is only relevant to the issue of reduction in penalty.

Further, IM Lieschke did not hide his frustration at the Court's inability to challenge whether the indemnity was invalid as being contrary to public policy. Put simply, he said that the Court had no jurisdiction to consider the validity of the policy, and must face the reality that insurance companies are willing to indemnify individuals and companies for criminal penalties.

Should you seek insurance to indemnify against WHS penalties?

While it is common to obtain insurance coverage for legal costs in the investigation of a WHS incident or the defence of any prosecution, the Ferro Con case raises a number of interesting issues as to whether your organisation should seek insurance coverage in respect of WHS penalties for the business and its officers.

  1. Insurance may mean a higher penalty: Although it is not clear how the fact of the insurance policy came to be known, it was made abundantly clear in the Ferro Con case that an early guilty plea will not result in any sentencing discount where the penalty imposed on the defendant/s is the subject of an indemnity. While in most cases the fact of insurance coverage will not be known, it is possible following from this decision that a safety regulator can now legitimately seek that information as a matter relevant to sentencing.
  2. Different enforcement options: In circumstances where indemnification acts to undermine a court's sentencing ability by limiting the deterrent effect, prosecutors may seek, and courts may impose, different enforcement options that are not the subject of insurance coverage. For example, there may be greater use of "adverse publicity orders" where the business is directed to widely publicise its conviction through media, including social media. This happened in the Ferro Con case, where Mr Maione was ordered to publish notices in various newspapers and in the journal of the Master Builders Association. Equally, the fact of insurance coverage may play a part in the prosecutorial discretion to initiate proceedings against individuals and/or seek more mainstream sentencing options such as good behaviour bonds or community service.
  3. Detrimental impact on safety culture:Penalties for WHS breaches are imposed by legislation to deter poor safety performance by organisations and their decision makers. It is likely that where the safety net of insurance exists, positive safety performance will not be pursued with the vigour it requires. This may have a detrimental effect on the safety culture of your business. The unintended result of that could be an increase in workplace incidents, reduced productivity and low staff morale – and have a long-term effect on the operations and output of the business.
  4. Insurer may decline coverage: Notwithstanding that an insurance company has provided an insurance policy to a business and its officers in respect of criminal penalties, the insurer may take the position to not pay out on the policy on the basis that it is void against public policy. This is consistent with most policies having an exemption that the claim will be paid "where lawful" or a similar exclusion. Although unlikely, given the probable loss of future business, an insured in this situation would have little recourse in circumstances where indemnification under contracts of insurance is generally limited to the extent that the law allows. For example, it is not clear in the Ferro Con case whether the insurer, following the comments by the Court, is actually providing the indemnity.

More information: Holding Redlich will be conducting seminars next month on this issue. If you would like to receive an invitation to this seminar, please click here.

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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Michael Selinger
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