Indemnification of personal penalties05 February 2018
Insurers have traditionally offered statutory liability insurance policies (SLIPs) to protect against legal exposure from claims for breach of duty. Typically these policies, subject to policy exclusions, will cover the legal costs of defending or settling litigation for a contravention of a safety or industrial obligation. SLIPs can also offer varying levels of protection against breaches of civil penalty provisions or fines. Subject to any statutorily prescribed limitations or policy terms that exclude prohibited conduct resulting in a breach, they can seem like a golden ticket to escape the personal financial burden of breaching obligations.
There have been calls recently to amend the Work Health and Safety Act 2011 (Cth) (WHS Act) to prohibit using SLIPs. Independent Reviewer Mr Tim Lyons echoed concerns about indemnification policies being used to protect against WHS fines in his Best Practice Review of Workplace Health and Safety Queensland report. The Government did not adopt this recommendation into the new Work Health and Safety and Other Legislation Amendment Bill 2017 (Qld), which was passed and assented to on 23 October 2017, but has not ruled out such a reform as part of a broader stocktake of the State's insurance markets.
Challenges have been made as to the use of SLIPs to protect against personal penalties and the courts have provided some guidance on the likely sentencing consequences where litigants choose to rely on their insurer for this purpose.
So what is the problem?
A number of interest groups have raised alarms about the availability of policies that indemnify an individual against personal penalties. Common concerns are:
- the public policy fear that some individuals can "insure out" of their legal obligations, whilst others must pay the price for failing to meet them
- the availability of SLIPs negatively impact the behaviour of those operating in industries or environments regulated by statute, and
- the availability of SLIPs weakens the deterrent effect and overall purpose of pecuniary penalty regimes or fines, which are often intended to have a targeted consequence on the individual.
On the other hand, SLIPs can help manage the commercial problem of individual risk and liability in decision-making. Without appropriate liability management, it can be harder to attract skilled individuals to senior executive roles as they become exposed to strict responsibilities and penalties for breaches (of which they may arguably not be at fault). For example, many breach provisions do not require intent on behalf of the wrongdoer and could foreseeably leave an individual bankrupt for an act of recklessness or negligence. Those that do ultimately assume these roles consequently become more risk averse.
Indemnification of personal penalties
It is accepted practice that directors can seek out personal liability shields from the financial consequences for breaches under the Corporations Act 2001 (Cth). As noted previously, the classic argument against this is that these policies diminish the responsibility imposed on such individuals.
Civil penalties under the Fair Work Act 2009 (Cth) (the FW Act) can be viewed similarly. The purpose of the regime is to ensure those responsible for the actual decision-making are held accountable. However, we expect future cases will examine the ability of the courts exercising their statutory and/or any inherent powers to make non-indemnification orders for breaches of legislation.
SLIPs that offer coverage against paying a fine for a criminal offence are even more controversial. Detractors argue that this practice strikes at two key purposes of the criminal law?retribution and rehabilitation.
In a workplace setting, these cases can arise in a safety context where the Court is imposing a fine for criminal conduct committed by an officer. In Queensland such a scenario falls outside the scope of s 272 of the WHS Act, which prohibits any contractual term from overriding the WHS Act's express provisions but does not make any limiting reference to indemnity policies. The Court commented on these issues in Hillman v Ferro Con (SA) Pty Ltd (in liquidation) and Anor  SAIRC 22.
The employer, Ferro Con, operated a specialist steel business. In 2010, a falling beam struck and fatally injured one employee rigger and injured another whilst they attempted to move it into position. The employer was charged for breaching s 19(1) of the Occupational Health, Safety and Welfare Act 1986 (SA) (OHSW Act) for failing to ensure, so far as reasonably practicable, the safety of the rigger. The employer company had a sole director acting as the "responsible officer" under the OHSW Act, who was also charged for not taking reasonable steps to ensure the employer met its obligations.
Both Defendants pleaded guilty to the respective charges and believed the circumstances of their case warranted a penalty reduction. During sentencing, the Court was disapproving of each Defendant's decision to engage the employer's insurance policy. The Court considered that sincere remorse encompasses an expression of regret and an intention to change conduct in the future to avoid a similar incident occurring. To show remorse, the Court said there needs to be a real acknowledgment of the criminal wrongdoing and an acceptance of the penalties. In this case the reduction in penalty was not granted as the Defendants' decision to rely on their insurance policy demonstrated a lack of sincere remorse.
The appropriateness of the indemnification of personal penalties in civil and criminal matters will continue to be debated in the courts. Thus far, the Australian judiciary has provided a clear warning against reliance on SLIPs as a complete ticket out of obligations, particularly where contraveners are attempting to make an argument for a reduction in penalty. An intention to rely on an indemnity policy can lead to a compensatory increase in sentence or more adverse types of orders. In the long-term, these decisions could make policies less effective, more difficult to obtain and more expensive.
 Pecuniary penalties. Guidance for legislative design  NZLCR 133, chapter 15.
 An offence that must be proven beyond reasonable doubt. A 'criminal record' eventuates from a conviction – eg see Criminal Law (Rehabilitation of Offenders) Act 1985 Qld.
 See The Honourable T F Bathurst, 'Insurance Law – a view from the Bench' (19 September 2013) Australian Insurance Lawyers Association National Conference, Sydney, .