Insurance and indemnity
Contrary to public policy?
15.6Both common law and statute recognise that in certain circumstances indemnification against liability is unenforceable on grounds of public policy. Fire and All Risks Insurance Co Ltd v Powell is cited as providing the general principle that:
… where the act amounting to the offence is sufficiently serious or of such an anti-social character as to justify a refusal to allow an indemnity in the interests of the public, public policy should be invoked to deny cover to the assured.
15.7In that case, the legislative provision in breach was found to be a “mere” regulatory provision, rather than a crime in the sense that it would shock the conscience of reasonable people or cause to them to regard the defendant as a criminal. In reaching this finding, the Court applied a range of criteria such as the gravity of the conduct, goals of deterrence and the interests of the victims, and concluded that the indemnity survived. The penalty imposed was sufficient for the protection of the public, and it was not going to help deter future offenders for the Court to refuse to allow the indemnity.
15.8Generally, the availability of indemnities and insurance for employees and directors of New Zealand companies is governed by the Companies Act 1993. The Act provides that a director or employee can be indemnified for any liability but criminal liability, breaches of fiduciary duty or breaches of section 131 (duty to act in good faith and in the interests of the company) of the Companies Act. A director or employee may be insured by the company against any liability save criminal liability, so long as it is permitted by the company’s constitution and is fair to the company.
15.9In relation to corporate liability, the Companies Act does not place any restrictions on a company seeking to insure its statutory liabilities. Companies are able to seek cover for liability to fines and penalties, subject to the policy being challengeable in court as void on public policy grounds. Similarly, individuals may insure themselves against liability without procedural restrictions, subject to the same limitation.
15.10The increasing use of pecuniary penalties to regulate behaviour in Australia has given rise to questions about the applicability of the conventional doctrine that insurance against the imposition of penalties is contrary to public policy. Conceptual differences between conventional criminal offending and pecuniary penalties (and strict liability offences) have led to the gradual retreat from the position that the creation of a statutory contravention punishable by a monetary penalty is always a reason to invalidate an indemnity.
15.11A judicial address to the 2013 Australian Insurance Lawyers Association on liability insurance for directors and officers, acknowledged that in most cases issues of public policy will not arise because the relevant insurance contract will exclude liability in circumstances that might offend public policy. However, where a policy squarely purports to indemnify directors and officers against statutory liability, Justice Bathurst pointed to a significant lack of clarity about when it would be against public policy for directors and officers to access liability insurance where a pecuniary penalty is imposed. Canvassing the arguments for and against permitting cover for pecuniary penalty liability, he noted:
It is obviously within the policy of the law for people to [i]nsure themselves against liability incurred through negligence, and I do not believe anyone has suggested that this circumstance is altered because the duty is also subject to a civil penalty provision, which is intended to have a deterrent effect.
At the other end of the spectrum, it seems equally clear that a director or officer cannot be indemnified for loss incurred through wilful criminal acts … Between the two extremes of intentional criminal conduct and civil negligence, things are much less clear.
15.12Another significant issue is that a particular contract of indemnity may not be in issue in legal proceedings and so may fall outside a court’s powers of determination. In an Australian decision, Hillman v Ferro Con (SA) Pty Ltd (in liq), the Industrial Magistrate expressed great frustration that the defendant, whose actions had caused a workplace fatality, was insured, finding that the defendant’s:
… actions have also undermined the Court’s sentencing powers by negating the principles of both specific and general deterrence. The message his actions send to employers … is that with insurance cover for criminal penalties for [Occupational Health and Safety] offences there is little need to fear the consequences of very serious offending…
15.13It also seems that there are market incentives to provide liability insurance even if, were the policy to be tested before the courts, it might be found void for reasons of public policy. This issue has been addressed in certain statutes by penalising the indemnification of contraventions, and is discussed further below.