15.21We have considered whether it is desirable, in the interests of regulatory certainty, for pecuniary penalty regimes to pre-empt arguments about whether the availability of insurance and indemnification is potentially void for public policy considerations. Statutes could do this by expressly authorising or confirming the extent to which such measures are available.
What I do think is undesirable however is the lack of clarity around these issues. At the moment, the market’s best guess seems to be that insurance for criminal penalties is likely to be deemed illegal or unenforceable by the courts, and that it is not clear if a similar situation applies in relation to civil penalties.
I have spoken on previous occasions about the need for certainty in the legal rules applicable to commercial activity. That need is acute in this context. Directors and officers need to know whether their policies are enforceable and will protect them against the risk of personal liability and possible bankruptcy. Insurers need to be able to properly assess variables in order to accurately price risk. ASIC [the Australian Securities and Investments Commission] needs to assess how insurance may affect its corporate regulation strategy. At present, it is questionable whether sufficient clarity exists to enable those assessments to be made satisfactorily.
15.23The advantages of express statutory confirmation include greater certainty for directors and officers, as identified by Justice Bathurst. It would also confirm that the impacts of indemnification on the regulatory regime have been addressed by policymakers in designing the regime, thus ensuring a robust regime and providing a clearer indication to the public of how issues of liability may be dealt with.
15.24On this basis we conclude that pecuniary penalty statutes should expressly confirm whether contracts that indemnify or insure against liability to a pecuniary penalty are legal, or whether they are subject to any particular prohibition or limitation.
15.25A further question for policymakers designing pecuniary penalty regimes is whether to squarely prohibit or limit the availability of indemnification in any respect, as in the case of price fixing under the Commerce Act. Whether any such measure is necessary will depend on the nature of the pecuniary penalty regime and its underlying objectives.
The question of whether indemnity should be available for civil penalties, or for the personal financial consequences of breaching a civil penalty provision is a difficult one.
On the one hand allowing insurance in such circumstances tends to negate, or at least significantly undermine the deterrent and punitive goals that underlie the imposition of such penalties … Nonetheless … [to] my mind, excluding indemnity for civil penalty provisions would be at odds with the general acceptance that insurance is available for the civil consequences of negligent behaviour. Breaches amounting to civil penalty provisions may often be the result of honest but careless behaviour… it does not seem unreasonable to me that directors should be able to protect themselves from liability for civil penalties …
Traditionally, a person could not insure themselves against the consequences of deliberate criminal acts and, in particular, to purchase indemnity for a fine or other punishment imposed for the commission of a crime. But where the law was broken by an act or omission which was negligent, different considerations intruded and the consequential case law is byzantine, in part because of particular statutory provisions or policy considerations in particular areas of human activity. As a matter of commercial reality much will depend upon the type of cover that insurers are prepared to provide rather than the limits of what the law permits.
Theirs is the business of evaluating risk likelihood and likely levels of loss when loss occurs. They are entitled as a matter of law, and compelled by practical reality, to make careful inquiry of those seeking cover. Those who want cover need to be truthful and complete in their responses or risk being denied indemnity. When a claim is made, the nature and extent of it may result in future cover being available (if at all) only at the cost of increased premiums. Above all insurance companies can and frequently do affect the future conduct of insured persons by requiring of the taking of precautions against loss. Where the criminal law merely hopes to deter by threat or example an insurance company has much more effective tools at its disposal, particularly in the context of commercial activities. Insurers can require safety precautions and distribute financial burdens according to risk far more effectively than any warranted inspector.
… as a matter of policy, when considering areas of human activity in which there is a required process of taking precautions against foreseeable risk the policy advantages of permitting insurer participation seem compelling. Insurance against the consequences of unintentional breaches of public or environmental welfare laws, far from undermining those laws, adds in a factor tending to promote their adherence. There is a vast difference between profiting from a deliberately unlawful act, or at least taking prior steps to reduce the impact of its consequences, and insuring, that is paying in advance for at least some protection against, the consequences of prosecutions flowing from unintentional shortcomings of a type which many people would characterise as part of the human condition ‒ one which can be reduced though probably never eliminated.
15.29Another consideration is whether the availability of indemnification would significantly dilute the deterrent effect or the punitive impact of a pecuniary penalty on an individual, as they do not personally pay the penalty imposed on them for the contravention. However, adverse publicity, reputational impacts and any other applicable consequences may provide adequate deterrent and punishment.
Knowing that they are “insured” for the criminal and civil liability of industrial accidents, some firms will find it harder to economically justify the large investment in systems designed to prevent such accidents from taking place. Economists call this moral hazard. Leaving aside ethical considerations, if a company will not face the consequences of deficiencies in its systems, it is less likely to maintain such systems. The vigilance around safety may be lost …
G16 Pecuniary penalty statutes should deal expressly with the question of insurance or indemnification in relation to pecuniary penalty liability
Policy makers should consider whether there should be no bar on insurance or indemnification in respect to pecuniary penalty liability under the proposed regime, or whether policy reasons justify a particular prohibition or limitation. In either case, an express statutory statement confirming or restricting the legality of contracts to indemnify or insure is desirable.
Factors to be considered include:
The nature and gravity of the illegal conduct. Are there public policy reasons why indemnification or insurance in respect of the conduct / breach should be barred? For example, was the conduct so morally reprehensible that punishment should be borne personally?
The deterrent effect of the penalty. Would the availability of indemnification significantly dilute the deterrent effect of a pecuniary penalty provision? Or does the disciplinary effect of indemnification and insurance contribute to the deterrence objectives of the pecuniary penalty regime? Similarly, would those insured prefer to allow the breach and recover under their insurance policies rather than to avoid the breach altogether?
Interests of innocent third parties. Will the penalty be diverted for reparative purposes or to fund education to prevent future breaches? If so, will the contravener be able to pay the penalty if the indemnity is not allowed?
Other relevant considerations are the potential impact of insurance and indemnification on penalty imposition by the courts, the potential impact on prosecution strategies, and the impact on the personal liability of directors and managers.
Where it is necessary to impose statutory restrictions on insurance and indemnification in a pecuniary penalty regime, policymakers should consider penalising the provision of insurance or indemnification in breach of those restrictions.