Insuring against corporate crimes
by Neil Foster
University of Newcastle, Australia
Can and should corporate directors and officers obtain insurance for, or indemnify themselves against, the possibility of a criminal fine following a conviction? Or should this be deemed to be against public policy? The general rule is that one should not be able to insure against one’s own wrongdoing. Criminal laws would lose much of their deterrent effect if the rule were otherwise in respect of fines-only offences.
In Australia legal restrictions applying to companies draw a distinction between “indemnity” and “insurance”. Logically an insurance policy would always seem to involve some sort of “indemnity”, but the difference appears to lie in the question whether the source of a promised payment is from company general funds, or from a general policy provided by an insurer and paid for by the company. Under the Corporations Act (s 199A(3)(b), 2001A), a company is not allowed to “indemnify” an officer for legal costs arising in “criminal proceedings” in which the person is found guilty. Herzfeld (below) notes that, due to their so-called “regulatory” character, there may be a question as to whether occupational health and safety law proceedings fall within this description, but concludes on balance that they probably do. (Herzfeld p 281).
What about the fine itself? While the legislation of most Australian states is silent on the point, it seems that, as a matter of common law public policy, a company cannot indemnify an officer for (or provide insurance against) payment of a criminal penalty. While there is some doubt about criminal penalties for “strict liability” offences, the better view is that where an offence involves any element of personal fault, insurance against payment of the penalty will not be available. (Herzfeld p. 293) Indeed, Herzfeld argues that this should be the case even for offences where fault is not a part of the offence. But at least where a “defence” of “due diligence” would have been available, the courts are reluctant to allow insurance to be available – see R v Northumbrian Water, ex parte Newcastle and North Tyneside Health Authority  Env LR 715, discussed in Foster “Personal Liability” (2004)(below), at 262-263. Since the personal liability provisions in NSW do have such a defence, insurance against payment of a fine is probably not available.
But what is the reality? Say that a corporate officer violates the law and earns her company millions of dollars. The illegality is discovered, the officer is convicted, and then fined 500,000 dollars. Ah, but what if the officer now receives a bonus of 750,000 dollars for earning millions for her company? Financially, the officer comes out 250,000 dollars ahead even if not indemnified for the fine. How is this to be regulated?
The question of whether the costs of defending a criminal prosecution, as opposed to the penalty itself, should be insurable is less clear. After all, the corporate officer may well be innocent, but reluctant to invest her own savings in a defence that could leave her financially destitute even should she prevail. Herzberg recommends that Australian legislation should be clarified to allow such costs to be the subject of insurance (Herzfeld p. 294) and there is much to be said for drawing a distinction between the costs of defending a prosecution and a fine following a conviction.
So far we have looked at criminal fines. But many countries have rejected corporate criminal liability in favour of civil, administrative or regulatory liability. Whatever the label attached to the legal proceeding, the penalty is the same– a fine. However, if the fine is not a “criminal” fine, the question arises whether it can be the subject of insurance. Generally, both natural and legal persons can insure against civil damages damages such as in a tort case. But should the practical financial consequences when there is corporate misconduct turn on whether the identical misconduct is classified as a civil, administrative, regulatory (quasi-criminal) or criminal offence?
For further information on this topic, see N Foster, The Personal Liability of Company Officers for Company Breach of Workplace Health and Safety Duties (February, 2004), thesis accepted for award of degree of Master of Laws at the University of Newcastle (copy available on request); ch 5; Herzfeld “Still a troublesome area: Legislative and common law restrictions on indemnity and insurance arrangements effected by companies on behalf of officers and employees” (2009) 27 Company and Securities Law Jnl 267-298; V Finch, “Personal Accountability and Corporate Control: the Role of Directors’ and Officers’ Liability Insurance” (1994) 57 Modern L Rev 880-915, and C Baxter “Demystifying D&O Insurance” (1995) 15 Oxford Jnl of Legal Studies 537-564 for excellent reviews of the policy issues involved in such insurance, and the UK situation; S Ansell “Directors’ and Officers’ Liability Insurance- Recent Reforms and Developments in Australia and New Zealand” (1995) 23 Aust Business Law Rev 164-173, S J Traves & R N Traves “Directors and Officers Liability Insurance: Reducing the Burden of Legal Liability” (1996) 26 Qld Law Society Jnl 587-604, and M Waller & L Courtice “Insuring against environmental risks in Australia and some recent developments” (1998) 8 Aust Product Liability Reporter 172-181 for some comments from an Australian perspective; and C Parsons “Directors’ and Officers’ Liability Insurance: A Target or a Shield?” (2000) 21 Company Lawyer 77-86.