2018 has seen unprecedented levels of regulatory action against Australian corporations. This includes the watershed $700 million fine against the Commonwealth Bank for breaches of the anti-money laundering and counter-terrorism financing laws.
Given the scale and frequency of the civil penalties being imposed, it is unsurprising that many insureds have tried to manage the risk through insurance. While statutory liability insurance is a relative mature insurance product, there is some uncertainty whether civil penalties are in fact insurable due to the unique position it occupies in the regulatory landscape as confluence between criminal and civil law.
While some statutes expressly prohibit indemnity (such as those found under the Corporations Act 2001 and the Heavy Vehicle National Law 2013), many other statutes remain entirely silent on the matter.
As the law currently stands, it appears that:
- a number of decisions address the insurability of criminal and other intentional conduct (but only in the context of third party compensation claims rather than non-compensatory penalties arising from unintentional conduct); and
- as a matter of public policy and construction:
- no indemnity will be available where an insured intends to cause the specific loss – i.e. no entitlement to indemnity can arise in relation to an act founded on illegal or intentional conduct (such as suicide under a life insurance policy or arson under a property/ISR policy); and
- no indemnity will be available in respect of ‘intentional’ criminal conduct, but indemnity may be available in respect of some ‘inadvertent’ criminal conduct.
There is a long line of cases (in relation to motor accidents) that accept a person can be insured against third party liabilities arising from negligent criminal conduct. For example in James v British Insurance General Company  2 KB 311 at 323, the English Court of Appeal held that the third party motor insurance policy responded to a drinking driving claim (resulting in the death of another driver):
It was gross negligence or reckless negligence, negligence of the kind which constitutes criminality; but nevertheless it was negligence, and was not the wilful or advertent doing of the act… there is not, in my view, on the part of the person who does the act, that degree of criminality which in the doing of a known unlawful act makes it against public policy that the perpetrator should be indemnified in respect of it.
In Australian Aviation Underwriting Pty Ltd v Henry (1988) 12 NSWLR 121 at 125, the NSW Court of Appeal held that an insurance policy which excluded liability for death and disablement arising from the insured person’s own criminal act must be read narrowly and would not capture negligent or inadvertent criminal conduct:
The issue of public policy has not been raised in the present case but these and like decisions are of some assistance in that they show that the law, and in particular the law relating to insurance, has distinguished between intentional crimes and crimes which are not intentional but are the consequence of negligence, however gross.
Outside the scope of motor vehicle accident cases, courts seem to adopt a far more conservative approach. In Gray v Barr  2 QB 554 at 581, the English Court of Appeal (in the context of a non-motor accident death) held that despite the insured being acquitted of murder and manslaughter charges (during an earlier criminal trial), the insured was not entitled to indemnity under a liability policy (in a subsequent compensation to relatives claim), because the insured was “guilty of deliberate, intentional and unlawful violence, or threats of violence”.
The rationale for the divergent case law seems to centre on the compulsory nature of the motor vehicle insurance schemes and their clear third party compensatory nature.
The case law is more sparse in relation to inadvertent conduct. In Lancashire County Council v Municipal Mutual Insurance Ltd  C.L.C. 1459 at 1465-1467, the English Court of Appeal unanimously held that the Council’s public liability insurance policy did not, as a matter of public policy, exclude exemplary damages (notwithstanding the fact that such damages are paid to punish and deter the specified conduct).
The Court in Lancashire County Council also noted the fact that the Council’s exposure was only by way of vicarious liability and the relevant intentional conduct had been carried out by its employees (rather than by the Council itself). Specifically, Staughton LJ remarked that:
“the insurance will for the most part be called on to indemnify the council or the chief constable when they are liable vicariously, for the fault of others... In the present case any claim for indemnity in respect of exemplary damage is almost certain to be made by the chief constable, or possibly the council, in respect of their vicarious liability. In those circumstances I would hold, for that reason alone, that the claim is not vitiated by illegality”.
The obvious limit to the decision in Lancashire County Council is that the underlying issue concerned the insurability of exemplary damages. While there is some crossover, the civil penalties regime is designed to deter “commercial wrongdoing”. Accordingly, whether the availability of insurance unnecessarily mitigates against such specific and general deterrence remains a live question.
Insuring Civil Penalties
Given the existing case law, it is difficult to draw together any strong unifying themes. However, at a very basic level:
- in relation to those cases involving criminal conduct, it appears that:
- intentional criminal conduct by an insured cannot be covered, but a special exception exists in relation to motor accident cases (where the courts distinguish between intentional and unintentional criminal conduct). There is an absence of any relevant case law suggesting whether such an exception can be applied to criminal conduct that do not require a mens rea element i.e. strict and absolute liability offences (assuming the relevant conduct was not carried out with malice); and
- outside the context of motor accident cases, the courts seem to adopt a far more narrow approach (notwithstanding the fact that such claims usually involve an innocent third party seeking compensation from the insured);
- in relation to those cases involving civil conduct:
- it appears that intentional conduct by an insured cannot be covered by insurance; and
- it is undecided whether inadvertent or negligent conduct is insurable.
In the absence of direct authority, it remains to be seen whether civil penalties are in fact insurable under Australian law. To a significant extent whether cover will ultimately be available will turn on the relevant statutory regime and the specific harm that is the subject of the prohibition.
In our view, the real difficulty for insurers arises in the context where:
- the civil penalty regime is designed to provide specific and general deterrence; and
- the specific harm that is the subject of the prohibition is inadvertent conduct by the insured.
While this remains an unsettled area of the law, while we are hopeful that (in the absence of any express statutory clarification on the matter), the approach adopted by the Court in Lancashire County Council is given some weight. Specifically, the Court accepted the fact that the availability of insurance would reduce the punitive effect of the award of exemplary damages, nonetheless Brown LJ (as he then was) found that:
- the availability of such insurance would not remove all the costs since the Council may face higher future premiums;
- as a matter of public policy, the Court should also give effect to contracts of insurance; and
- the common law should only intervene on public policy grounds “in very plain cases”. Staughton LJ went even further, remarking that “it is not the task of the courts to interpret private contracts in such a way as to ensure that the national interest is well served”.