Insuring Against Fines and Penalties

Lawbooks Stacked

Lawbooks Stacked

The Legal Aid, Sentencing and Punishment of Offenders Act 2012 (which was given Royal Assent on 1st May 2012) is a subject on which I have previously written. It is, however, worth drawing attention to in another context which bears a less oblique relationship to the name of the Act.

The Background

The Act represents a radical shift in the approach to the level of fines and penalties payable for criminal offences across a broad spectrum of legislation applicable to business including the Companies Act 2006, the Financial Services and Markets Act 2000, the Data Protection Act 1998 and the Competition Act 1998.

A question often asked by D&O clients is whether and to what extent there is cover under their D&O policies for fines and penalties. That question rose to particular prominence in the aftermath of the Court of Appeal decision in Safeways vs Trigger (and others).

The Safeways case left the door open on the question as to the insurability of certain categories of fine and penalty. Insurers are often reluctant to provide any (or, if so, only very restrictive) cover in this area.

Whilst there is no doubt that English public policy prohibits the insurance of fines and penalties relating to offences of deliberate or dishonest misconduct, the position is much less clear in relation to offences of strict liability where proof of intent is irrelevant. There are literally hundreds of offences in this category on our statute books. A large number of these will be affected by the changes introduced under the Act.

Bigger Fines for Directors and Officers

In general terms, for offences carrying a fine capped at £5,000 (often referred to as the “statutory maximum”) the cap will be removed and, in the absence of a new cap being imposed by the Secretary of State, no upper limit will apply. This will allow magistrates to impose deep pocket style fines for “wealthy or corporate offenders or organisations”.

A good example of a statutory offence applicable to directors of all companies which is currently capped at £5,000 but which will become uncapped when the new Act comes into force is the offence under the Companies Act of failing to file accounts (and its close cousin, the offence of failing to file annual returns).

Figures from Companies House indicate that in 2010/2011 there were 3,440 prosecutions for failure to file accounts and 1,703 prosecutions for failure to file annual returns. As lawyers Shoesmiths in their briefing note on this subject conclude:

“As the level of fines a director or officer of a company may face personally is set to increase to an unknown level, companies need to rethink their approach to compliance. Statutory breaches can no longer be considered “minor” because they attract a relatively low fine. Heavier fines on repeat offenders and large corporate organisations that should do more to adhere with legislation are likely to follow”.

I would only add that the need to establish clarity on the question as to the extent of insurance that may be available for such fines and penalties is likely to become all the more significant. D&O insurance policies (and the attitude of insurers) differ quite markedly on this important issue.

About Francis Kean

Francis is an Executive Director in Willis Towers Watson's FINEX Global, where he specializes in insurance for Dir…
Categories: Directors & Officers | Tags: ,

One Response to Insuring Against Fines and Penalties

  1. SERGIO says:

    Francis,

    This is an interesting post.

    We are currently in the middle of a legal debate with the insurance regulator here in Spain regarding whether it is legal to have administrative fines and penalties insured (the law is currently silent on this). Their intention is to declare it illegal but we will await the final outcome..

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