Spotlight on insurance cover for fines and penalties against directors
By Stephen Layburn, senior associate, Bell Gully

When the Companies Act 1993 came into force, there was plenty of debate about the partial relaxing of restrictions limiting a company’s ability to provide its directors and officers with indemnity and insurance coverage. One of the big issues was how the change might serve to help directors manage their exposure to fines and penalties imposed by law.

This issue was highlighted because of the developing trend in “public order” type legislation, seeking to encourage compliance by making people directing the mind or will of a company personally liable for its breaches, for instance in the areas of resource management, health and safety, and restrictive trade practices.

For some commentators on this issue, the bottom line was the potential gap in the cover that was able to be provided by directors’ and officers’ liability insurance cover (D & O cover) for fines and penalties, when this cover appeared to breach the public policy doctrine that prevents claimants benefitting from their own illegal conduct.

The Safeway supermarket case
A decision of Justice Flaux of the English High Court, released on 15 January 2010, sheds some light on this issue, and suggests that D & O cover may provide much greater comfort for directors than was previously thought. In Safeway Stores Ltd & Ors v Twigger & Ors [2010] EWHC 11 (Comm), there was a claim by Safeway against some of its former directors and employees for taking part in initiatives which the UK Office of Fair Trading (OFT) alleged had breached the prohibition against restrictive trade practices contained in the Competition Act 1998. After an investigation, the supermarket chain entered into a ‘fast track’ agreement under which it admitted breaching the Competition Act. The penalty has yet to be determined, but the OFT has indicated that it would be in the region of £10 million.

The supermarket chain then commenced proceedings against the directors and officers for negligence, and breaches of their employment contracts and fiduciary duties. Safeway sought an indemnity against the chain’s liability for the penalty, plus the costs of the OFT investigation. The directors and officers sought to strike out the claim on the grounds that it breached public policy – that is, that the chain, having committed an unlawful act, cannot claim an indemnity for the liability which results from that act.

The Court assessed the strike-out proceedings on the basis that it was required to address two questions:

1. Was the unlawful act sufficiently serious? The Court found that while it is clear that the public policy doctrine applied to criminal acts, it was wider and applied to non-criminal matters, although there must be an element of moral turpitude or reprehensibility. In this case, the Judge concluded that the breach, while resulting in a penalty that was administrative rather than criminal (to which a civil standard of proof applied), still had many of the elements of a criminal fine, did involve moral reprehensibility, and was sufficiently serious to trigger the public policy doctrine.
2. Were the wrongful acts those of the claimants? The Judge considered that the key issue was whether the supermarket chain had primary and direct liability for the breaches, rather than vicarious liability for the acts of its directors and officers. He concluded there was no evidence to suggest that the illegal conduct was approved by the board or the shareholders, and therefore the chain was not primarily liable. On the facts, the wrongful acts were committed in the name of the chain by the directors and officers. However, as this was only a strike-out application, the question of whether the directors and officers were directing the mind and will of the chain did not need to be finally determined, pending a full trial.

Having determined that there was not sufficient evidence to determine that the chain was primarily liable and, as a result, the chain had a real prospect of defeating a defence by the directors and officers that the chain was blocked in its claim against them on public policy grounds, the Judge also considered whether a claimant could issue civil proceedings to recover a criminal fine from the person whose actions caused the fine to be imposed. He concluded that where the elements of the criminal offence included intention, there was authority that the offender could not recover, in a civil damages claim, the amount of a fine imposed on them in criminal proceedings. 

On the more difficult issue of whether this reasoning extended to strict liability fines (where intention did not need to be proven), the Judge said that a fine might be able to be recovered in civil proceedings where the claimant had not been personally at fault. 

In effect, the Judge concluded that, unless there is clear evidence that the conduct of the directors or officers amounted to directing the mind and will of the company, there was no reason why the public policy doctrine should prevent an attempt by the supermarket chain to bring a civil claim to recover the fines imposed as a result of the conduct of the directors and officers. 

Implications for D & O cover
Various pieces of public order legislation in New Zealand contain provisions for imposing fines directly against individual directors or officers who directed the mind or will of the corporate offender. In some examples, the language used includes exposure to liability for acquiescence and, in some cases, liability may result even where the body corporate is not convicted (or even prosecuted). There are also examples where the legislation specifically prohibits the body corporate indemnifying and/or obtaining insurance cover for its directors and officers for their exposure to liability for such fines and penalties.

While there are a number of different policy wordings available in the market, and D & O insurance generally excludes cover for fines and penalties, D & O cover would not protect directors and officers against whom fines and penalties were levied, where they were directing the mind and will of a corporate offender. However, if a convicted corporate offender sought to pass its liability on to a director or officer, that person may be able to avail themselves of the protection of D & O cover, which would typically extend to meeting their legal costs. 

In turn, it would be unusual for a company to pursue a director or officer in this manner unless that individual was able to claim from an insurer under a D & O policy (because individuals do not usually have sufficiently deep pockets). 

While a full hearing of all of the issues relating to the Safeway matter is still some time away, the outcome of the strike-out application points to a need to examine the fine print of the exclusions, prior to finalising the terms of a D & O policy.