D/O liability insurance gets to England’s High Court

Insurance policies for directors and officers (D&O) liabilities have yet to gain much application in terms of occupational health and safety penalties.   But D&O insurance policies are in Australia and are established in other countries.

According to Wikipedia:

“Directors and Officers Liability Insurance (often called D&O) is liability insurance payable to the directors and officers of a company, or to the organization(s) itself, to cover damages or defense costs in the event they suffer such losses as a result of a lawsuit for alleged wrongful acts while acting in their capacity as directors and officers for the organization.”

A decision by the High Court in England throws further light on the application of D&O.  The recent decision concerning the conduct of Safeway is not one that involves an OHS-related decision and is not criminal but it illustrates how complex an OHS prosecution case could be if D&O becomes involved in the legal action.

The case, as I understand it from a briefing note provided by Barlow Lyde & Gilbert (BLG).  Safeway Stores could be facing a GBP10 million fine from the Office of Fair Trading concerning

“repeated exchange and disclosure of commercially sensitive retail pricing information”

to which the company confessed.  Safeway then commenced action against its executives and employees as described below:

“Safeway then commenced proceedings for breach of employment contract, breach of fiduciary duty and negligence against eight former employees of the Safeway Group, including the former chairman of Safeway Limited and four individuals who were directors of companies within the Safeway group.  The claim is for an indemnity against the company’s liability for the penalty.  It also claims as damages its costs including the legal costs of the OFT investigation itself.”

The action raises many questions of liability and the concept of the “corporate mind” but Frances Kean of BLG writes:

“There is another aspect to this case which is perhaps of greater significance and interest to D&O insurers.  Many, if not most, D&O policies contain express provisions excluding cover for fines and penalties.  Thus in this case, had the OFT been granted the statutory power to levy fines directly against the individuals concerned (as they have for example in respect of a “cartel offence” under section 177 of the Enterprise Act 2002) no cover (other than in respect of costs and expenses) would be available under the majority of D&O forms.  Instead, however, and because the company which itself is liable for the fine or penalty has sought to pass that liability across to its directors and employees, a D&O policy is likely to be very much in play. “

When researching the issue for an article on the issue of D&O and workplace safety, the response from most lawyers and the legal advisers for OHS regulators was the legal mantra that you can’t have someone else pay a fine or penalty.  One person said that this would be like receiving a jail sentence and having someone else do the jail time.  This is unlikely to occur with a jail penalty but financial penalties are different and it seems that D&O policies provide for financial penalties to be covered.  If this is true, a financial penalty for an OHS breach is no penalty at all.

In the case mentioned above Safeway as a company admits to breaches of the Competition Act and anticipates a huge financial penalty.  It then goes for eight of its own employees including the former chairman and and eight company directors – to what end?

At some point in the near future the Australian OHS regulators will face complexities in their OHS prosecutions from D&O insurance policies.  Strategies need developing now in anticipation.  If preparatory work is not done, the first case where a company executive walks out of court smiling because an insurance company will be paying all the legal costs and the substantial financial penalty that the court has just applied, there will be a public outcry and hard questions asked of the regulator.

Perhaps a pre-emptive clarification from one of the OHS regulators on this issue would be useful. (Treat the boil before you need to lance it)

Kevin Jones

reservoir, victoria, australia

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