Insurance over OHS prosecution hits the deterrence effect

In response to proven breaches of occupational health and safety laws, judges usually apply financial penalties to companies and individuals.  These penalties, like all court-ordered punishments are to deter the offenders from re-offending but also to show others the consequences of their actions.  But what if an insurance company would pay for that penalty in return for regular premium payments?  If the offender does not pay the penalty, deterrence is gone.

On 27 June 2013, a company and its director were fined $A200,000 each in relation to workplace incident that resulted in the gruesome death of one man and a near miss for another but the director had taken out a general  insurance policy and the insurance company paid out!!??.  A fine of $A200K awarded but the offender may pay no more than $A10K.

Labour lawyers have stated for years that insurances, particularly director’s and officer’s (D&O) liability, cannot apply to court-ordered financial penalties.  Michael Tooma has said

“that Directors’ and Officers’ liability insurance does not cover liability for work health and safety offences because these offences “are criminal in nature””.

Neil Foster of the University of Newcastle has warned of the need to clarify D&O insurance products:

““…if the true impact of personal liability provisions is to be felt, it seems that some action must be taken to make clear what has been the policy of the law for many years, that a criminal penalty must be paid by the person on whom it has been imposed. Only then will the law ‘bite’ sufficiently for a real difference to be made.”

The case of Hillman v Ferro Con (SA) Pty Ltd (in liquidation) and Anor [2013] SAIRC 22 on 27 June 2013 it seems to have proven some labour lawyers wrong.  The potential legal and corporate impact of this case could be substantial.

Readers are urged to access the case judgement through the link above and consider the case carefully.  A short summary and response to the case is provided by the ABC.  SafeWorkSA has issued a media release on the judgement which is very cautious in its wording.

“SafeWork SA charged Ferro Con (SA) Pty Ltd with failure to provide a safe system of work under the Occupational Health, Safety and Welfare Act 1986. Mr Maione was charged under the same act with failure to take reasonable steps to ensure the company’s compliance.

The court heard that neither a risk assessment nor a job safety analysis were conducted before the 1.8 tonne, 14-metre long steel monorail beam was lifted into place, with two workers directly below it.”

The judgement details the incident as such:

“The riggers’ employer Ferro Con, was then using a large crane to install a 1.8 tonne 14m long steel monorail beam to the rafters of a partially built building. The lifting of the beam had been poorly planned by others. No risk assessment or job safety analysis had been undertaken for this type of lift, and no safe working procedure had been devised to take account of the particular hazards of the task. As a result Mr Fritsch was required to pull down heavily on a tag line in an attempt to lower the tilted beam’s high end to a level position, so it could then be bolted to a rafter. This necessarily required Mr Fritsch to stand under the beam to exert the required force, contrary to a general instruction to not stand under a load.

While Mr Fritsch was trying to do this the fabric sling supporting the beam snapped, resulting in the end of the beam dropping directly onto his head. He was instantly rendered unconscious and died soon after.

The other rigger, Craig Fowler, was standing on an Elevated Work Platform at the time. His machine was struck by the falling beam but he was able to ride the fall until he could jump clear onto nearby scaffolding.”

According to the judgement Paolo Maione was the sole Director of Ferro Con since 2006, and the Responsible Officer.  He was prosecuted as the Responsible Officer. However, initially Maione said that his sister was the responsible person.

Maione accepted remorse for the incident that led to the death of 35-year-old Brett Fritsch.  The defendants’ lawyer Mr C Bleby QC asked the court for a reduction in the penalty as a result but the magistrate declined this request.  Below is Industrial Magistrate Lieschke’s response to this (emphasis added):

“Ferro Con had in place a general insurance policy which apparently included indemnification of its Director for fines imposed for his criminal conduct. Curiously the insurance covers a criminal fine but not a consequential compensation order. The insurance cover carries a $10,000 excess or deductable payment. As Ferro Con is in liquidation and has no assets with which to pay the excess Mr Maione has paid it personally. He may not even bear the full cost of this if claimed as a tax deduction. By his payment he has ensured the insurance company grants both Ferro Con, and more importantly him, the indemnity he sought. In this way Mr Maione has made arrangements to avoid the vast bulk of the anticipated monetary penalty.

In my opinion Mr Maione’s actions have also undermined the Court’s sentencing powers by negating the principles of both specific and general deterrence. The message his actions send to employers and Responsible Officers is that with insurance cover for criminal penalties for OHS offences there is little need to fear the consequences of very serious offending, even if an offence has fatal consequences. As for specific deterrence Mr Maione has not said he no longer has such insurance for his current businesses.

In my opinion Mr Maione’s actions are so contrary to a genuine acceptance of the legal consequences of his criminal offending that they dramatically outweigh the benefits to the justice system of the early guilty plea and statement of remorse.”

SafetyAtWorkBlog expresses deep sympathy to Brett Fritsch’s family over his death.

The details of the circumstances of the incident included in the judgement read like a detailed incident investigation report and over the next few days, SafetyAtWorkBlog will put together a discussion on the issues raised and the deficiencies listed.  It is a sad tale of an activity that is regularly done on many construction sites in Australia and elsewhere.

But there is also a political dimension to the incident as it occurred on the trouble construction site of the Londsdale-based Desalination Plant in Adelaide, a project that led to a Parliamentary Inquiry.

Kevin Jones

reservoir, victoria, australia
Categories accountability, business, construction, crane, death, evidence, executives, insurance, justice, law, OHS, safety, Uncategorized

27 thoughts on “Insurance over OHS prosecution hits the deterrence effect”

  1. The only way I can see the this changing is that when the legislator (SafeWork SA), will impose the new fines under the WHS laws next year and then the insurance directors will not be able to take the liability of the larger fines because the premiums will not be able cover the fine.

    The problem you also have this will take some time due to the fact the fines under the new WHS 2012 will not be enforced until Jan 2014 and then it will take approx 2 yrs., for the first case to become public as per the Adelaide Aqua desalination plant.

    There will always be someone out there trying to find a loophole in the legislation. We are now at the realm of changing legislation for common sense.

    In regards to the desalination plant in SA, the Principle Contractor must take some responsibility also, when I was inducted onto the site the only thing the HSE/OHS Advisor taking the induction could talk about for 2.5hrs was being on time and being under budget, I think I roughly counted 38 times.

    This is now when the HSE/OHS professionals need to take responsibility for their position regardless of Project Management, because as we all know ATTITUDE on site is critical, this was set up to fail because conducting a Safety Induction with the main theme was “being on time and being under budget” sets up a culture of taking short cuts. This is the first mistake.

  2. So true – the question is what is to be done?

    My curiosity immediately moved to the question as to how many contractors and indeed companies involved in the joint venture were covered under such a policy? Was it just the one or was it many? I would like to think this is one area Parliament will look into.

    I am trying to consolidate in my own mind the legal issues here. It\’s a very disturbing result for any sentence. Is there even an avenue to appeal? I would have thought that would be the quickest path to legal clarity on all levels of sentencing issues but on what grounds would that appeal be lodged? It\’s hard to conceive the Supreme or High Court being willing to tread on Parliament\’s territory given that it seems to be more a policy issue than one of interpretation.

    The insurance companies must be rubbing its self righteous hands together with glee. To think of the compensation rights the average worker gave up in the face of a this same industry hollering about the undue pressures being placed on it. The only thing I am certain of here, should this become common place practise, premiums will rise.

  3. motoguzzirulz – That was the point of the article, your understanding has been challenged, insurance paid the fine, it was done and all the law professors were wrong. The question is what is to be done about it?

  4. You cannot insure again a criminal prosecutions, Pecunary penalties can not be paid by Insurance of an sort period. I recall for my Law Lectures by a very leared multiple degree law lecurer. I await to so who would challenge this precept. It will be very interesting,thus I operate on what has been statedto me until it is challenged.
    Cheers.

  5. The focus here has been on the avoidance of the penalty but should Adelaide Aqua have been required to take a more direct role in the safety arrangements of its contractors, employing someone to perform a specialist role that you cant and has a safety strike already against them could mean the managing of risk is obscured and the BP oil rig disaster where more than one company was found to have been responsible for this with BP having a company subcontracted to it all were fined .

  6. Hi Les,

    Maldeplume doesn\’t mention workers comp, merely premiums. I took it to mean the D&O policy premiums. She is saying that it would force next years premium to go up through D&O experience, and it likely would.

    As I mentioned earlier, if judges handed down max fine to those with insurance (to punish the insurance company in the interests of public policy), the D&O premiums would go through the roof.

    So nothing to do with workers comp as I read it.

  7. I have to say, on a personal level, I am thankful for this decision and the treatment of the issues by the Magistrate. It provides an opportunity to address the issue head on and for regulators to give strong guidance through legislation about whether this form of insurance should be accepted. What I am particularly interested in is the voice of the safety proffession: Who will articulate a position and lobby for change?

  8. Hi Maldeplume,
    Unfortunately penalties can only be handed out via regualtors or judiciary.
    Also the WHS laws are separate from the Workers Comp laws. Hence you can\’t have a penalty for one addressed under another.
    We would need a complete rewrite of both to incoporate such an approach.
    And, if you\’re implying that premiums rise due to failures to comply, the natural effect of workplace injury claims on the workers comp premiums doesn\’t prevent breaches of the WHS laws. Such \’cowboys\’ as those who don\’t comply with WHS laws also \’bully\’ employees into not making workers comp claims so premiums are still not affected.
    And see my comments above – bigger penalties don\’t bring compliance; they bring more crafty evasions.

  9. Graham Dent writes:

    \”Excellent article Kevin. I was scrolling down to make a post and saw that Neil Foster had made the point I had been planning to make.

    A while ago I was involved in a conference with a client with one of Australia\’s leading insurance lawyers. He agreed that these policies straddle a very fine line as to when they will and will not be enforceable. That is, there will be circumstances when an insurer can say I will not pay under this policy given (for example) that the insured\’s conduct involved recklessness. There will be cases where if an insurer was sued by an insured for refusing to pay out, that a court would say that the application of the policy to that particular claim / incident is unenforceable and contrary to public policy.

    But, here is the rub. These policies are very lucrative for insurers – and this case will no doubt have increased interest in and sales of policies.

    This means there will be cases where an insurer may say – we can avoid this claim, it falls outside the scope of our cover, or in the circumstances it will be unenforceable if we are sued.

    BUT

    for many claims the financial benefits to an insurer in maintaining confidence in the market in the product it sells will be worth more to them than the cost of paying out on the claim.

    If this case had somehow gone the other way and the insurer had refused to pay up – how many more policies do you think it would be able to sell?

    Food for thought !\”

  10. Hi again Tony,
    I don\’t agree that safety is black or white. Who is to be the judge of what is safe or not safe?

    – You may be able to work more safely than me in relation to a given risk, based on competence, capability and compliance factors. Similarly, you may go closer to the edge of a cliff than me (or vice versa) based on how we each perceive the risk.

    Hence the laws include opportunity for workers to refuse to do work on the grounds THEY don\’t feel safe. Not that the situation is necessarily unsafe for everyone.

    On this basis a regulator can only assess whether certain steps have been taken or not to determine the level of risk as \’acceptable\’ or not and whether suitable controls have been developed to address unacceptable risks so far as is reasonably practicable (within the full definition of that concept at law).
    Also, my analogy of the speeding laws still addresses your comment about making it \’prohibitive and uncomfortable for the perpetrator\’.

    How many people get fined over a long weekend for breaches of road rules? And how much publicity do these get across the media.

    And yet these reports don\’t make it prohibitive or uncomfortable for those who breach the same rules on the next long weekend.

    Similarly there are media releases from time to time with regard to significant cases such as this one attracting significant penalties. These do not serve to prohibit or make other perpetrators uncomfortable.
    First, the perpetrator needs to read/hear about them and then they need to consider if they might get caught doing something similar. And the biggest barrier to \’prevention\’ is \’I might not get caught\’.

    I reiterate – there hasn\’t a been a law written or an enforcement program developed that prevented a breach of the law – simply because we can\’t afford the scale of the police force that such enforcement would require. It\’s all about how we perceive the risk of being caught.

    My approach is to encourage the officers of my current employer to realise the good business sense associated with \’doing it safely\’. After all, we WHS professionals need to acknowledge that they are primarily \’in business\’.

    This approach is working fairly well where I am at present. But I have previously left other employers where it was less successful.

  11. Perhaps rather than a financial penalty handed down by the court (which I strongly agree with higher penalties), the sting is in next year\’s premium… The devil made me say it!

  12. G\’Day Les, I suppose it gets down to numbers and by that I mean the number of employers, who in the main comply, as against the number that don\’t and unfortunately in the small business community the latter is the norm. If we want the law to work and have an effective deterrent for those who are willing to take the risk of non compliance, then we need a heap of prosecutions for every day breaches with stiff penalties applied that are well advertised to hammer home the need to take safety seriously.

    To get caught in the act needs policing that is proactive, not reactive, otherwise we are not in the business of providing a safer working environment. Sure there are shades of Grey in all things, however when it comes to safety it really is black and white, it is either safe, or it is not, you can\’t be half pregnant.

    As you say, there will always be those that will try it on, surely the task at hand is to make the price of trying it on prohibitive and patently uncomfortable for the perpetrators.

  13. The cynic in me can\’t help observing that the core instinct of the corporate beast is to outsource risk and costs. In this case the outsourcing of costs is to the \’community\’ of PCBU\’s taking out such \’indemnity\’ against the risk of being held personally liable. The underlying \’social contract\’ between this group is that \’we all agree to support accountability avoidance by contributing to a pool of funds that will be available to effectively eliminate any financial risk to the members of the syndicate.\’

    I told you I was in a cynical mood…

  14. Hi Tony,
    I can understand and echo your frustration but, in all honesty, enforcement has never worked effectivley in any arena of human endeavour.
    We will never be able to pay enough \’policemen\’ to enforce the laws of the land in all perceivable situations.
    It\’s the very reason we need laws in the first place – to establish an appropriate \’boundary\’ and to punish those who step beyond. If everyone had the \’greater good\’ at heart we wouldn\’t need laws in the first place.
    But there hasn\’t been a law written yet that \’prevented\’ a crime.
    Laws only deter those who weigh up the risk of breaking it as too great.
    And we know from WHS performance that risk taking is a part of the human psyche. And that some humans will take greater risks than others.
    Consider the roads – even when policemen are visible at \’speed traps\’ many drivers slow down if they see the policemen and speed up again when they\’re past. And if they don\’t see, or fail to slow, they pay the penalty – the breach still wasn\’t prevented.
    And you only have to watch reality TV shows like Cops and Customs to see that certain people always \’try it on\’ in the hope they don\’t get caught.
    Even if \’policing\’ was increased in WHS those employers who don\’t want to comply will just get more and more crafty in their efforts to evade their legal responsibilities. And this case is an illustration of that point.

  15. My boss and I went to a workshop on D&O insurance as regards to paying fines, along with one of the underwriters who wrote a D&O policy. Very interesting workshop, though it had no answers. The insurers, lawyers and brokers had no idea if insurance covered these situations as it had never been tested, and often relied on the two parties involved as Neil said. Their feeling was that for offences not involving negligence, the D&O would be honoured, but for negligence cases such as this one, it would not. It would seem they were wrong.

    In the end I think all this will do is make judges jack the fine up to punish the insurance company for being complicit (and therefore have a bearing on premiums) and then send the officer to gaol. Personally I would rather take the smaller fine and not go to gaol.

  16. Just goes to prove, that safety in the workplace is prosecuted by a huge number of employers who will do pretty much anything to provide the minimum at the lowest cost and take the risk of prosecution as it comes. All the while protecting themselves with insurance coverage against extremely rare prosecution. If it was otherwise, insurance companies would not accept the risk.

    I have continued to shout into the wind about proactive inspectorial visits without notice and a substantial regime of \”on the spot fines\” and what I hear back is that under resourcing of the of the inspectorate will never see this sort of activity in the field. Go figure?

    I think the saying of an \”ounce of prevention is better than a pound of cure\” really rings true. The \”reasonably practicable\” argument doesn\’t wash with me as it has been recognised widely that it is an unreasonable \”get out\” for those who seek to avoid their responsibilities, which in the case of safety seems to be huge number.

    Far, far too much waffle and nowhere near enough effective action by OHSW professionals in having safety enforced.

  17. Thanks for the links here, Kevin, this is a very interesting decision.

    Perhaps as one of the \”labour lawyers\” you suggest may have been proven wrong 😉 I can point you to paras [82]-[83] of the excellent judgment, where his Honour flags the fact that the indemnity may indeed be \”invalid as being contrary to public policy\” but says, with respect perfectly correctly, that in his situation there was no jurisdiction to explore that issue. This is one of the problems with these clauses- their validity or otherwise will usually need to be resolved in an action between the two parties with a direct interest, the insurance company and the insured director, and neither of them has an interest in seeing the clause declared invalid!

    Lieschke IM does the best he can by taking the availability of insurance into account as a factor negating any reduction in penalty otherwise to be imposed on the director. I think (as I say in my article you kindly linked to on a previous post) that it would be possible for a regulator like SafeWork SA to approach a court and seek a declaration that such a clause in an insurance policy was invalid (say under s 18 Australian Consumer Law or similar provision governing insurance contracts), but so far that theory has not been tested.

  18. Just shows you how inadequate our old legislation was, it will be interesting to see what will happen under the WHS legislation. At least with that there is the option of imprisonment especialy in light of the magistrates comments. Mind you, there was always that option under the old laws, just that none of the prosecutors have had the guts to bring it on! Under S59 of the \’old\’ act he could/should have been fined double the Division 1 fine = $400k or imprisoned for 5 years – go figure? Pretty hard to insure against imprisonment, BUT until someone cops that penalty it make pefect sense to insure against monetary loss.

    1. Malcolm, in an academic OHS context, I think that this case and the judgement will cause us to review \”deterrence\”. One could argue there is reputational damage but that is transient and can be minimised.

      The company director was ordered to publish notices of the Court decision in South Australian and national newspapers but the public influence of such newspaper notices is increasingly ineffective as newspapers lose prominence and online versions strip out such notices. I don\’t advocate a public flogging but newspaper notices are not the way of the future.

      I think it would be instructive for a lawyer to reassess this case under the new Work Health and Safety laws and see what outcome would be likely. This type of legal case study/hypothetical could be very useful and reduce the need for us to wait several years for real cases.

  19. I wonder if I can get an insurer to indemnify me against speeding tickets????
    What a joke – how can it be legal to indemnify someone against breaking the law?????

  20. This is outrageous! Whats next, an insurance policy which indemnifies against custodial sentences? Where is the deterrence? This brings a whole new meaning to the Monetary Units Acts, and the definition of a \”Penalty Unit\”. Unit yes, but Penalty no.

  21. This is outrageous! Whats next, an insurance policy which indemnifies against custodial sentences? Where is the deterrence? This brings a whole new meaning to the Monetary Units Acts, and the definition of a \”Penalty Unit\”. Unit yes, but Penalty no.

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