Prohibition of insurance and indemnities for WHS penalties

Introduction

In recent years, compliance with work health and safety (WHS) laws has been an area of increasing criminalisation and focus by parliaments, regulators and Courts. This is evidenced by changes such as the introduction of industrial manslaughter offences in some jurisdictions in Australia, regulators increasingly bringing prosecutions for the most serious types of offences (i.e., industrial manslaughter and recklessness prosecutions), and Courts imposing harsher sentences on companies and individuals for breaches of the WHS laws.

In this context, an emerging change which is causing concern for companies and company officers is the recent prohibition of insurance and indemnities for penalties imposed in relation to WHS offences in some jurisdictions in Australia.

In this article we explore this change in further detail, in particular:

1. the status and nature of this change, and why it has been introduced;
2. the potential impacts of the change, looking at recent trends in sentencing decisions; and
3. what companies and individuals should do in response.

Status around Australia

The prohibition of insurance and indemnities for WHS penalties was recommended in the Marie Boland Review of the Model WHS Laws published in February 2019, and also the Senate Inquiry into industrial deaths published in October 2018.

NSW was the first jurisdiction to implement the change, and has included the prohibition in its WHS Act. The prohibition came into effect in June 2020 and applies to WHS penalties for incidents occurring after that date.

A similar prohibition has been included in the model WHS Act for Western Australia which is currently awaiting commencement.

Victoria passed legislation in September 2021 to introduce the prohibition to its OHS Act, and the majority of the provisions will commence in September 2022. A core difference with the prohibition in Victoria is that, unlike in NSW, the prohibition appears to apply to penalties for all incidents once it comes it effect, including incidents which occurred before its commencement. This may affect legal proceedings that are currently on foot and which are not resolved before the commencement of the prohibition.

What does the prohibition cover?

The prohibition adopted in NSW is broadly drafted, and provides that it is an offence for a person to provide or receive the benefit of insurance or indemnification for any penalty imposed under the WHS Act. A similar approach has been followed in WA and Victoria.

Importantly, the prohibition does not extend to insurance and indemnities for legal costs in defending prosecutions for breaches – the Marie Boland Report stated that companies and officers should not be precluded from accessing insurance or indemnity arrangements for legal costs in defending a prosecution.

What is the rationale for this change?

The rationale for introducing this prohibition, as explained in the Marie Boland Review and Senate Inquiry, is that provision of insurance or indemnification for WHS penalties undermines the deterrent effect of imposing a criminal penalty, and therefore has the potential to reduce compliance with WHS laws. This is of particular concern in the context of officers’ duties, which were introduced into the model WHS Laws as one of the core ‘drivers’ to improve corporate safety.

How are insurance / indemnities for penalties usually treated?

Insurance policies that cover penalties for WHS offences have been available on the market in Australia for some time. However, to the extent those policies extend to criminal penalties, the legality of these policies has always been uncertain, as there is a view that a policy that provides an indemnity for a criminal penalty is void and unenforceable for being against public policy.

If such a policy was ever challenged in Court, a Court could find that the policy is void. However, there have been no specific cases addressing this, so these policies have been able to exist as they have been offered by insurers and not challenged by the beneficiaries of the policy.

Some Courts have however expressed their dissatisfaction with the existence of such policies in sentencing decisions for breaches of WHS laws. For example, a Magistrate in South Australia criticised the fact that a company and director had access to an insurance policy for any sentence imposed on them. The Magistrate declined to apply any discount to the sentences imposed on the company and director on account of their early guilty plea and remorse, stating that the existence of the policy was contrary to the director’s “genuine acceptance of the legal consequences of his criminal offending.” Not all courts have followed this position however, as a NSW Court rejected this approach, and found instead that the existence of an insurance policy was a neutral factor and no adjustment to the penalty was required.

Is the prohibition unusual?

Australia is not the only the jurisdiction to have prohibited insurance/indemnities for WHS offences – New Zealand for example has also declared insurance for fines and penalties to be void under its Health and Safety at Work Act 2015.

In addition, it is not just under work health and safety legislation where such a prohibition exists – in employment legislation, for example, Federal Courts have the power to make personal payment orders for breaches of the Fair Work Act 2009 (Cth), requiring any penalty to be paid personally by the individual, with the individual unable to seek or accept indemnity from another party, such as their employer or a union of which they are a member or officer. This power to do this was recognised in the High Court case of Australian Building and Construction Commissioner v CFMEU [2018] HCA 3.

Similar prohibitions also exist for certain offences under the Corporations Act 2001 (Cth) and the Banking Executive and Accountability Regime (soon to be called the Financial Accountability Regime).

Possible sentencing outcomes for companies

Significant penalties can be imposed on a company for breaches of the WHS Laws. For category 1 (recklessness/gross negligence) offences, the maximum penalty in NSW for a company is $3.6 million.

For jurisdictions that have implemented the industrial manslaughter provisions, the financial penalties are even higher – in Victoria for example, the maximum penalty for industrial manslaughter (negligent conduct causing death) for a company is $16.5 million.

In terms of sentencing trends, Courts are continuing to impose higher penalties on companies for WHS offences. Some recent examples of cases involving significant penalties are set out in the following table. These cases however, are rare in the sense that they involve multiple fatalities, and/or extreme failures on the part of companies involved (eg the complete absence of a safety management system).

Possible sentencing outcomes for individuals

Significant penalties can also be imposed on individuals for breaches of the WHS Laws. For category 1 (recklessness/gross negligence) offences, the maximum penalty in NSW is $712,929, or five years jail, or both.

In the past 12 months, numerous directors and officers have received penalties in respect of WHS offences around Australia. Many of these penalties appear to be in the range of $40,000, although it depends on the jurisdiction and the nature and circumstances of the breach. Penalties can be higher or lower than this, but cases with penalties over $100,000 are rare, and typically only occur in extreme situations. For example, in Victoria, the director of an alternative medicine clinic was fined $176,750 after a client with multiple sclerosis died while receiving a controversial oxygen treatment at the clinic. The director was a former chiropractor who had been struck off after being found guilty of professional misconduct.

Risk of imprisonment

Separate to financial penalties, however, the more significant concern for directors and officers in relation to WHS offences is (and has always been) the potential for prison sentences to be imposed.

The risk of imprisonment is particularly apparent in the jurisdictions that have implemented industrial manslaughter provisions. For example, in Queensland, Victoria and the Northern Territory, there is no monetary penalty associated with an industrial manslaughter breach by officers – a term of imprisonment (which may or may not be partly or wholly suspended) is the only penalty available. The maximum jail term is 20 years in Queensland, 25 years in Victoria, and life imprisonment in the Northern Territory.

The table below sets out a summary of recent sentencing outcomes involving directors and workers where sentences of imprisonment have been imposed.

As can be seen from the table below, the first sentences of imprisonment for offences under WHS legislation occurred in January and February 2019. In 2020, sentences of imprisonment continued to be imposed, but unlike the earlier cases, a strong trend was established whereby sentences were wholly suspended, so that the offender was not required to serve any part of their sentence. More recently in May 2021, however, a director in Western Australia received a prison sentence and was required to serve eight months immediately, so there is some uncertainty as to whether the trend of imposing wholly suspended sentences will continue.

In the majority of the cases outlined below, the directors or individuals in question were directly involved in (i.e., supervising or managing) the work activities. One of the cases below (the Brisbane Auto case) also involved directors engaging in misleading conduct during the regulator’s investigation of the incident.

Separate to any monetary penalty, another concern for directors and individuals associated with breaches of the WHS laws is the personal consequences that can flow from a criminal conviction. These can be far reaching, and may involve barriers to employment, travel, financial or insurance arrangements, professional license or registrations, house rental and adoption.

What should companies and directors do in response to the prohibition of insurance and indemnities?

Where the prohibition applies, companies and directors will need to:

1. Ensure that their statutory liability insurance arrangements/contracts do not provide indemnification for penalties for breaches of WHS laws. Policies will generally provide cover for penalties “to the extent permitted by law” so this will create a limitation in accordance with the initial grant of cover. Companies should speak to their insurance advisors to ensure their insurances are compliant and offer appropriate protection to the extent permissible.
2. Confirm that there are no contractual or other arrangements with employees which provide for indemnification for penalties for breaches of the WHS laws. The standard wording that indemnification will be provided “to the extent permitted by law” is acceptable.

Whether insurance is available or not, companies and officers should ensure they have robust systems and processes in place for compliance with the WHS legislation and in particular, addressing industrial manslaughter laws. Regulators have stated that industrial manslaughter investigations will involve an assessment of safety culture and in particular, whether the company has a ‘culture of compliance.’ In light of this, it is important for organisations and officers to have a plan in place showing the actions they will take to demonstrate a culture of compliance, and measure and assess compliance with the actions.