Thinking | 2 July 2020

Directors and officers don’t get bitten: amendments to the Work Health and Safety Act 2011 (NSW) are making penalties bite

By Matthew Curll and Gemma Dehn

Under recent changes to the Work Health & Safety Act 2011 (NSW) (WHS Act), directors and officers cannot be insured or indemnified for penalties for WorkSafe breaches. Our Insurance and Corporate teams discuss the implications of these changes for directors and officers (and their companies), insurance providers and brokers.

WHS Act changes

Changes to the WHS Act make it an offence to provide, take out, or take the benefit of, insurance or an indemnity, which provides cover or indemnity for penalties imposed by the WHS Act.

Historically, directors & officers (D&Os) have been able to utilise the dual measures of D&O insurance and deeds of indemnity and access to manage their personal exposure to WHS Act penalties. This has never been more important, as recent trends show penalties are on the rise.

Regulators are unimpressed with D&Os relying on insurance and deeds in this way. Taking the bite out of the penalty reduces the effectiveness of three of the principles associated with sentencing – punishment, deterrence and denunciation. However, things have recently changed in New South Wales.

Section 272A of the WHS Act prohibits entering into, providing, or receiving the benefit of a contract of insurance or other arrangement, which provides cover or indemnity for a monetary penalty imposed by the WHS Act.

Section 272B of the WHS Act makes it an offence for an officer of a body corporate to assist or procure, induce, conspire with others, or in any other way (whether by act or omission) be knowingly concerned in/party to the commission, of an offence under Section 272A of the WHS Act.

Notably, the changes to the WHS Act do not prohibit obtaining or providing insurance cover or indemnity for defence or inquiry costs that may be incurred in responding to an action or inquiry seeking to impose a penalty under the WHS Act.

In other words, D&Os and companies can still be covered for the cost of defending their position.

Maximum penalties

The maximum penalties for breaches of Section 272A and 272B of the Act are as follows:

BreachMax penalty for a body corporateMax penalty for an individual
S. 272A(a)- entering into insurance contract or other arrangement$125,000$25,000
S. 272A(b) or (c)- providing insurance or taking the benefit of insurance/an indemnity$250,000$50,000
272BN/A$125,000

Who is affected?

  • D&Os (and their companies) are impacted because:
    • If a penalty is imposed under the WHS Act, indemnity for the penalty under any insurance or indemnity is legally prohibited. This means possible direct individual and/or company exposure for significant penalties that may payable under the WHS Act.
    • If Sections 272A or B are breached, an additional penalty will be payable by the individual/company (which would also not be insurable/indemnifiable).
  • Insurers may face a penalty if they provide a policy of insurance or provide indemnity under a policy of insurance, in breach of Section 272A of the WHS Act.
  • Brokers should be aware of the WHS Act prohibitions on insurance cover for penalties posed by the WHS Act so they can:
    • advise clients on risk for which they can’t be insured; and
    • check that insurance policies taken out by their clients do not provide cover which will put their clients in breach of Section 272A or 272B of the WHS Act.

What else can be done?

D&Os (and their companies)

In this situation, there is only one real strategy left for D&Os. To minimise exposure to the new uninsured/unindemnifiable risk faced as a result of Section 272A and 272B, they must manage the underlying risk itself. This is also known as deterrence – precisely what the regulators are trying to achieve. The diagram below illustrates this strategy.

Diagram_Protections against director risk

In addition, Sections 272A and 272B do not prevent D&Os and their companies obtaining insurance cover or indemnity for defence costs/inquiry costs.  In other words, D&Os can still get cover or indemnity for their legal costs incurred in responding to an investigation or proceeding seeking to impose a penalty under the WHS Act.

D&Os and their companies need to ensure that management of underlying risk remains front and centre at the board room table. They must ensure there is:

  • a thorough plan in place to avoid risk;
  • a preventative system and accountability in place to manage the plans; and
  • an emergency response plan in place to ensure a thorough response to an incident and mitigation of exposure for an impending investigation or proceeding which may give rise to a penalty exposure under the WHS Act.

For assistance minimising the uninsured/unindemnifiable risk now faced by your company (or you) please contact any one of our listed contacts below.

Insurers

Any cover/indemnity provided for penalties imposed by the WHS Act will be prohibited (this will most likely affect D&Os, Statutory Liability and some Professional Indemnity policies). Changes to the WHS Act will impact policies already in currency as well as future policies.

Insurers should carefully review their existing policy wordings to ensure they are not in breach of Section 272A or 272B of the WHS Act.

Notably, most policies will already include general wording which excludes indemnity for liability/loss the insurer is prohibited from paying by law. Such wording is likely to provide protection against breach of the provisions of Section 272A and 272B of the WHS Act.

However, for the abundance of absolute caution, insurers may consider amending policy wordings to provide a specific exclusion of cover for WHS Act fines and penalties.

Brokers

Brokers should carefully review existing and new policies to ensure their clients are not at risk of a breach of Section 272A or 272B of the WHS Act.

When advising clients on the scope and availability of insurance cover, brokers should advise clients that indemnity for fines or penalties imposed by the WHS Act is prohibited by law and that this is an uninsurable risk which directors and officer and their companies must manage themselves.

However, defence costs are insurable and adequate cover for this should be obtained/maintained.

Key takeaways

The changes imposed by Sections 272A and 272B of the WHS Act create a potentially significant uninsurable/unindemnifiable risk for D&Os and their companies. It is important for directors, officers and their companies to be aware of this additional risk, so that strategies can be put in place to manage the potential risk exposure.

Directors, officers, companies and insurers also risk exposure to significant penalties if they try to obtain/provide insurance cover or indemnity for penalties posed by the WHS Act. D&Os, companies, insurers and brokers, should carefully check any new and existing policies of insurance and deeds of indemnity, to make sure they do not breach the new provisions of the WHS Act. If in doubt, seek legal advice to avoid any unexpected exposure.

Hall & Wilcox’s experienced insurance and corporate teams are available to advise on the issues and exposures summarised in this article.

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