Do you need Directors and Officers Insurance? In this report we look into potential penalies and fines that directors could face without such cover
So there is no doubt that fines and penalties are a great concern for individual directors and companies. Below we will examine the differences between types of fines and whether they are insurable at law.
It is not possible to insure against liability for a criminal fine or penalty, as the Companies Act law prohibits these to be insurable. Any insurance contract that purports to insure criminal fines would be void and unenforceable. The reasons for this is that a person may not benefit from his own wrong, and therefore may not be indemnified against the consequences of his intentional wrongdoing.
Defence costs are usually covered by the D&O policy where there is an investigation made against the Director. However if the Court rules a negative judgement the Director for a criminal investigation, the director will have to repay the defence costs and also the Criminal fine will not be indemnified by insurance or the company.
Criminal Fine Claims example:
Two former Directors of a large national bank were fined by the Financial Services Authority (FSA) and banned from working for a regulated financial firm again.
The City regulator fined the former deputy Chief Executive £504,000 for misreporting mortgage arrears data. The former Credit Director was fined £140,000 for also failing to ensure accurate financial information. The FSA said the two had admitted their misconduct and received reduced fines as a result of their co-operation.
Civil Fines and Penalties
Whilst there is no formal comprehensive system regarding the use of civil penalties in the UK, a relatively broad range of civil penalties is nonetheless being employed by a variety of regulatory agencies and government bodies. There would appear to have been a gradual increase in the level of use of civil penalties over the last few years, albeit not necessarily driven by government policy.
There is a general consensus that civil fines and penalties are legally insurable. However, whether the fine is insured or not depends on the Courts view of what the intention of the individual was. Intentional wrongdoing will not be covered, but where a fine is imposed for conduct of negligence or non-fraudulent acts or omissions, this could be subject of a binding contract of insurance.
D&O Insurance can cover Civil Fines and Penalties as long as the fine or penalty is deemed insurable at law.
Civil fines claims example:
On 23 October 2009, a total of £85,000 in fines was imposed upon a company and its two directors following the death of 40-year-old, after a coolant drum exploded, causing him fatal injuries.
The company pleaded guilty under Sections 2 and 3 of the Health and Safety at Work etc. Act 1974 (HSWA) for failing to protect the Injured Welder and other staff working at the factory, and was fined £60,000. It was fined a further £5,000 under Regulation 3 of the Reporting of Injuries, Diseases and Dangerous Occurrences Regulations (RIDDOR). Unusually, the costs the company were required to pay exceeded the total fine payable, at £67,000.
Father and son directors also pleaded guilty under Section 37 HSWA, on the basis that the breach committed by the company under Section 2 HSWA was attributable to their neglect. Each was fined £10,000. It was noted that this was a particularly serious case, involving significant danger and a company who had operated with inadequate safety management systems for many years.
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