This is a single section from Chapter 26. Read the full chapter here.
Should insurance or other indemnity be able to cover a pecuniary penalty liability?
Legislation should prohibit indemnity or insurance for a pecuniary penalty only if that would be consistent with the underlying policy objectives.
The effect of insurance and indemnification on the deterrent effect of pecuniary penalties is not necessarily clear. On the one hand, insurance mitigates the financial risk so it may undermine deterrent and punitive goals of the legislation. On the other hand, insurance companies can motivate their clients to minimise their risk of non-compliant behaviour through the threat of increased premiums.
There are some statutory restrictions on indemnities and insurance against criminal liability. For example, section 162 of the Companies Act 1993 prohibits a company from indemnifying or effecting insurance for a director or employee of the company for criminal liability. This tricky issue should be considered by officials, but a prohibition on indemnity or insurance is justified only if it is necessary to achieve the underlying policy objective. The following factors may be relevant:
- The nature and gravity of the illegal conduct—Are there public policy reasons why indemnification or insurance in respect of the breach should be barred? For example, is the conduct so morally reprehensible that punishment should be borne personally?
- The deterrent effect of the penalty—Would the availability of indemnification significantly dilute the deterrent effect of a pecuniary penalty provision? Or does the disciplinary effect of indemnification and insurance contribute to the deterrence objectives of the pecuniary penalty regime? Similarly, would those insured prefer to allow the breach and recover their loss under their insurance policies rather than avoid the breach altogether?
- Interests of innocent third parties—Will the penalty be diverted for reparative purposes or to fund education to prevent future breaches? If so, will the contravener be able to pay the penalty if the indemnity is not allowed?
Other relevant considerations are the potential impact of insurance and indemnification on penalty imposition by the courts and the impact on the personal liability of directors and managers.