Legislators and regulators increasingly hold individuals accountable for corporate wrongdoing. Marsh has partnered with Clyde & Co to create an interactive map that provides insight into whether fines and penalties imposed on directors and officers may be covered by insurance.
10/05/2022 · 42 minute readSince the 2008 global financial crisis, there has been an increasing trend from legislators and regulators to seek to hold individuals accountable for corporate wrongdoing. One result of this trend is a proliferation of different fines and penalties that may be levied against individual directors, officers, or other senior managers. Whether or not the fines and penalties that may be imposed on directors and officers are insurable is one of the most common questions we receive from clients. Unfortunately, the answer is frequently far from clear, as legislators and regulators rarely explicitly address the insurance implications of the various penalties they impose. Marsh’s guide to the insurability of fines and penalties under directors and officers (D&O) liability insurance examines the legal landscape in 22 countries. These jurisdictions were chosen based on the frequency of D&O claims and where our clients most commonly purchase locally admitted D&O policies.
In our guide, experts from across Clyde & Co’s international network of offices and correspondent firms provide an analysis of what fines and penalties may be covered by insurance, which are prohibited from cover, and what directors and officers may expect from the substantial grey area that remains.
While there are instances of decisions from lower Courts (for example, Court of Appeal of Paris, 14 February 2012) holding that coverage of fines is against public policy, there is still an open debate on whether they may be insurable under French law. Prominent academics have taken the view that administrative fines ought to be insurable provided that they do not result from excluded intentional wrongdoing under article L. 113-1 Insurance Code (faute intentionelle ou dolosive) — for example, Lamy Assurances 2017, § 1367. Some have seen confirmation of that position in the Supreme Court Marionnaud case (Civ. 2, 14 June 2012, n° 11-17.367; and similar cases) as coverage was refused on the basis of exclusion clauses rather than public policy principles. However, the question of whether the insurance of a fine was compatible with public policy was not presented to the court. There was a report by a member of Parliament suggesting that fines from the CNIL (the French Data Protection Authority) should be insurable. That position was controversial and a more recent report in early 2022 from a business group (Haut Comité Juridique de la Place Financière de Paris — l’assurabilité des risques cyber) suggested the opposite position. We consider that the purpose of a fine — whether it is criminal, administrative, or civil — is to incite the payor to change its behavior or, in the case of a company, its corporate processes and governance, even if no intentional wrongdoing is personally attributable to the company. That purpose is defeated if the fine is borne by an insurer. Of course, one may argue that, even then, an insured fine may have indirect consequences — such as higher premium, non-renewal, and uninsured portions. However, these are far from certain. For these reasons, we consider that it is contrary to French public policy to insure fines issued on the basis of French law. However, it may be possible for a French policy to insure a fine issued under the law of a country where such fines are insurable. The insurer potentially has a duty to inform an insured of the fact that a risk may be uninsurable as a matter of public policy. There is currently no precedent as to whether there will be consequences for insurers who indemnify an uninsurable risk. Contributors - David Meheut, Clyde & Co Scroll to top
It is still largely an unresolved question whether, and to what extent, fines and penalties are insurable. The decisive legal test will be whether covering fines or penalties would be in breach of public policy. The German Civil Code, section 138(1), states that any legal transaction that is contrary to public policy is void. In the absence of statutory insurance prohibitions and case law, the majority view in legal literature is that coverage is inadmissible since it would contradict the purpose of a fine to sanction illegal behavior and prevent similar future breaches. If inadmissible, covering fines might also lead to regulatory action by the German insurance supervisory authority, the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin), which so far has not taken a public position. However, other authors advocate for more nuanced differentiations. They distinguish, in particular, between fines for intentional and negligent offenses, arguing that civil law should only sanction a behavior that is also punishable under criminal law and, therefore, intentional. Finally, a question related to the insurability of fines, and also still not resolved by case law, is whether a company that has been fined can seek recourse against directors and officers if and to the extent that they are responsible and can be held liable for the underlying non-compliance. A number of courts have held that EU antitrust fines imposed on the company cannot be passed on to directors and officers. According to the courts, antitrust fines aim to sanction the company (“deterrent effect of fines”), not individuals, and this objective must not be undermined by national law in line with the “effet utile” principle. That said, the law on the recoverability and insurability of fines is still evolving. Contributors - Henning Schaloske, Clyde & Co Scroll to top
In Spain, generally speaking, fines can be imposed by the criminal courts, where a criminal offense is found to have been committed, and also by administrative or public bodies, in the case of regulatory or sanctioning proceedings. The insurability of fines and penalties is not expressly regulated by Spanish law. There is a general consensus that fines imposed by courts arising from a criminal offense are not insurable, as this would be against public policy. However, there is an open debate in respect of the insurability of administrative fines. In 2008, in a response to a query as to the insurability of criminal and administrative fines, the Spanish insurance regulator issued a response that such fines are not insurable. However, the arguments in support of this view are open to debate. For example, the fact that fines are not compensation for damages falling under class 13 (general liability) does not mean that fines may not fall under other classes. Further, the ability to insure fines does not mean that a culture of infringing regulations is fostered, in the same way that the existence of professional indemnity insurance does not mean that more professional wrongful acts are committed. Despite what was asserted in the response by the Spanish insurance regulator, administrative fines are not only imposed in cases involving deliberate/intentional conduct, fines can also be imposed for negligent conduct. As such, it is not necessarily the case that the insurability of the fine would offend public policy. Indeed, in numerous situations, such as cases involving personal data, the insurability of administrative fines is unlikely to offend public policy, as the fines are aimed at protecting private, as opposed to public, interests. Despite the regulator’s view in 2008, it has not taken any action to prevent policies from providing cover for administrative fines. This could be viewed as the regulator implicitly allowing cover. An argument in support of this view is that while Section 76(b) of the Spanish Insurance Contract Act 1980 provides expressly, in respect of legal aid insurance, that the insurance shall not cover the payment of fines, it is up for debate whether other classes of insurance, which are not expressly banned from providing cover for fines, may therefore be considered as permitted to cover fines. Finally, while a draft Spanish insurance contract act, published in 2013, provided that clauses covering criminal and administrative fines are null and void for public policy reasons, this prohibition was removed in a later version of the draft published in May 2014. Again, this may be an indication that fines may not be, per se, uninsurable. At present, there is no date set for when a final draft will be published (and it is not expected in the near future), so the Spanish position remains unclear, although the developments described above appear be in favor of the insurability of administrative fines. Contributors - Ignacio Figuerol, Clyde & Co Scroll to top
Swiss law does not explicitly provide for a prohibition on the insurance of financial penalties or fines. However, according to the case law of the Swiss Federal Supreme Court and legal scholars, financial penalties and fines of a punitive nature do not constitute compensable damage and are therefore generally not insurable. For example, in a case concerning tax fines, the Swiss Federal Supreme Court held that contractual agreements, whereby a third party undertakes to pay a fine, are unlawful and therefore invalid. There is thus a considerable risk that the claim for corresponding insurance coverage could not be enforced. Also, the insurer takes the risk that such cover is regarded as a criminal offense (assisting or encouraging of offenders). In practice, many Swiss insurance policies contain exclusions for financial penalties or fines. Notably, the mentioned case law does not apply without exception — especially in the case of so-called administrative sanctions in corporate criminal law, there is room for exemptions. For example, it may be questionable whether an administrative "fine" has any penal character at all. If a person is sentenced to a fine, although there is no culpable conduct, there can no longer be any question of a penal sanction. Such a "sanction" can have a purely compensatory function, which is why there should be nothing to prevent such a "fine" from being passed on or insured under private law. It is also possible that a fine with a penal character imposed by a foreign authority could be understood as a breach of Swiss "ordre public" and therefore classified by a Swiss court as excessive or confiscatory. As a consequence, the fine (to the extent that it is deemed excessive) would no longer be classified as a penalty in the penal sense, but as compensable damage, against whose insurability there are no objections. Insurers and policyholders are therefore well advised to check the insurability of fines and administrative sanctions in each case for the penal nature of the sanction. It is possible that a "sanction" is not insurable due to its penal nature, or that a supposedly uninsurable "fine" turns out to be insurable. Contributors - Dominik Skrobala, GBF Attorneys-at-law Ltd Scroll to top
The question of insurability of fines and penalties has not been specifically considered by the Irish courts. In common with other jurisdictions, some policies expressly exclude cover for fines and penalties, while others provide cover “to the extent insurable by law”. It is generally understood that criminal fines or those of a penal nature are uninsurable for offending public policy, i.e., the legal doctrine of ex turpi causa, which prevents a claimant from benefiting from its own wrongdoing. However, the application of the principle is by no means clear. Looking at the English law decisions of Safeway and Patel v Mirza, in order for the principle to apply and to render the cover uninsurable by law, some element of “moral turpitude” is required. As the Supreme Court put it in Patel v Mirza, the following should be considered: “the seriousness of the conduct, its centrality to the contract, whether it was intentional and whether there was marked disparity in the parties' respective culpability.” The Irish Supreme Court in Quinn v Irish Bank Resolution Corporation Limited (In Special Liquidation) & Others [2015] emphasized the importance of public policy, finding that if the relevant legislation renders an activity illegal, but is silent on whether a contract sufficiently connected to that activity is to be regarded as void or unenforceable, the Court must consider whether the requirements of public policy will render the element of the contract connected with the illegal act as unenforceable. Therefore, while fines imposed for strict liability offenses or innocent breaches may be insurable (if not already excluded by the policy terms), in situations where fines are arising from deliberate or negligent conduct, that conduct will need to be assessed within the factual matrix to determine whether the maxim is engaged and, in turn, the fine is uninsurable. Contributors - Garrett Moore, Clyde & Co Scroll to top