A recent decision of the Industrial Magistrates Court has called into question insurance policies which indemnify directors for fines for breaches of workplace health and safety law.
The new Work Health and Safety Act (SA) 2012 (“the new Act”) imposes a significant obligation upon officers of businesses to exercise due diligence to ensure the business’ compliance with its health and safety obligations. Officers who fail to comply with this obligation can be prosecuted personally and, if found guilty, face fines of up to $600,000.00 and/or 5 years jail.
Some companies might provide insurance coverage for their directors and executive managers indemnifying them against such fines, thereby limiting the amount which the director or manager is personally liable to pay.
In a recent prosecution under the previous legislation (the Occupational Health, Safety and Welfare Act (SA) 1986 ), Industrial Magistrate Lieschke of the Industrial Offences Jurisdiction of the Magistrates Court of SA, commented adversely on such arrangements, and called into question whether they would be effective under the new Act.
In Hillman v Ferro Con (SA) Pty Ltd (in liq) & Maione (1), an employee was killed, and another employee put at risk of fatal injury, as a result of the company’s failure to provide a safe system of work.
The company (in liquidation) was prosecuted, and Maione, its sole Director and “Responsible Officer” was also prosecuted for failing to take reasonable steps to ensure the company’s compliance with the legislation, which contributed to the commission of the offence by the company.
Both the company and Maione entered guilty pleas, and sought a reduction of the penalty imposed due to their early guilty plea, and remorse about the incident. (As a general “rule of thumb” a party can expect a reduction of a fine of around 25% due to an early guilty plea.)
The company had in place a general insurance policy which indemnified Maione for fines imposed for criminal conduct. Maione paid the $10,000.00 insurance excess personally, as the company was in liquidation, and secured the benefit of the indemnity.
Industrial Magistrate Lieschke imposed a significant penalty (66% of the maximum) on both the company and Maione, and refused to reduce the penalty to take account of the early guilty plea and expression of remorse. In his view, by making arrangements to avoid paying the vast bulk of the anticipated monetary penalty, Maione had acted in a way which was so contrary to a “genuine acceptance” of the legal consequences of his actions, as to “dramatically outweigh” the effects of the early guilty plea and expression of remorse and contrition.
His Honour suggested that the use of such insurance policies “undermined the Court’s sentencing powers by negating the principles of both specific and general deterrence”, and sent a message that with such insurance coverage, there was little need for officers and businesses to fear the consequences of very serious offending, even involving a fatality.
His Honour acknowledged that the Court had no ability, in the case at hand, to consider whether the indemnity was invalid as contrary to public policy, as the 1986 Act did not prohibit such insurance arrangements (although he noted that New Zealand’s occupational health and safety legislation prohibits such insurance policies, as does the Road Traffic Act (SA) 1961).
His Honour referred to Section 272 of the new Act which provides that any contractual term which purports to modify the operation of the Act is void, but noted that the new Act does not expressly prohibit insurers from providing such policies.
Time will tell whether such indemnities will be found to be void pursuant to Section 272 of the new Act. Industrial Magistrate Lieschke’s decision might persuade the Minister to consider this issue when conducting the required review of the operation of the new Act in 2014, and propose amendments to prohibit such policies. Whatever occurs in the future, this decision demonstrates that the use of such policies might influence the Court’s attitude to sentencing. (It might even be envisaged, in an appropriate case, that if such an indemnity was available to the defendant, the Court might be more inclined to impose a custodial sentence, to ensure that the penalty has a deterrent effect.)
The obligation upon officers of a business under the new Act – to exercise “due diligence”, is more onerous than the obligation which was imposed upon Responsible Officers under the 1986 Act to take “reasonable steps”. Furthermore, the maximum fines which can be imposed under the new Act are significantly greater than those under the 1986 Act.
While an indemnity against potentially significant fines for breaches of the new Act might provide some peace of mind to officers, the best way to avoid such fines is to comply with the Act, and exercise due diligence to ensure that the business is complying with its obligations.
The first step in exercising due diligence is to ensure that officers understand the new Act and the obligations it imposes upon businesses, officers, workers and others.
DW Fox Tucker recommends that, if you have not yet done so, your Board of Directors and/or executive managers undertake training in the new Act to ensure that they understand both the businesses’, and their own personal, responsibilities.
This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Should you wish to discuss any matter raised in this report, or what it means for you, your business or your clients' businesses, please feel free to contact us.