Insurance Indemnity for work health and safety penalties imposed on Directors and Officers no longer lawful in NSW

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By Rachael Sutton, Partner

Previously Directors and Officers were able to utilise the dual measures of Directors and Officers insurance and deeds of indemnity and access to manage their personal exposure to WHS Act penalties.   With the maximum penalties having increased threefold in recent years and the Court moving to reflect this increase in sentencing, this type of cover was being increasingly called upon to cover the payment of fines.

Such policies were the subject of a review by Marie Boland in her 2018 report which included at Recommendation 26 that the model WHS Act be amended to make it an offence to:

  • enter into a contract of insurance or other arrangement under which the person or another person is covered for liability for a monetary penalty under WHS legislation
  • provide insurance or a grant of indemnity for liability for a monetary penalty under WHS legislation, and
  • take the benefit of such insurance or such an indemnity.

Accordingly the Work Health and Safety Act, 2011 (WHS Act) was amended on 18 June 2020 to include the following provisions:

  • Section 272A which 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 which 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.

Defence and inquiry costs not impacted

Importantly 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, Directors and Officers and companies can still be covered for the cost of defending their position.

Implications

Any cover/indemnity provided for penalties imposed by the WHS Act will be prohibited (this will most likely affect Directors and Officers, 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 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.  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.

The maximum penalties for Directors and Officers for breaches of work health and safety duties and failure to exercise due diligence under s 27 of the WHS are significant now ranging from $127,050 (Category 1 – Offences) up to $761,750 (Category 3 – Offences).

Due diligence includes taking reasonable steps–

  1. to acquire and keep up-to-date knowledge of work health and safety matters, and
  2. to gain an understanding of the nature of the operations of the business or undertaking of the person conducting the business or undertaking and generally of the hazards and risks associated with those operations, and
  3. to ensure that the person conducting the business or undertaking has available for use, and uses, appropriate resources and processes to eliminate or minimise risks to health and safety from work carried out as part of the conduct of the business or undertaking, and
  4. to ensure that the person conducting the business or undertaking has appropriate processes for receiving and considering information regarding incidents, hazards and risks and responding in a timely way to that information, and
  5. to ensure that the person conducting the business or undertaking has, and implements, processes for complying with any duty or obligation of the person conducting the business or undertaking under this Act. The duties or obligations under the WHS Act of a person conducting a business or undertaking may include–
    1. reporting notifiable incidents,
    2. consulting with workers,
    3. ensuring compliance with notices issued under this Act,
    4. ensuring the provision of training and instruction to workers about work health and safety,
    5. ensuring that health and safety representatives receive their entitlements to training; and
  6. to verify the provision and use of the resources and processes referred to in paragraphs (c)-(e).

In light of the changes, it is now more important that ever for Directors and Officers to minimise exposure to the work health and safety risks and to exercise their obligation of due diligence to manage the underlying risk itself otherwise they will need to personally bear any penalties and fines that are imposed on them for breaches of the WHS Act.

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