March 2022


Change needed for statutory liability policies

By Crossley Gates and Frank Rose, Partners, Keegan Alexander

One of the New Zealand insurance industry’s best innovations has been the introduction of the statutory liability policy in the 1990s.

Even today, there is no insurance policy quite like it elsewhere in the world, as far as we are aware.

The policy started insuring criminal fines and defence costs under three statutes only:
• Health and Safety in Employment Act 1992 (now the Health and Safety at Work Act 2015)
• Resource Management Act 1991
• Fair Trading Act 1986.

The three statutes have in common:

  1. They are all business focused, and at least two apply to nearly every business.
  1. Two don’t specifically address criminal behaviour but contain criminal offences within them. The Health and Safety at Work Act is poorly recognised for what it actually is, a criminal law statute to reduce workplace injuries/deaths (and thus the Accident Compensation Corporation’s exposure).
  1. The criminal offences are all strict liability offences. That means the offence is committed by merely conducting the elements of the offence; it doesn’t matter that the offender didn’t intend to do so. For example, an offence is committed under the Health and Safety at Work Act when an employer fails to take all reasonable steps to protect employees from injury at work, and an injury occurs. It doesn’t matter that the employer didn’t intend to fail to take all reasonable steps.
  1. Consequently, the offending can be genuinely accidental from the insured’s point of view (an essential ingredient of all insurance).

5. The offenders are likely to be ‘white collar’ business owners or operators who are usually otherwise law abiding. The news that they are facing criminal prosecution will often come as a shock.

These factors make the insurance policy attractive to businesses. It is not surprising the product is now a core feature of most businesses’ liability insurance suites.

Competitive pressures inevitably led to the cover widening beyond the initial three statutes. 

Civil law versus criminal law

Traditional liability policies insure civil legal liability, ie, the laws that require a person to pay compensation to another person who has suffered loss because of a breach of contract or tort by the first person.

Contrast this with the criminal law, which prohibits stated conduct by creating offences that punish those who ignore the prohibition as a way of incentivising compliance. Any fine payable does not compensate anyone; the offender forfeits the money to the Crown.

Different processes and procedures apply to these two areas of the law. Eg, the standard of proof to obtain judgement in a civil trial is on the balance of probabilities, ie, more likely than not, whereas the standard of proof to obtain a conviction in a criminal trial is beyond reasonable doubt. A court usually sits as either a civil court or a criminal court.

As a statutory liability policy is insuring against the consequences of a criminal trial not a civil one, its name is a misnomer as liability is a civil law concept. The industry should call it something like statutory offences policy. That would lead to a clearer signal of what it insures.

Pecuniary penalties

One difficulty with applying the criminal law to business misconduct is the high bar required to obtain a conviction – any reasonable doubt means the accused must be acquitted. This makes the prosecution of ‘white collar’ crimes, such as insider trading, difficult, particularly when businesspeople often have the means to defend themselves using top lawyers.

Increasingly, Parliament is requiring payment of a pecuniary penalty to the Crown, instead of a fine, as a way of punishing misconduct in business-orientated statutes. The statute no longer calls the misconduct an offence and the standard of proof is the lesser civil standard – on the balance of probabilities.

This has caused some consternation in the legal profession because that concept mashes together parts of the civil and criminal law – a pecuniary penalty is a punishment in the same way a fine is under the criminal law, but the standard of proof is to the civil law standard only.

Statutes that provide for payment of pecuniary penalties are increasing and include:

  •  Anti-Money Laundering & Countering Financing of Terrorism Act 2009
  •  Biosecurity Act 1993
  •  Commerce Act 1986
  •  Hazardous Substances and New Organisms Act 1996
  •  Unsolicited Electronic Messages Act 2007
  •  Financial Markets Conduct Act 2013

Law Commission

In August 2014, the Law Commission (a government body charged with considering the reform of areas of the law) studied the concept of pecuniary penalties and provided guidelines to the government about their use.

The Law Commission’s Report contains the following summary:

Pecuniary penalties are punitive measures. They are not intended or designed to compensate people affected by a breach, but to punish the contravention and deter future contraventions. However, they are imposed on a lower standard of proof than criminal offences, and in civil proceedings that lack many of the procedural protections offered by the criminal law. There has been concern that pecuniary penalties illegitimately challenge the traditional distinction between the criminal and civil law. This is one factor that prompted the Commission’s review.

Pecuniary penalties are also a relatively novel form of penalty. They have been adopted into statutes in an ad hoc manner, especially since 2000. Apparent inconsistencies among existing pecuniary penalty provisions suggest a lack of clear principles guiding their use. These were other factors driving the Law Commission’s review.

We have reached the view that pecuniary penalties can be a valid tool of enforcement and may be desirable in some circumstances. In this report we identify what those circumstances are. We have concluded that, for the most part, the rules of evidence and procedure that accompany pecuniary penalties are appropriate.

The Law Commission considered insurability of pecuniary penalties. When looking at the position in Australia, it said:

The increasing use of pecuniary penalties to regulate behaviour in Australia has given rise to questions about the applicability of the conventional doctrine that insurance against the imposition of penalties is contrary to public policy. Conceptual differences between conventional criminal offending and pecuniary penalties (and strict liability offences) have led to the gradual retreat from the position that the creation of a statutory contravention punishable by a monetary penalty is always a reason to invalidate an indemnity.

In summary, the Law Commission:
1. Concluded that pecuniary penalties are a valid tool of enforcement in certain circumstances.
2. Set out guidelines for when those circumstances apply.
3. Said the law should not place a blanket prohibition on insuring against an order to pay pecuniary penalties. Rather, Parliament should decide whether to prohibit it or not on a case-by-case basis in each statute.

Financial Markets Conduct Act 2013

We quote the relevant provisions in this Act about pecuniary penalties as an example of their application: 

484 Overview of civil liability
(1) The following orders (civil liability orders) are available for a contravention, or involvement in a contravention, of a civil liability provision (except if otherwise provided) under this subpart:
  (a) a declaration of contravention
  (b) a pecuniary penalty order (on application by the FMA only)
  (c) a compensatory order
  (d) other civil liability orders under section 497.

489 When court may make pecuniary penalty orders
(1) The FMA may apply for a pecuniary penalty order against a person under this Act.
(2) If the FMA applies for a pecuniary penalty order against a person under this Act, the court —
  (a) must determine whether the person has contravened, or been involved in a contravention of, a civil liability provision; and
  (b) must make a declaration of contravention if it is satisfied the person has contravened, or been involved in a contravention of, a civil liability provision; and
  (c) may order the person to pay to the Crown a pecuniary penalty that the court considers appropriate if it is satisfied the person has contravened, or been involved in a contravention of, a civil liability provision.

S509 of the Act puts the fact that this is a civil not a criminal proceeding beyond doubt:

509 Rules of civil procedure and civil standard of proof apply to civil liability
The proceedings under this subpart are civil proceedings and the usual rules of court and rules of evidence and procedure for civil proceedings apply (including the standard of proof).

Parliament passed this Act before the Law Commission’s report and it is silent about any prohibition against insuring against payment of pecuniary penalties. Contrast this with a recent amendment to the following Act.

Credit Contracts and Consumer Finance Act 2003

107E Restriction on insurance
(1) No person may enter into a contract of insurance that indemnifies or purports to indemnify a person (person A) in respect of —  
  (a) any pecuniary penalty imposed on person A under this Act; or
  (b) any costs incurred by person A in defending any civil proceedings in which the pecuniary penalty referred to in paragraph (a) is imposed.
(2) Any contract that does so is void.

That section follows the Law Commission’s recommendations by addressing expressly whether insurance against payment of the pecuniary penalty is legal – it is not.

Statutory liability policy changes required?

The statutory liability policy initially insured fines payable for certain criminal offences. Most policies use the correct criminal language consistent with this, such as ‘offences’, ‘convictions’, and ‘fines’.

That language is not apt for insuring pecuniary penalties payable under civil law using the civil standard of proof.

As Parliament is more often resorting to using pecuniary penalties in business-related statutes, we recommend statutory liability underwriters address whether they intend to insure them or not as soon as possible.

We are aware of several disputes about claims for pecuniary penalties under a standard statutory liability policy. This is not surprising, given the existing language does not fit the pecuniary penalty legal regime.

Just as the Law Commission recommended that statutes creating pecuniary penalties expressly state whether they can be insured or not, we recommend statutory liability policies either expressly exclude them or expressly cover them.

We believe cover for them will require different language that is in harmony with their civil law nature.

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Resolve is the official publication of the Australian Insurance Law Association and
the New Zealand Insurance Law Association.