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A global guide to the insurability of fines and penalties

Legislators and regulators increasingly hold individuals accountable for corporate wrongdoing.

21/06/2022 · 6 min

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.

Click on a country to learn more about the insurability of fines and penalties

Since 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.

Insurability of fines and penalties

Continental Europe

France

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.

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Germany

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.

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Spain

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.

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Switzerland

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.

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Ireland

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.

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Insurability of fines and penalties

United Kingdom

England & Wales

The insurability of fines and penalties is an area fraught with complexity. In circumstances where there is no express prohibition on the insuring of fines by the regulator in question — as is the case with, for example, the Information Commissioner’s Office (unlike the Financial Conduct Authority which expressly prohibits the insuring of fines and penalties it imposes) — the general legal position on insurability will need to be considered.

First, the policy language will need to be reviewed. Under some wordings, there is no coverage for any fines and penalties whatsoever. However, under other common formulations, only criminal fines are excluded and fines are covered to the extent they are “insurable by law”. If it is not "insurable by law", then the courts will consider it void and unenforceable.

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Whether an insurance policy will cover a fine depends on the public policy question of whether it is possible to recover for a loss that results from your own wrongdoing. This statement, often expressed as the ex turpi causa principle and known as the "illegality defence", is a well-known common law public policy doctrine. In the insurance context, the making of an insurance claim for the recovery of fines imposed on companies and individuals for illegal acts would remove the deterrent effect of such fines; the "illegality defence" prevents this.

After many conflicting cases as to how to apply the “illegality defence”, the Supreme Court in Patel v Mirza [2016], laid down three factors that should be taken into account when deciding whether it would be in the public interest to enforce a claim despite some "illegality" on the part of the claimant:

  1. The underlying purpose of the prohibition which has been transgressed.
  2. Any other relevant public policies which would be rendered ineffective or less effective by the denial of the claim.
  3. The need for proportionality.

The leading case is Safeway v Twigger (2010). Safeway had been prosecuted by the Office of Fair Trading (OFT) for alleged fixing of dairy prices contrary to section 2(1) of the Competition Act 1998. Safeway agreed to pay a fine and, as part of the agreement, admitted that by participating in various initiatives with other supermarkets, it had breached the prohibition in the Act by the repeated exchange of commercially sensitive retail pricing intentions. Safeway's shareholders sought recourse from a number of the directors and employees that it alleged were responsible for the price fixing conduct in question. The defendants applied to strike out the claim, arguing that it was barred by public policy on the grounds of ex turpi causa. Summary judgment was refused in the first instance.

On appeal, the Court of Appeal concluded that for the “illegality defence” to apply there must be an element of moral turpitude or moral reprehensibility involved in the relevant conduct, such that the act constitutes, in effect, quasi-criminal conduct.

In the subsequent Supreme Court case of Les Laboratoires Servier v Apotex Inc (2014), the court supported this by stating, “… non-criminal acts giving rise to the [illegality] defence includes cases of … the infringement of statutory rules enacted for the protection of the public interest and attracting civil sanctions of a penal character, such as the competition law considered by Flaux J in Safeway Stores Ltd v Twigger …”

Further, in Sainsbury’s Supermarkets Ltd v MasterCard Inc and Others (2016), the Competition Appeal Tribunal held that, “whether an infringement of competition law can trigger an illegality defence depends upon whether that infringement is an “innocent” one (in which case, we consider it cannot) or a “negligent” or “deliberate” one (in which case it may do).”

There are three broad categories of conduct for which any fine or penalty might be imposed: (i) intentional or reckless wrongdoing; (ii) strict liability situations, where no particular fault is required; and (iii) negligence.

As such, the position in England & Wales is broadly as follows:

  • Fines resulting from intentional wrongdoing will not be indemnifiable, whatever the type of fine, and might also, in any event, be excluded by other policy provisions, such as fraud or dishonesty, or personal advantage exclusions. However, where the fine is "indirect", a company might still be able to recover from a director a corporate fine resulting from intentional conduct. In Safeway, Safeway was not able to pass the fine onto its directors/employees as the Act under which the fine was levied imposes liability on an undertaking that is a party to an agreement that infringes the Act intentionally or negligently — it is therefore personal to that corporate undertaking. This case does not act as authority that recourse against directors will never be possible — the door has been left open.
  • Strict/no fault liability fines will likely be indemnifiable, as there is no requirement that the insured's conduct involves an element of moral turpitude (subject to the caveat that fines imposed by certain regulators, such as the FCA, mentioned earlier, are uninsurable in all cases and policies typically exclude criminal fines).
  • Fines imposed for negligent conduct are more complicated. Civil fines or penalties imposed for purely negligent conduct could, in theory, be insurable depending on the degree of moral culpability per Safeway and subsequent cases. As such, the ex turpi causa principle is engaged by conduct that reaches a certain level of moral turpitude falling short of criminal/intentional behavior. If it is engaged, the fines are not insurable, but if it is not, then they may be insurable. An assessment will therefore need to be made as to the degree of moral turpitude involved in the conduct leading to the infringement — this is far from an easy task and will be very fact specific.

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Scotland

Generally speaking, fines deriving from criminal conduct are uninsurable. In Geddes Ltd v Neil Johnson Health & Safety Services Ltd (2017), Lord Tyre noted that there was no Scottish authority on the recoverability of fines and that it was appropriate to look to the English courts for guidance. His Lordship concluded that, although there is no authority for the proposition that criminal fines are never recoverable, one has to consider responsibility for the commission of the offense.

If an individual is convicted of an offense, committed knowingly, then the law precludes recovery of the fine for public policy reasons. For civil or regulatory penalties, again, the courts will consider responsibility. Intentional wrongdoing on the part of a claimant is not the only situation to which the illegality defense will apply; it may also apply if negligence is established (see the discussion of Safeway Stores Ltd v Twigger in the England & Wales section).

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Insurability of fines and penalties

Middle East & Africa

Israel

General legal principles and doctrines in Israel suggest that insurance should not be afforded for fines and penalties. The purpose of these doctrines is to deter the perpetration of criminal acts, which may result in fines or penalties.

Another purpose is that, as a matter of public policy, a person or entity should bear the consequences of their own criminal or quasi-criminal acts.

Accordingly, Section 26 of the Insurance Contract Law provides that if the insurance event was caused intentionally by the insured, the insurer is discharged of its duties. Furthermore, Section 30 of the Contracts Law (General Part) provides that contracts that are illegal, immoral, or contradict public policy are void.

While some authorities have stated that the required "intent" refers to the desire to obtain insurance benefits, others have sufficed with the intent referring to the desire to achieve the results of the act perpetrated by the assured and not necessarily to be paid by insurer.

The concept that a party who has sustained a loss as a result of its own unlawful activities should not be allowed to seek recovery from a third party, is reflected in the ex turpi causa defense, which has evolved in Israeli jurisprudence.

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The first ruling of the Israeli Supreme Court on this issue strictly upheld this principle and confirmed that it applied without exception (Mesilot Tel-Aviv vs. Toydan). In later decisions, the Supreme Court adopted a more flexible approach and determined that each case must be viewed on its own merits, considering public policy issues, the nature of the fine, its objective, and that conflicting legal principles should be examined. In the case of Naaman vs. Solel Bone, the court made a distinction between a civil and a criminal fine, and ruled that when the sanction is civil, in some circumstances, the ex turpi causa defense will not apply. There are several laws in particular areas which include specific prohibitions to insure fines and penalties.

The Companies Law 1999 prohibits insurance of D&Os against fines, civil fines, monetary levies, or fines in lieu of indictment imposed on them. It also prohibits the insurance of intentional or reckless acts.

In a decision approving a settlement in a derivative action filed against D&Os of a bank (Aharoni vs. Mizrahi Tefachot Bank et al) regarding fines paid by the Bank, the Court of Economic Affairs in Tel-Aviv commented that it accepts in principle the insurer's argument that an insurance cover to compensate or indemnify against fines and penalties is inappropriate, and that it may be contradictory to public policy.

There are also specific prohibitions to insure fines or penalties imposed on a person or entity in the framework of certain regulatory or administrative proceedings. For example, the Securities Law prohibits the insurance of regulatory enforcement proceedings against any person or entity, other than in respect of defense costs or compensation to the injured party.

In view of the above, in principle, fines and penalties are uninsurable under Israeli law.

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Qatar (excluding the Qatar Financial Centre)

There is no express prohibition pursuant to codified Qatar law that prevents fines and penalties from being insured. Further, Article 777(1) of the Civil Code (Law 22 of 2004) notes that an exclusion that seeks to exclude cover for breach of a law or regulation is void, unless the exclusion expressly notes the specific actions that will trigger the exclusion. That said, Qatar law only allows the insurance of a “legitimate interest” and, pursuant to the Article 151 of the Civil Code, all contracts, including insurance contracts, are void if the contractual obligation to be performed is contrary to public order or morals.

In light of this overarching “public order” test, the extent to which fines or penalties can be insured is not always clear. This lack of clarity is complicated by the fact that civil disputes often involve criminal complaints, and that certain fines and penalties (including ones that arise pursuant to Qatar’s criminal law) are viewed as compensatory in nature. Consequently, certain “compensatory fines” are routinely insured, such as the penalties under Shariah law for wrongful death or bodily injury.

The general position under Qatar law is, therefore, that there is no express prohibition on insuring fines and penalties. However, the insurance of certain types of fines and penalties may well be considered to be contrary to public order or morals and may result in the insurance contract being considered void. Deciding whether the subject matter of an insurance contract is contrary to public order or morals is ultimately left to the discretion of the court.

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United Arab Emirates

In general, under UAE law, civil, regulatory, and even some criminal fines and penalties are insurable, unless expressly excluded under a policy. However, there could be an argument that pursuant to Article 205 of the UAE Civil Code, insuring fines and penalties (specifically punitive fines and penalties) should not be permissible because that would be contrary to public order or morals.

Civil matters routinely involve criminal complaints. For example, in the context of wrongful death and bodily injury, fines can be imposed under Shariah law, such as "Diya" and "Arsh" by UAE courts. These fines are insurable and are often insured, as they are deemed to be compensatory in nature.

Within the "offshore" Dubai International Financial Centre (DIFC) regime, as DIFC law follows English law, it is likely that the position is similar to the UK (though, a point of contrast to note is the Dubai Financial Services Authority does not expressly prevent the insurability of fines as the UK’s FCA does). However, this will depend on the specific factual scenario and relevant legislation.

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South Africa

This issue remains unresolved in South African law and, in the absence of statutory regulation, if the matter were to come before a court, it would likely be decided with regard to public policy. The academic opinion supports this.

With a handful of notable distinctions, South African courts have, in the area of insurance law in particular, historically drawn heavy influence from English law and the trend there will only serve to reinforce this position. Any determination by a court will involve a weighing of, on the one hand, the recognized policy imperative that contracts freely entered into ought to be honored and enforced out of respect for individual autonomy (pacta sunt servanda) and, on the other hand, the principle that nobody may take advantage of their own wrong (nemo ex suo delicto meliorem suam conditionem facere potest).

There are instances where statutory liability is created that is not explicitly linked to criminal conduct, and it is at least plausible that the courts might find that public policy dictates a relaxation of the maxim referred to above. This is especially the case where the actual (even if not the direct) beneficiary of the insurer’s payment is not the insured, but (ultimately) a third party wronged in some way. Other jurisdictions distinguish between “statutory fines/penalties”, which are penal in nature, and “statutory damages”, which are compensatory in nature, prohibiting insurance of the former and allowing insurance of the latter. This is the kind of distinction that the courts may use when deciding a difficult case on the subject.

Ultimately, a court will likely determine that public policy dictates that fines and penalties are uninsurable in law. This is influenced by statutes, such as the South African Companies Act 71 of 2008, which expressly forbids the taking out of insurance against director liability for fines and penalties.

The debate on this issue has continued with the introduction of the Protection of Personal Information Act 4 of 2013 on 1 July 2020. The general consensus appears to be that the administrative fine or penalty will not be paid by the insurer due to the same principle applicable to criminal fines and penalties, namely that payment by the insurer of such a fine or penalty would be contrary to public policy and will reduce the deterrent and punitive effects of holding an insured personally liable for wrongful acts. 

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Insurability of fines and penalties

Asia

China

As a general rule, claimants cannot pursue a legal remedy arising in connection with their own illegal act. Pursuant to Article 65 Paragraph 4 of the Insurance Law, liability insurance is defined as “a type of insurance which takes the insured’s legal liability for indemnity to a third party as the subject matter insured”. The scope of coverage is limited to civil liabilities. The emphasis is on an “indemnity” for civil liability, not a fine or penalty for administrative or criminal wrongdoing.

In 2006, the China Insurance Regulatory Commission (the CIRC, and now the CBIRC) commented on the terms of a Guarantee Insurance that concerned “fines and other customs taxes and penalties caused by late payment on [the] part of the insured in violation of relevant laws and regulations”. The CIRC advised that, here, the underwriter is insuring the liability of the insured arising from illegal conduct, which is contrary to the principles of Guarantee Insurance. Further, considering the current legal environment and socio-economic development in China, they advised that it is not appropriate for insurance companies to develop and operate such policies.

There are currently no insurance policies that cover administrative fines or penalties in the Chinese insurance market that we are aware of. Policies from several well-known Chinese insurance companies expressly exclude fines, penalties, and punitive damages.

In 2020, the CBIRC issued the Regulatory Measures for Liability Insurance Business/责任保险业务监管办法, Article 6 of which expressly prohibits criminal fines and administrative fines from being covered. The Measures correspond with the statements by the CBIRC 14 years ago and further provides that any insurer who illegally covers criminal fines and administrative fines shall face an administrative penalty.

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India

There is a dearth of jurisprudence available on the aspect of insurability of fines and penalties in India and it is often seen as a grey area.

While insurers often offer coverage for fines and penalties, it may be conditional on its insurability or the illegality of the offense that resulted in the imposition of the fine. Ambiguity in this matter arises because the issue of insurability is normally not directly addressed in the statute or in the regulatory provisions. There is still ambiguity as to which penalties are indemnifiable, and which are not.

In the absence of well-developed jurisprudence, cover for loss on account of a fine or penalty will have to be tested on the principles applied to willful misconduct, fraud, dishonesty, and similar conduct. Cover for such losses is generally excluded. Accordingly, although there appears to be no express bar rendering fines and penalties uninsurable, these conduct exclusions are found in the insurance policies that are offered, based on principles of public policy.

Furthermore, the Companies Act 2013 sets out various offenses that are punishable with imprisonment, fines, or both. In certain cases, officials have been empowered to “compound” an offense. "Compounding an offence" means that owing to a compromise or agreement, the charges against the offender are dropped. However, courts in India have often observed that acquittal on the basis of compromise is not an acquittal on the merits after appreciation of evidence, but is an acquittal based on an act of a victim by which he either forgives or enters into an agreement with an undertaking not to prosecute the offender. Thus, the acquittal based on compromise can never be an honorable acquittal. Since compounding would also highlight the admission of the offense to a certain degree, it may be read along with the broader exclusions for willful misconduct and dishonesty disclaiming coverage.

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Malaysia

The Malaysian Insurance Act of 1996 does not specify what matters may or may not be insurable. There is also no express legislation or case law that clarifies whether fines and penalties are insurable.

The Malaysian legal system is predominantly based on English common law and it is likely that the Malaysian courts will refer to the UK Court of Appeal’s decision in Safeway v Twigger when faced with a similar legal issue.

Until such time, section 24 of the Contracts Act 1950 should be considered. This provision provides that the consideration or object of an agreement is unlawful if it is forbidden by law or it is of such nature that, if permitted, it would defeat any law that appears to refer to contracts that are regarded as illegal. Indemnities for illegal conduct are unenforceable. The ex turpi causa principle is accepted and widely applied by the Malaysian courts, in both civil and criminal proceedings. 

In the recent case of Extreme Design & Associates Sdn Bhd v Ministry of Domestic Trade and Consumer Affairs, the High Court quoted MacGillivray on Insurance Law, Eleventh Edition:

"The courts will not permit a person to enforce his rights under a contract of any kind if it is tainted by illegality. This principle of public policy is expressed in the familiar Latin maxim ex turpi causa non oritur actio (an action does not arise from a base cause). Although this maxim is lacking in precise legal definition, it is reflected in two rules affecting the enforceability of rights under contracts of insurance. First, a claim is unenforceable when the grant of relief to the plaintiff would enable him to benefit from his criminal conduct. Secondly, a claim is unenforceable when the plaintiff either has to found his claim on an illegal contract or to plead its illegality in order to support his claim. Once a court has determined that one or other rule applies to the facts of a given case, it has no discretion whether to apply the rule depending upon the degree to which the plaintiff has affronted the public conscience."

More commonly known as the doctrine of illegality, a person who participates in an illegal enterprise will be barred from recovery in respect of harm resulting from the illegal activity. It is arguable, although inconclusive, that fines and penalties commonly arising from misconduct or an illegal act are generally not insurable under Malaysian law.

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In practice, it is difficult to determine whether a particular case falls on one side or the other. Judge Moore observed in Auckland Regional Council v Gubbs Motors Ltd [2009]: “Traditionally, a person could not insure themselves against the consequences of deliberate criminal acts and, in particular, to purchase indemnity for a fine or other punishment imposed for the commission of a crime. But where the law was broken by an act or omission which was negligent, different considerations intruded and the consequential case law is byzantine…”

Bay of Plenty Regional Council v Whitikau Holdings Limited [2018] is one of the few New Zealand cases to closely consider the insurability of fines. The judge concluded that, in the case of serious and deliberate offending that shocks the public conscience, a court can declare that an insurance policy is void against public policy. However, the judge accepted that what constitutes serious and deliberate offending is less clear in cases where the death of a person is not involved.

The Court referenced the Australian case of Fire and All Risks Insurance Company Limited v Powell [1966], where it was held that, outside the gravest of crimes, the insurability of criminal conduct depends on the weighing factors such as the:

  • Gravity of the class of crime.
  • Offender’s knowledge of the facts or law that make the conduct a crime.
  • Need for deterrence.
  • The victims’ interests.
  • The general public’s interest in the observance of contracts.

The illegality of insuring fines and penalties is clearer in respect of certain offenses where parliament has expressly legislated against it. The most significant of these is the Health and Safety at Work Act 2015, which expressly prohibits insurance for fines imposed under the Act.

Insurance policies issued by New Zealand insurers anticipate the public policy issues and commonly restrict cover from offenses involving significant moral turpitude. Many policies exclude fines imposed under the Crimes Act 1961, the Act that prohibits ‘traditional’ criminal conduct. Deliberate breaches and reckless conduct is commonly excluded.

In summary, the insurability of fines and penalties in New Zealand has not been clearly and comprehensively articulated by either the courts or Parliament. There is no question that fines arising from lower level offending may be insured and that very serious offending may not. The middle ground is more difficult. 

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Singapore

It is currently an open question in Singapore whether, and to what extent, fines and penalties are insurable. The Singapore courts have recognized and applied the ex turpi causa principle, but the question of the insurability of fines and penalties has yet to come before the courts.

Given the close affinity between Singapore law and English law (especially in the context of insurance law), the English case law on this question will have persuasive authority. It may therefore be the case that, following the position in Safeway v Twigger, and for public policy reasons, the extent to which fines and penalties are insurable will be dependent on the extent of moral turpitude or moral reprehensibility involved in any given case.

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Insurability of fines and penalties

Pacific

Australia

There is some degree of uncertainty as to whether fines and penalties are insurable by law in Australia. Insurability may be barred by the courts due to public policy considerations or may be expressly prohibited by statute, particularly where the availability of indemnity would undermine the deterrent effect of the imposition of fines. In considering the insurability of fines, the courts (for example, in Fire and All Risks Insurance (1966)) have noted the following considerations as relevant: (a) the gravity of the offense; (b) the person’s knowledge of the facts or law making their conduct unlawful; (c) the likelihood that if enforcement of the indemnity were permitted, the commission of similar unlawful acts would be promoted; and (d) the degree of likelihood that enforceability would promote the interests of innocent victims.

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The absence of intention in criminal acts could result in the act being one that was insurable by law. Notably, in two cases (Australian Aviation Underwriting Pty Ltd v Henry (1988) and Horsell International Pty Ltd v Divetwo Pty Ltd (2013)), clauses excluding cover for ‘criminal’ acts applied only to acts which had an element of intention (the policy in Horsell excluded conduct which was “fraudulent, dishonest, malicious, willful or criminal” — intention was the common thread running through the words of this exclusion). The insurers were ordered to indemnify criminal fines for negligent conduct that resulted in death.

The position is less clear where the offense is one of strict liability as the intent element is absent. Strict liability offenses are often criminal in nature and civil pecuniary penalties, prosecuted and determined within the criminal jurisdiction, are often categorized as criminal fines. There is no defense available for an absolute liability offense, unless the enabling legislation expressly provides one. Strict liability offenses involving negligence may be uninsurable. While not concerning whether an insurance recovery could be made (rather, the case concerned whether the company could recover its losses from the directors themselves), the UK case of Safeway v Twigger is the main case on this point. It held that the ex turpi causa principle may apply and be a bar to recovery where there is “an element of moral turpitude or moral reprehensibility involved in the relevant conduct”. If such conduct exists, it may therefore be the case that losses arising from strict liability offenses may be irrecoverable, whether under insurance or otherwise. For further information, see the England & Wales section.

Courts are currently grappling with the issue of insurability of fines and penalties. In Hillman v Ferro Con (SA) Pty Ltd (2013), the court refused to reduce the maximum penalties imposed for criminal conduct despite the defendants’ cooperation, contrition, and early guilty pleas because they were indemnified by their insurance policy. The court considered that the indemnity outweighed the benefits of an early guilty plea and statement of remorse, and “… undermined the Court’s sentencing powers by negating the principles of both specific and general deterrence”. There is, therefore, potential for courts to impose higher penalties if made aware that insurance indemnity is available.

More recently, a judge of the Federal Court of Australia held that the court was empowered to order a non-party to the proceedings not to indemnify a defendant in respect of a pecuniary order made against him. The judgment was overturned by the Full Federal Court in Construction, Forestry, Mining and Energy Union v Australian Building and Construction Commissioner (2016), although the Full Federal Court decision was subsequently appealed to the High Court of Australia.

On appeal, the majority of the High Court found that the relevant section of the legislation does not empower a court to make a non-indemnification order as such an order is penal and is beyond the scope of the relevant legislative sections. However, the majority of the High Court held that a personal payment order on the defendant could be made under the relevant legislative section, barring him from seeking or accepting an indemnity in relation to his pecuniary order. The majority of the High Court reached this conclusion after examining the principal purposes of such pecuniary penalties, being a specific deterrent towards the contravener and a general deterrent towards other potential contraveners. The majority of the High Court found that the relevant legislation section includes an implied power to make such further orders as are reasonably required for, or legally ancillary to, the accomplishment of the deterrent effect that the penalty is calculated to achieve.

Notably, some Australian jurisdictions, including New South Wales,  Western Australia and Victoria, make it an offence for a person to provide or receive the benefit of insurance or indemnification for penalties imposed for workplace health and safety offenses. The restrictions do not, however, prohibit the provision or procurement of insurance for legal costs incurred in the defense of proceedings relating to such breaches.

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New Zealand

Despite the wide uptake of policies that provide cover for fines and penalties, the legality of such cover has received relatively little consideration by the New Zealand Courts.

Historically, it was a firmly held principle of New Zealand common law that it was against public policy to indemnify a person for the consequence of the commission of a crime. This was frequently expressed in the Latin maxim, ex turpi causa non oritur actio. Literally, an action does not arise from a dishonorable cause. 

Over time, a number of exceptions to this rule developed. If an offense was relatively trivial then it would not engage the principle. Strict liability offenses were also a recognized exception. 

More recently, the courts have indicated a willingness to move away from the application of the rule and its exception and to consider each case on its own merits.

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Insurability of fines and penalties

North America

Canada

In Canada, liability insurance policies used to clearly exclude fines and penalties without qualification. More recently, they tend to cover them “if insurable under the law pursuant to which the policy is interpreted” or “if insurable in the jurisdiction applicable to the claim which most favours their insurability”. No general statutory prohibition exists.

The consensus is that if the fine or penalty is imposed to sanction the insured’s own conduct, which generally relates to offenses that are “criminal” in nature and require some form of intention, it is probably not insurable (supported by common law and relevant provincial insurance statutes). However, if the sanction is imposed more as an administrative measure —  generally those of absolute liability without a requirement to prove intent or because the person happened to occupy a particular position which draws the imposition of the fine or penalty — then it is insurable.

More uncertain is the insurability of strict liability offenses. This issue overlaps with the principle that deliberate conduct is not insurable. Importantly, however, this principle is narrowly construed and generally applies only when the harmful consequences of the conduct are foreseen or reasonably foreseeable.

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The Supreme Court case of Guindon v Canada (2015) concerned whether penalties imposed on a tax adviser pursuant to section 163.2 of the Income Tax Act should be properly characterized as criminal or administrative. The court looked first at the “criminal in nature” test, focusing on the nature of the offense rather than the underlying acts. The focus of the enquiry was the purpose of the statute, which was to promote honesty and deter gross negligence among tax advisers. The court also looked at a number of indicia of a criminal process, emphasizing that the amount of the penalty imposed was not one of them.

The court then considered whether the penalty under consideration was truly a penal consequence. The court concluded that the penalty had a legitimate regulatory purpose of promoting compliance with a tax scheme rather than aimed at punishing anti-social or immoral conduct. Therefore, it did not amount to a true penal consequence and the penalties were administrative rather than criminal. The immediate implication was that these fines could be insurable in principle. The broader lesson is that the analysis of such monetary awards must consider the legislative context and not just the conduct in question. Moreover, it highlights how fine the distinctions that determine insurance cover can be.

The Guindon decision, by widening the scope of fines and penalties to be considered “administrative” in nature, may also broaden what might be presented as insurable “loss” under liability policies, especially specialty lines. However, in determining insurability, the underlying conduct must still be examined carefully; intentional conduct that leads to foreseeable harm may still be contrary to public policy or statute. This means the labels of “administrative” or “criminal”, “fine” or “penalty” will not be the end of the enquiry.

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United States

The majority of US states preclude coverage for fines and penalties as a matter of public policy. In these states, statutory fines or penalties that are considered to be penal, rather than remedial, are not insurable. For example, New York has a public policy against insuring punitive damages and damages for conduct intended to cause harm. See, for example, Zurich Ins. Co. v. Shearson Lehman Hutton, Inc., (N.Y. 1994); Public Serv. Mut. Ins. Co. v. Goldfarb, (N.Y. 1981); and Navigators Ins. Co. v. Sterling Infosystems, Inc., (N.Y. Sup. Ct., 2015).

However, New York’s public policy against the insurability of punitive damages or for intentional harm may not apply to “statutory damages” that are not wholly punitive in nature. In Navigators Ins. Co. v. Sterling Infosystems, Inc., the court ruled that statutory penalties and fines must be examined to determine whether they are primarily punitive in nature, as “statutory damages will often be simultaneously both compensatory and punitive.” The court ruled that statutory penalties under the Fair Credit Reporting Act (FCRA) were primarily compensatory in nature, and that neither New York public policy regarding punitive damages nor explicit language in the policy excluding penalties and fines rendered “statutory damages” intended to compensate victims as uninsurable.

The New York Court of Appeals recently addressed this concept in J.P. Morgan Securities Inc. v. Vigilant Insurance Company, (N.Y. 2021), finding that “where a sanction has both compensatory and punitive components” and a “reasonable insured would likewise have understood the term ‘penalty’ to refer to non-compensatory, purely punitive monetary sanctions”, a payment “should not be characterized as punitive in the context of interpreting insurance policies.” Courts in other jurisdictions have similarly held that whether a penalty is insurable depends upon whether it is wholly punitive or contains some compensatory element. See, for example, Call One Inc. v. Berkley Insurance Co., 2022 WL 580802 (N.D. Ill. Feb. 25, 2022).

Because of the difficulty of assessing whether a “fine or penalty” is punitive or compensatory in nature, case law across jurisdictions in the US tends to be fact specific, due to the nature of the specific penalty or fine, the language of the policy, and the state’s public policy about punitive damages. For example, in First Health Settlement Class v. Chartis Specialty Ins. Co., a state court in Delaware and a state court in Louisiana both evaluated whether a payment under a Louisiana health insurance statute would constitute an excluded penalty. They arrived at opposite conclusions, with the Delaware court finding the payments were excluded and the Louisiana court finding the payments were covered “statutory damages”.

In RSUI Indemnity Company v. Murdock, (Del. 2021), the Delaware Supreme Court recently held that Delaware’s “announced” public policy of providing insurance coverage to directors and officers trumped its general public policy of not insuring fraudulent conduct. The court held that Delaware does not have “a public policy against the insurability of losses occasioned by fraud as to vitiate the parties’ freedom of contract.” Some courts may find that a state’s policy of freedom of contract outweighs a competing public policy to not allow insurance coverage for fines or penalties.

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Insurability of fines and penalties

Latin America

Brazil

The Brazilian Civil Code (article 762) renders uninsurable the intentional wrongful acts committed by the insured, the beneficiary, or a representative of either of them. Therefore, fines and penalties arising from deliberate wrongdoings are not insurable in Brazil.

Conversely, there is no provision under Brazilian law preventing coverage for fines and penalties arising from negligent acts. However, fines and penalties resulting from acts that violate public policy would not be indemnifiable either. Despite there being no express prohibition in respect of negligent acts, coverage is ordinarily excluded under the general terms and conditions of most local insurance policies.

As such, where available, additional cover for fines and penalties must be sought from insurers. Particularly in respect of D&O insurance, SUSEP (Brazil’s supervisory authority for private insurance) did not permit coverage for fines and penalties prior to 2016, under the argument that doing so would lead to moral hazard in the marketplace, as coverage for fines and penalties would harm the dissuasive effect of the sanctions. However, since 2016, SUSEP has expressly authorized coverage for administrative and civil fines/penalties in the context of D&O insurance. The only exception being D&O insurance policies issued for closed private pension entities, where coverage is limited to defense costs.

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Mexico

Mexican law does not restrict insurers’ ability to insure fines or penalties. Accordingly, the position in Mexico follows the legal principle that, if it is not forbidden, then it is implicitly legally permitted.

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