Why Directors and Officers Should Rethink WHS Insurance

Directors & Officers Insurance (DOI) is an important safeguard that protects senior leaders and decision makers. However, when it comes to work health and safety (WHS) prosecutions, the value of insurance is questionable, particularly in circumstances where WHS-specific coverage is being offered as an add-on or additional coverage of a more general and existing DOI policy.

Leaders who believe that a safety-specific DOI policy will protect them from the financial consequences of a WHS prosecution may be paying a premium for a product that offers far less protection than they realise and is already covered by a general DOI policy.

All Australian jurisdictions (other than Tasmania and the Northern Territory) now prohibit insurance arrangements that indemnify a person against WHS fines or monetary penalties. These reforms arose from recommendations made following Marie Boland’s 2018 review of Australia’s model health and safety laws. The review concluded that allowing insurance to cover penalties undermined the deterrent effect of WHS enforcement. That extended to insurance cover in place to indemnify directors and officers found guilty of their own duty breaches under WHS laws.

In Western Australia, for example, section 272A of the Work Health and Safety Act 2020 (WA) provides that an insurance policy is of no effect to the extent it purports to indemnify a person for liability to pay a fine for an offence under the Act.

That is not where the line is drawn though. It is also unlawful:

• to enter into, or offer to enter into, an insurance policy that indemnifies against WHS fines;
• to indemnify a person against WHS fines;
• to be indemnified against WHS fines; and
• to pay another person an indemnity for WHS fines.

Fines can be handed down to individuals and bodies corporate that contravene the terms of the relevant sections.

Against that background, directors and officers should carefully examine what they are receiving for the premiums they pay for DOI. They must fundamentally understand that, if convicted of a WHS offence (in their capacity as a director or officer), they will be personally liable for any penalty imposed. Organisations should make this clear and encourage prospective and existing directors and officers to obtain independent advice in the event that question arises.

That said, while there are prohibitions in place in relation to fines for WHS contraventions, a residual benefit exists in that DOI can still cover the legal costs associated with:

• providing advice to a director or officer in relation to risks arising from a WHS incident or prosecution; and
• representing a director or officer in relation to a WHS prosecution.

However, a tension often arises in these matters between the frequently divergent interests of the insured (i.e. the director or officer), the insurer, and the corporate entity. The director or officer, often facing a serious WHS prosecution, may wish to vigorously contest the allegations, protect their reputation and avoid a conviction (and in doing so, incur significant fees). The insurer and the company, on the other hand, will be focused on limiting financial exposure, including the cost of any legal defence and advice throughout the process. In practice, this means the insurer may exert pressure to resolve a matter quickly or cost-efficiently, even where that outcome does not serve the individual director or officer’s interests. We have found that the insurers exert this pressure even in circumstances where the director or officer wishes to enter into plea negotiations with the safety regulator. Directors and officers should be aware of this dynamic and consider seeking independent legal advice rather than relying solely on insurer-appointed lawyers.

This tension becomes more significant as WHS prosecutions become longer, more complex and more expensive. It is not uncommon for investigations to run for months or years before charges are laid.

The broader lesson is that insurance products cannot always deliver the certainty that policyholders expect or desire. In the WHS context, legislative policy has shifted firmly towards personal accountability, limiting the scope for insurance arrangements to remove risk altogether.

None of this means that directors and officers should abandon DOI altogether. Legal costs incurred in responding to a WHS investigation or prosecution can be substantial. Policies that provide cover for investigation expenses, legal representation and defence costs may still offer considerable value, particularly given the seriousness of modern WHS enforcement. Indeed, in some cases, the legal costs of responding to a prosecution may actually exceed the eventual penalty imposed.

However, directors and officers should be realistic about what their policies achieve, and organisations should be transparent with their directors and officers about what they are covered for. In circumstances where “WHS specific” coverage is offered as an add-on to a generalised DOI policy suite, organisations should carefully consider whether the legal costs that would be covered are not already captured under the more general DOI policy in place. Many organisations are considering a self-insurance model where provision is made in budgets for funding to support directors and officers with the costs of litigation in the event of prosecution. This approach will not contravene WHS laws provided the support is limited to the costs of defence and not penalties. However, it is extremely important that organisations seek legal advice on the establishment of this kind of support and implications under WHS and employment law.

In a regulatory environment where WHS penalties cannot be insured and personal accountability remains paramount (in the legislature’s view), the best protection from prosecution remains effective governance, strong safety systems and a genuine commitment to WHS compliance and due diligence obligations.

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This article was co-authored by Xavier Burton, Associate, in our Perth office.

The views expressed in this article are general in nature only and do not constitute legal advice. Please contact us if you require specific advice tailored to the needs of your organisation.

Photo by Benjamn Child on Unsplash