Can indemnity for civil penalties be claimed under D&O insurance policies?
Scope of cover
Typically, D&O insurance policies indemnify for legal defence costs, settlements and damages. They may also include cover for civil penalties, provided they are not fines or penalties uninsurable by law, or arising from deliberate, fraudulent or criminal conduct.
Civil penalties in Australian law are monetary sanctions imposed by courts or regulators for breach of statutory obligations. They differ from criminal penalties in that they do not require proof of criminal intent and are primarily aimed at deterring non-compliance. Fines or penalties described by insurance policies as 'uninsurable by law' refer to instances where statutes explicitly prohibit indemnification or insurance for civil penalties imposed by legislation. For example, the Work Health & Safety Act 2011 (NSW) (WHS Act) prohibits entering into, providing, or benefiting from insurance or indemnity arrangements that cover liability for civil penalties under the Work Health and Safety Act (NSW)s 272.
Nonetheless, Australian Courts have maintained that even where insurance policies may explicitly provide cover for civil penalties, and such indemnification is not prohibited by statute, public policy considerations may override the policy terms. That is, the Courts have on several occasions declined to permit indemnity where doing so would undermine the deterrent purpose of the penalty.
When courts will deny indemnity
In ABCC v CFMEU [2018] HCA 3 (ABCC),[2018] HC 3 the High Court considered whether Mr Myles, a Union official who contravened the Fair Work Act 2009 (Cth) (FW Act), could be indemnified by the Union for the civil penalty imposed on him. The Court held that the FW Act gives the Federal Court an implied power to make a personal payment order, which would disallow Mr Myles from seeking indemnity from the Union. The Court explained that such orders are appropriate where necessary to ensure that pecuniary penalties serve as an effective deterrent, both for the individual concerned and others in similar positions.
On remittal, the Federal Court noted that Mr Myles’ misconduct was intentional and, when considered alongside repeated contraventions by him and other Union officials, reflected a broader pattern of deliberate non-compliance with the FW Act in pursuit of Union interests. The Court therefore proceeded to impose a personal payment order on Mr Myles, reasoning such would make clear to him and other Union officials that they cannot knowingly contravene the FW Act on the basis that indemnity from the Union will protect them from personal consequences (see ABCC v CFMEU [2018] HCA 3 at [40], per Allsop CJ, White and O'Callaghan JJ) .
Whilst not involving a corporate director or officer, the decision in ABCC demonstrates the courts' willingness to impose personal liability for civil penalties even where indemnity, in this case by a union, is not prohibited by statute. Further, it shows that particularly where non-compliance is found to be deliberate or systemic, the courts are more likely to deny individuals from seeking indemnity for civil penalties.
In ACCC v BlueScope Steel [2023] FCA 1029 (BlueScope Steel) the Federal Court imposed a $57.5 million penalty on BlueScope for its attempts to induce competitors to enter price-fixing arrangements. A $575,000 penalty was also imposed on senior executive Mr Ellis, who was found by the Court to have played a central and intentional role in the offending conduct. Finding that the relevant conduct warranted a significant penalty, the Court also proceeded to make a non-indemnification order, disallowing Mr Ellis from claiming or accepting indemnity for his penalty under any D&O insurance policy.
Referring to the decision in ABCC, the Court reasoned that if Mr Ellis were to be indemnified, the pecuniary penalty would be entirely devoid of sting or burden. The Court therefore imposed the non-indemnification order to ensure the penalty served as a genuine deterrent to both Mr Ellis and others who 'who may otherwise calculate that the rewards from such conduct outweigh the risks of detection'.
When courts may allow indemnity
In ACCC v Productivity Partners Pty Ltd (trading as Captain Cook College) [2025] FCA 542, the Federal Court took a different approach. The College's COO, Mr Willis, was found to be knowingly concerned in unconscionable conduct carried out by the College. The Court found Mr Willis personally liable for contraventions of the Australian Consumer Lawand the Competition and Consumer Act 2010 (Cth), imposing a penalty of $400,000. However, unlike the decision in BlueScope Steel, the Court declined to make an order preventing Mr Wills from claiming indemnity for the penalty under a D&O insurance policy. This was on the basis of the Court's finding that Mr Wills was unaware that his conduct was unconscionable, and had not acted dishonestly or recklessly. Further, the Court emphasised the role D&O insurance plays in attracting skilled professional to leadership roles, warning that too readily denying indemnity, particularly where conduct is not intentional or dishonest, would undermine the utility of D&O insurance.
Key takeaways
Whether a Court will allow a director or officer to claim indemnity for a civil penalty will primarily depend on the nature of the conduct and the individual's state of mind. Courts are more inclined to allow an individual to be indemnified where the conduct was not intentional, dishonest, or reckless. Conversely, where conduct is found to be deliberate or systemic, and where indemnity would undermine a penalty’s deterrent effect, the Courts are more likely to intervene.
As this area of law evolves, insurers may respond by narrowing coverage, introducing sub-limits or excluding certain penalties. Directors and Officers should not assume that D&O liability insurance will automatically protect them from personal liability. Best practice is to proactively seek legal advice with regards to the scope and limits of current D&O liability policies and how any legal developments may necessitate changes to ensure adequate protection.
Navigating the complexities of indemnification of directors in respect of civil penalties and coverage under a D&O liability insurance policy can be challenging. Ensure you're adequately protected and informed. Contact a MinterEllison expert today to review your D&O policies and get tailored legal advice.
