Directors and officers (D&O) have a wide range of statutory and common law duties and responsibilities. Failing to discharge those duties may expose a director or officer to legal action and personal liability from a number of sources. Businesses and their senior management maintain insurance cover under D&O Liability and Statutory Liability policies to deal with those exposures.

This article looks at who is covered under these types of insurances, how they operate, and the current issues for those managing the operations of businesses in the mining sector.

Why have cover?

When making decisions on behalf of a company, circumstances can arise which lead to claims against company directors and officers. These claims can come from a variety of sources including the company itself, other directors, shareholders, creditors, customers, employees, liquidators and administrators and regulators and Work Health and Safety (WHS) authorities.

These claims may lead to a liability to pay compensation, a fine or a penalty, as well as sometimes significant costs in defending these claims.

The cover

The insurance market traditionally offered policies designed to cover a fine or penalty brought against a company, directors, officers and employees relating to workplace injury or death. This is ordinarily done through D&O Liability (or Management Liability, another form of D&O cover) and Statutory Liability policies.

Changes to WHS legislation around fines and penalties have been introduced, resulting in significant changes to the design and approach to the placement of these insurances.

No insurance for fines and penalties

In 2018, a review of the Model WHS Laws was undertaken by Ms Marie Boland on behalf of Safe Work Australia and Senate Education and Employment Committee Inquiry into the framework surrounding the prevention, and investigation of industrial deaths in Australia (Boland Review).

Relevantly, the Boland Review recommended that the ‘Model WHS Act’ (which forms the basis of the WHS Acts implemented in most jurisdictions across Australia) 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 the ‘Model WHS Act’;
  • provide insurance or a grant of indemnity for liability for a monetary penalty under the ‘Model WHS Act’; and
  • take the benefit of such insurance or such an indemnity.

The Boland Review noted that the most effective way to prevent a person required to pay a penalty under WHS law from recovering that penalty under insurance or indemnification is to amend the Model WHS Laws in a similar way (thereby strengthening the deterrent effect of the penalties).

However, it was not suggested that companies and officers should be prevented from accessing insurance or indemnity for legal costs incurred in defending a prosecution, which can sometimes be more significant than the fine or penalty seeking to be imposed.

Most jurisdictions have since implemented this prohibition. For instance:

  • New South Wales included the prohibition in June 2020;
  • Victoria included the prohibition in September 2021;
  • Western Australia included the prohibition March 2022; and
  • Australian Capital Territory included the prohibition in November 2022.

On Queensland’s horizon

In Queensland, on 30 November 2023, the Work Health and Safety and Other Legislation Amendment Bill 2023 (Qld Bill) was introduced to Parliament and on 28 March 2024, the Work Health and Safety and Other Legislation Amendment Act 2024 (Qld WHS Amendment Act) passed.

The Qld WHS Amendment Act includes the introduction of this prohibition however, does not apply these prohibitions to Queensland’s resources safety laws, although we expect similar provisions to be introduced into specific Queensland resource legislation in due course.

Prior to the introduction of the Qld WHS Amendment Act, on 23 February 2024, the Education, Employment, Training and Skills Committee provided its report on the Qld Bill. It noted that the deterrent effect of penalties imposed under WHS legislation is significantly undermined if insurance or other arrangements can be used to pay the fines. .

We expect that all Australian jurisdictions will eventually align to prohibit insurance covering fines and penalties.

How insurers are responding

In response to these significant changes, insurers are endorsing Statutory Liability Policies to qualify that the insurance does not cover any payment of a fine or penalty imposed by any statute which would deem it an offence to do so. As noted earlier, cover for the defence costs incurred in defending a prosecution is still insurable.

The mining and resources sector

This prohibition has not in a technical sense translated to industry specific WHS laws such as those in the mining and resources sector, although we expect this will occur in due course. In any event, due to the frequency of losses experienced in the mining and resources sector and reduced premiums derived in other sectors as a result of these legislative restrictions, statutory liability insurance in the mining and resources sector has been significantly impacted (we understand there are currently less than five insurers offering stand-alone Statutory Liability Policies).

With this limited capacity, affordable statutory liability insurance has become almost impossible. Where is it is available, insurers ‘bookmark’ available capacity for those operational risks deemed as an ‘exception’ (but capacity is finite). Further limits, excesses, and premiums offered have become uncommercial forcing a number of participants in the mining sector to self-insure this risk. Ultimately, a stand-alone Statutory Liability Policy is preferred because of not only its ability to respond and pay defence costs immediately upon a claimable incident occurring but it isolates those costs away from the D&O Liability policy where the full limit of cover can be used for other claims not associated with breaches of the law.

The alternative to a stand-alone Statutory Liability Policy is to use the sub-limits of cover for ‘statutory liability claims’ under the D&O Liability Policy. While the same cover can be purchased, the limits of cover available for the insurers is significantly reduced.

A further downside to this method is that D&O liability insurance operates on an aggregate annual limit (where the limit erodes in the event of a claim), leaving a reduced level of cover for other claims for other types of liabilities under a D&O Liability Policy.

Early engagement is key

With several factors continuing to impact the provision of insurance in the mining and resources industry, we are increasingly seeing directors use early market engagement strategies to secure adequate coverage.

Along with early engagement, we recommend prioritising face to face meetings with the insurers, as this can help to differentiate your risk profile and potentially secure more favourable outcomes.

This is an article from our 2024 Edition of Emerging Issues for the Australian Energy and Resources Industry. To read more from this publication, click here.