The insurability of regulatory fines and penalties – an Asian snapshot

As regulatory and criminal investigations into companies and individuals continue apace across the globe, so does the exposure of those involved, and their insurers. Whether fines and penalties are insurable is a complicated issue in many jurisdictions. Focusing on Asia in this article, we set out below a snapshot of the current position in China, Hong Kong, Malaysia, Singapore and India. For reasons of public policy and to prevent a party gaining from their wrongdoing by transferring their penalty to their insurers, the approach is, generally, that coverage is not available for intentional wrongdoing. However, strict liability and negligence remain unchartered territories for insurers. That said, this broad consensus is subject to variations and, in many instances, the law is still developing. Indeed, this issue is likely to be the subject of further attention by the courts and legislature in the near future, given the increasing prevalence of significant fines and penalties in relatively new contexts, such as following breaches of data protection laws, which may lead to claims being made under cyber policies. China As a general rule, a claimant will be unable to pursue a legal remedy if it arises in connection with their own illegal act. Pursuant to Article 65 Paragraph 4 of the Insurance Law of the People's Republic of China, 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 a civil liability, not a fine or penalty for administrative or criminal wrongdoing. In 2006, the China Insurance Regulatory Commission (the CIRC) issued a commentary response in relation to the terms of a guarantee insurance. The subject matter of the guarantee insurance is "fines and other customs taxes and penalties caused by late payment on part of the insured in violation of relevant laws and regulations". The CIRC advised that, under such an insurance policy, the underwriter is insuring the illegal liability of the insured, which is contrary to the principles of guarantee insurance. The CIRC further advised that, considering the current legal environment and socioeconomic development in China, it is not appropriate for insurance companies to develop and operate such insurance policies. There are currently no insurance policies that cover administrative fines or penalties in the Chinese insurance market, with policies from several well-known Chinese insurance companies expressly excluding fines, penalties and punitive damages. Hong Kong There is no express prohibition in Hong Kong legislation against providing cover for regulatory fines or penalties. It is, however, contrary to common law principles. There has not been any Hong Kong case law which sets out a precedent as to whether regulatory fines and penalties can be insured. Section 468(4) of the new Companies Ordinance, which came into force on 3 March 2014, confirms that a company can purchase insurance for its directors. Indeed, listed companies should do so, or explain why not, in their annual reports. What the legislation does not address, however, is the extent to which such insurance can cover fines and penalties. Hong Kong is a common-law jurisdiction and relies on English law principles for guidance. It is anticipated that the Hong Kong courts will follow the UK decision of Safeway v Twigger (2010) and prohibit insurance of criminal fines or civil fines where there is morally reprehensible conduct involved. This is on the basis of public policy that it would dilute the deterrent effect of a fine if it resulted in no personal payment by the wrongdoing individual. Conversely, if the fine is imposed because a company is vicariously liable for the acts of its employees or is strictly liable or has committed an "innocent" breach of legislation, it is possible that the fine may be recoverable, if there is available insurance which responds. 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 which 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 also refer to the UK Court of Appeal’s decision in Safeway v Twigger (2010) 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 Latin maxim of ex turpi causa non oritur actio, which essentially means that a right cannot arise from a wrong, is accepted and widely applied by the Malaysian courts, in both civil and criminal proceedings. 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 which commonly arise from misconduct or an illegal act are generally not insurable under Malaysian law. Singapore It is currently an open question in Singapore whether, and to what extent, fines and penalties are insurable. The Singapore courts have recognised and applied the doctrine of ex turpi causa non oritur actio, 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 English 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. India In India, there is very limited jurisprudence on the insurability of fines and penalties, partly because of the minimal fines and penalties prescribed by earlier statutes. Generally, unscrupulous behaviour resulting in the imposition of fines, penalties or punitive damages is not covered based on the concept of public policy, which does not have a clear definition. In India, the few insurers offering coverage for civil fines and penalties include the caveat "if permissible under law". 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 wilful 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. Contributed by James Cooper, partner, Clyde & Co

The insurability of regulatory fines and penalties – an Asian snapshot

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