Insurability of fines: Can companies insure against fines when directors act fraudulently?

Under common law principles, fines are generally not insurable due to public policy. However, the UK Supreme Court case of Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2019] UKSC 50 leaves open the possibility of companies being covered for fines where they are not vicariously liable. This may be particularly relevant for directors & officers’ liability policies with cover the company itself.

General principle: Fines are not insurable

Under common law, regulatory fines are generally uninsurable due to public policy. The rationale is straightforward: allowing companies or individuals to insure against fines would undermine the deterrent effect of such sanctions and run counter to the public interest. If wrongdoers could shift the financial burden of their misconduct to insurers, the punitive and deterrent purposes of regulatory fines would be diminished.

The leading authority on this principle is the UK Court of Appeal’s decision in Safeway v Twigger [2010] EWCA Civ 1472. In this case, the court held that the “illegality principle” barred an insurance claim for fines imposed on the employer. For the illegality principle to apply, there must be some element of “moral turpitude”—that is, conduct involving serious wrongdoing or dishonesty.

However, where fines are imposed on a strict liability basis (i.e. without moral turpitude), such fines may be potentially insurable.

Case law update: Singularis v Daiwa

The UK Supreme Court’s decision in Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2019] UKSC 50 has added nuance to the discussion. In this case, the director and sole beneficial owner of Singularis, Al Sanea, misappropriated company funds by instructing the company’s bank, Daiwa, to make various payments. After Singularis went into liquidation, the liquidators brought a claim against Daiwa for breach of the Quincecare duty of care.

A central issue was whether the director’s fraud should be attributed to the company, which would have barred the company’s claim against Daiwa. The Supreme Court held that attribution is not automatic, it depends on the context and the purpose for which the question arises. Where attributing wrongdoing to the company would defeat the very claim the company seeks to bring—and where the wrongdoer’s interests are adverse to those of the company—attribution will generally not be appropriate.

This means a company should not be prohibited from recovering from third parties when it is not the actual wrongdoer.

Implications for insurability of fines

While fines remain generally uninsurable due to the illegality defence, Singularis v Daiwa suggests that the wrongdoing of a director may not always be attributed to the company. If the company itself has not engaged in morally culpable conduct, it may not be contrary to public policy for it to be insured for fines.

Whether this position will be adopted more broadly remains to be seen. The insurability of fines will also depend on:

• The type of fine and nature of the offence (especially whether the company itself bears any responsibility)
• The wording of the insurance policy, which should be reviewed carefully

Practical considerations

• Policy wording: Companies should scrutinise the language of their insurance policies to determine whether coverage for regulatory fines is expressly excluded or potentially available
• Jurisdictional differences: While this analysis is based on UK law, companies operating in other jurisdictions (such as Hong Kong) should seek local legal advice, as principles may differ
• Regulatory trends: Companies should monitor regulatory developments and case law for further guidance on the insurability of fines

Conclusion

The landscape for insuring regulatory fines is evolving. While public policy continues to restrict coverage for fines arising from serious wrongdoing, recent case law indicates that companies may not always be barred from insurance coverage — particularly where they are not the “real” wrongdoer. Companies should remain vigilant, review their insurance policies and seek legal advice to navigate this complex area.