D&O Insurance: indemnification for civil penalties
In May 2025, the Federal Court of Australia declined to make an order prohibiting a corporate officer from claiming indemnification under their directors and officers (D&O) insurance policy for a civil penalty imposed for contraventions of consumer law.
The claimant under the policy was the chief executive officer of a college that offered online training courses to students across Australia under a government loan scheme. The government paid the college directly and each enrolled student incurred a corresponding debt to the government. The officer oversaw the enrolment and student-management operations of the college.
The college removed key enrolment safeguards that ensured students understood the nature of the courses, their obligations under the loan scheme, and the requirements for online study. It continued receiving government funding in respect of students enrolled through inadequate processes that did not ensure consent or capacity to undertake the courses.
The Australian Competition and Consumer Commission (ACCC) sought civil penalties and a personal payment order preventing the officer from seeking or accepting indemnity under their D&O policy. The policy expressly covered civil penalties, including those imposed under the Competition and Consumer Act, 2010. The ACCC argued that allowing indemnification would eliminate the penalty’s "sting" and undermine deterrence.
The ACCC argued that the court had power to make a personal payment order prohibiting indemnity by implication from the statutory penalty provisions, submitting that the legislation allowed the court to make any order necessary to give practical effect to the penalty regime and to ensure that a penalty imposed on an individual carried its intended deterrent effect.
The officer opposed the non?indemnification order, denied having acted dishonestly or with knowledge that their conduct was unconscionable, and asserted that the personal payment order would be contrary to the purpose of D&O insurance.
The court assumed, without deciding, that such a power exists, but emphasised: D&O insurance plays an important role in ensuring individuals are willing to take up management positions; courts should be slow to interfere with that benefit unless misconduct is wilful, dishonest or otherwise egregious; and deterrence must be balanced against fairness and the underlying purpose of D&O cover.
The court found that although the officer had consciously participated in the conduct, they did not know it was unconscionable or had act dishonestly with intent to cause harm. Therefore, the officer’s conduct did not justify denying the officer indemnity under the D&O policy. The court held further that preventing the officer from indemnity under the D&O policy would undermine the rationale of such insurance to support individuals to act in senior roles without fear that non-wilful errors will expose them to personal liability. Accordingly, the court declined to make the personal payment order sought by the ACCC.
The court imposed a civil penalty of $400,000 on the officer and a three-year disqualification from managing corporations.
This judgment highlights that although D&O policies may extend to civil penalties in some jurisdictions where conduct is not dishonest or wilful, courts may be reluctant to interfere with the contractual right to indemnity.
However, South African law places strict limitations on D&O indemnification. Section?78 of the 2008 Companies Act provides any provision that relieves directors of statutory duties or limits the consequences of wilful misconduct or breach of trust is void, and it bars indemnification for liability arising from fraud, wilful misconduct, acting without authority, or criminal fines. D&O insurance may only respond to liabilities for which indemnification is legally permitted, for example, wrongful negligent conduct.
Section?174 of the Financial Sector Regulation Act of 2017 prohibits any undertaking to indemnify a person for an administrative penalty imposed under any financial services law, rendering such undertakings void and criminalising non?compliance.
D&O policies must therefore comply with applicable law to exclude arrangements that are void or potentially criminal.
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