The Insurability of Regulatory Fines and the Doctrine of Ex Turpi Causa

As companies are increasingly subject to an evolving regulatory and compliance landscape, including in areas such as ESG, data protection and finance, the question of whether a company can be indemnified for regulatory fines under its insurance policies is particularly pertinent.

Risks of this nature may be expressly excluded in a policy or a regulator may have rules governing the insurability of fines imposed on regulated entities within its remit. However, there is no general prohibition on such coverage in Ireland. In some instances, a policy may provide coverage of this type but only “to the extent insurable by law”. A policyholder could, therefore, be exposed to the risk if the coverage is deemed to be unenforceable on account of the prevailing law in the relevant jurisdiction.

In the UK, the ‘illegality defence’, which prevents a person from relying on illegal conduct to ground an action against another person, has evolved in recent years to take a more pragmatic approach of balancing public policy considerations with the need for proportionality. In Ireland, the insurability of fines arising from regulatory breaches has not been considered by the courts but caselaw points to the public policy considerations of the regulatory provision in question being of particular relevance.   

The Approach in England and Wales  

Public policy has long been the predominant consideration in terms of the approach adopted in England and Wales, with companies being unable to recover sums under their insurance policies where it was seen as facilitating the evasion of a legal penalty.

The Financial Conduct Authority (FCA) in the UK expressly prohibits regulated entities from insuring against fines which it imposes, while the courts have applied the legal doctrine of ex turpi causa, a principle which prevents a claimant from pursuing legal remedies in order to recover or benefit as a result of their own illegal acts. This has been utilised by the courts, not only in cases of criminal illegality, but also in respect of companies seeking indemnity for fines relating to certain regulatory offences, so as not to negate the deterrent effect of the penalty imposed.

In Safeway v Twigger [2010] EWCA Civ 1472, companies in the Safeway Group sought indemnity from former employees, including directors, in relation to a penalty imposed by the Office of Fair Trading in the UK following an investigation into collusion on the retail price of dairy products.

The Court of Appeal held that the principle of ex turpi causa applied in this case as the purpose of the relevant competition legislation would be undermined if the liability could pass to an undertaking’s employees, or the employees’ D & O insurers. Therefore, the court held that the former employees were not required to indemnify the companies.  

The High Court had held that for the principle to apply there must be an element of ‘moral turpitude’ involved in the relevant conduct, which would suggest that breaches of a regulatory regime that do not involve culpable wrongdoing by the company might be treated differently.

The illegality defence and its interaction with public policy was considered by the UK Supreme Court in Patel v Mirza [2016] UKSC 42 and here the court adopted a “range of factors” approach, allowing for a greater degree of flexibility in determining whether a claim involving illegality can succeed. The court held that the claimant was entitled to be repaid funds that he had provided to the defendant in a failed attempt to benefit from insider trading.

In considering whether a claimant could successfully seek relief despite illegal conduct, the UK Supreme Court referred to the requirement to consider the underlying purpose of the relevant law that had been breached, any other relevant public policies which may be rendered less effective if the relief is granted and the need for proportionality. In order to avoid any such disproportionate result, the court identified a number of factors to be considered when determining whether to refuse relief on the grounds of public policy, including:.

• the seriousness of the conduct;

• its centrality to the contract;

• whether it was intentional; and

• whether there was marked disparity in the parties' respective culpability.

As such, the courts in England and Wales have not adopted a blanket approach in matters of public policy and illegality. In Saunders v Edwards [1987] 1 WLR 1116, the court opined that it should adopt a pragmatic approach and that:

“it is unacceptable that the court should, on the first indication of unlawfulness affecting any aspect of a transaction, draw up its skirts and refuse all assistance to the plaintiff, no matter how serious his loss nor how disproportionate his loss to the unlawfulness of his conduct”.

The courts have also had to consider what type of illegal acts are subject to the ex turpi causa principle. While cases involving criminal illegality are more typical of the doctrine, the position in respect of regulatory offences, which can vary considerably, can be more ambiguous. 

In Les Laboratoires Servier & anor v Apotex Inc [2014] UKSC 55, the UK Supreme Court, in a case involving patent infringement, held that in addition to criminal offences, a limited category of acts, which it described as "quasi-criminal", were also subject to the ex turpi causa principle. These include the infringement of statutory rules enacted for the protection of the public interest, which attract civil sanctions of a penal character, such as competition law. This is in contrast to most torts, breaches of contract and other civil wrongs.  

Ireland

The Irish courts have not considered the principle of ex turpi causa in the context of indemnity for regulatory penalties. However, the Supreme Court, in Quinn v Irish Bank Resolution Corporation Limited (In Special Liquidation) & Others [2015] IESC 29, a case which involved a claim that banking guarantees were invalid on account of company law breaches, considered the doctrine in the context of what it noted to be the exceptional expansion of regulation by statute. The court acknowledged that a strict rule of unenforceability where there has been illegal conduct has in the past been justified as a matter of public policy (e.g. to deter illegality). However, it observed that there is the potential for injustice if the courts apply this rule to all cases where there is a breach of a regulatory regime, noting that very many regulatory regimes create technical offences for a whole range of activities.

The Supreme Court went on to state that it may be necessary for courts to assess, in the context of each relevant statutory provision, the policy requirements of that statute and once it has determined that the public policy reasons for a particular statute require the ex turpi causa principle to be applied, no assessment of the merits of the individual case will follow. The consequences, in terms of possible injustice, “lie where they fall”. While the court was not dealing with the insurability of regulatory fines, this judgment would suggest that the courts will look at whether the public policy reasons for the underlying offence would be undermined by allowing coverage. 

Conclusion

Given the number of variables involved in considering statutory regulatory fines, a ‘one size fits all’ approach in terms of insurability would be difficult to impose and that is before issues such as conduct and culpability are considered. The number of ways in which a company might be in breach of some element of a regulatory regime is considerable and can range from the minor and technical to the substantive and serious.

The need for flexibility has been recognised in England and Wales where public policy considerations are of fundamental importance but declinature of coverage does not necessarily follow. In Ireland, there has been no determination that coverage of a fine arising from a regulatory breach is impermissible by its nature, while the Irish Supreme Court has indicated that the ex turpi causa principle is not absolute. It would appear, however, that the  public policy reasons for a particular statutory provision will be a key focus in any judicial consideration of the issue.

Policyholders and insureds should be aware of any express exclusions in their policies or any conditions imposed by a particular regulator, which would prevent cover regardless of the issues discussed in this article, while any queries in respect of coverage that is in place might helpfully be discussed with the relevant insurance broker.