Discussion Paper: Newly Proposed Sentencing Guidelines
Fines for breaches of health and safety law (including corporate manslaughter) cannot be indemnified by insurance and must be paid by the offending…
Implications for businesses
Fines for breaches of health and safety law (including corporate manslaughter) cannot be indemnified by insurance and must be paid by the offending company/individual. Higher fines tend to attract greater media interest, with further unquantifiable reputational damage. This in turn has an important knock on effect for insurers at every stage of an investigation, which stands to be even more significant now the consultation into the Sentencing Guidelines Council’s long awaited guidelines concluded on 18 February 2015.
A dramatic effect
If implemented (currently anticipated that they will be published in November/December 2015, and will come in to force in March 2016), they are likely to have a dramatic impact on the level of fines imposed on businesses convicted of health and safety or corporate manslaughter offences (or food safety and hygiene offences). For any business with an annual turnover in excess of £50 million the new norm will be fines of millions, rather than thousands, of pounds.
The aim and principles
The stated aim of the proposed guidelines is "to ensure that all sentences are proportionate to the offence committed and in relation to other offences" while following the principle that any fine "should be sufficiently substantial to have a real economic impact which will bring home to both management and shareholders the need to comply with the legislation and achieve a safe environment for workers and members of the public."
The Council makes clear that the starting point for its recommendations is that any fine must reflect: the seriousness of the offence, the culpability of the offender and take into account the financial circumstances of the offender so that it meets, "in a fair and proportionate way, the aims of punishment and deterrence."
For corporate offenders, the guidelines recommend that a number of steps should be followed by the judiciary in determining sentence in each case.
Step 1 - will determine the offence category by looking at culpability and harm factors. In other words how serious is this offence taking account of matters such as the risk it created; how serious was any injury actually suffered; how far short of appropriate standards did the defendant fall, and how widespread was the non-compliance.
Step 2 - will focus on the turnover of the offending organisation to determine a starting point for the appropriate level of fine. It is anticipated that corporate offenders will be required to provide comprehensive accounts for the last three years to enable an assessment to be made of financial status. Normally, only information relating to the convicted organisation before the court will be relevant, "unless it is demonstrated to the court that the resources of a linked organisation are available and can properly be taken into account".
The suggested ranges into which fines will fall (depending on turnover) leads to some alarming results. A ‘large’ organisation is proposed to be one with an annual turnover of £50 million. There are categories for medium, small and micro businesses below this.
An assessment of very high culpability with a high degree of risk created or significant harm actually caused will lead to a ‘large’ organisation looking at a fine on conviction of:
- For corporate manslaughter £4,800,000 to £20,000,000 (starting point - £7,500,000)
- For H&S offences £2,600,000 - £10,000,000 (starting point - £4,000,000)
This is serious for business. Fines by law cannot be insured. Make no mistake, these fines are intended to be punitive. They come straight off the bottom line, as do the prosecution costs which on conviction are also normally ordered to be paid by a convicted defendant (although insurers seem to be indemnifying for prosecution costs more than previously).
Furthermore, if annual turnover of the organisation convicted "very greatly exceeds" £50 million, "it may be necessary to move outside the suggested range to achieve a proportionate sentence". Logically it would seem that a business with an annual turnover of £100 million might expect to receive double these fine bands.
Step 3 - will involve a consideration of whether the fine suggested by steps 1 and 2 is "proportionate to the means of the offender." This will allow the court to take into account:
- The profitability of the business before tax, directors' remuneration, loan accounts and pension provision, and
- The assets of the business
Those factors might push the suggested fine up or down, or might simply lead to the court allowing more time for payment, or for payment by instalments.
Step 4 - suggests other factors will then be considered that may warrant further adjustment of the proposed fine. If the organisation for example is a charitable or public body the fine is likely to be reduced if it can be shown it would have a significant impact on the provision of that organisation's services.
Steps 5 to 9 - broadly set out matters which you would currently expect would form part of any reasonable plea in mitigation to reduce the penalty. This includes such matters as a discount for an early guilty plea, previous good record, and consideration of whether the total sentence is just and proportionate where more than one charge has been brought. There is also encouragement for consideration to be given, for example, to making a compensation order to anyone injured or damaged by the breach. The final step suggests that there is an obligation for the court to give reasons for, and explain the effect of, the sentence on the convicted defendant.
The message of the Sentencing Guidelines Council is therefore clear – they mean business. But what effect will these guidelines (if implemented) have for insurer clients?
Implications for insurers
Given that the stakes for business stand to be very high, we believe that this will result in insurers incurring increased costs because of the additional, potentially expert evidence that may be required in relation to:
- Culpability, risk of harm, cause of harm, and number of people exposed – prosecutors may be less inclined to agree a basis of plea without expert evidence being produced in relation to aforementioned, as they are all key factors which will be taken into consideration when determining sentence; and
- Financial Information - organisations will be required to provide significant financial information to the court, so that an accurate assessment of its financial circumstances can be made. A detailed forensic analysis of an organisation's finances is likely, with an emphasis on director's/partners remuneration/drawings, loan accounts and pension provisions.
We have performed a recent analysis of some of the more straightforward health and safety cases where guilty pleas were entered, which has confirmed the following:
|Case||Circumstances of incident||Fine (1)||Prosecution Costs (2)||Insured Pays (1+2)||Profit Costs (A)||Counsels Fees (B)||Insurer Pays (A+B)|
|HSE v A||Hand injury on timber mill saw||£4,000||£8,911.85 and £15 v/s||£12,926.85||£12,465||£4,000||£16,465|
|HSE v C||Crushed finger in lifting operation||£6,000||£1,514.85 and £200 v/s||£7,714.85||£7,965||£2,708||£10,673|
|HSE v O||Several injured by falling hoarding||£10,000||£13,069.50 and £200 v/s||£23,269.50||£9,533||£4,800||£14,333|
|HSE v CU||Fatal, crushed by tele handler||£80,000||£27,909.10 and £120 v/s||£108,029.10||£36,596||£38,793||£75,389|
In each of these cases, turnover was less than £2m (save for the case of HSE v A), however the Court required that minimal financial information be produced by each defendant, and was satisfied with the submission of abbreviated balance sheets together with confirmation from both Counsel that a basis of plea had been agreed.
In the event that these cases had been brought by the HSE post implementation of the Sentencing Guidelines, then it is highly likely that each defendant would face a significantly higher fine (once full disclosure of financial information had been made, and expert evidence of culpability adduced), and the insurer would incur significantly higher legal costs, because of the requirement to produce additional evidence in relation to: finances, culpability, risk of harm, cause of harm, and number of people exposed to the risk to health and safety that materialised.
To put this into context using the above cases as examples, we would anticipate that both the fine and costs would increase between 20 to 100% as follows:
|Case||Average turnover||Anticipated fine||Anticipated prosecution costs||Insured pays||Anticipated profit costs||Anticipated counsel/expert fees||Insurer pays|
|HSE v A||£20,000,000||£210,000||£10,000||£220,000||£20,000||£10,000||£30,000|
|HSE v C||£2,000,000||£54,000||£4,000||£58,000||£10,000||£5,000||£15,000|
|HSE v O||£400,000||£12,000||£20,000||£32,000||£15,000||£7,000||£22,000|
|HSE v CU||£6,500,000||£130,000||£40,000||£170,000||£45,000||£50,000||£95,000|
The development of the Sentencing Guidelines Council’s Guidelines are a reminder for any organisation, and its insurer, to review its approach to safety management, and to ensure it is supported by robust documentation, to minimise the risk of a health and safety related incident occurring.
When implemented, these guidelines will apply at the time of sentence (and not at the time the incident occurred), so insurers and their clients will also need to make careful and considered tactical decisions about case strategy to ensure minimal impact to the business.