Failure to prevent insurance fraud is now a crime

This article was originally published in Insurance POST, December 2023.

Billed as a “game-changer” and providing a significant change in gear in the UK’s fight against corporate crime since the Bribery Act 2010, the Economic Crime and Corporate Transparency Act 2023 received Royal Assent on 26 October 2023.

The Act represents a marked shift in how law enforcement bodies will deal with the scourge of fraud. Although the Act will strengthen anti-money laundering powers and reform Companies House, it is the approach to corporate criminal liability and its amending of the ‘directing mind and will’ test that has many querying how it will affect their businesses.

This includes exposure for their directors and officers and their D&O insurers.

Failure to prevent

The Act introduces a new ‘failure to prevent’ offence, as seen in the Bribery Act 2010 (failure to prevent bribery) and the Criminal Finances Act 2017 (failure to prevent the facilitation of tax evasion).

A relevant body will be liable where an associated person commits a fraud intending to benefit the business. A “relevant body” is a large organisation that meets the Act’s test if it satisfies at least two of the following in the financial year preceding the year of the offence:

• Turnover of more than £36 million.
• Total assets of more than £18 million.
• An average of more than 250 employees.

The Act introduces a statutory defence that a business can deploy if it is charged. It will be a defence for a business to demonstrate that it had “reasonable procedures” in place to prevent fraud, or that it was not reasonable in the circumstances to expect such procedures to be in place. Guidance on what “reasonable procedures” may look like will be published by the Government in due course. This guidance should be carefully scrutinised by businesses and their D&Os.

Directing mind and will

The Act also amends the longstanding directing mind and will test; where responsibility for wrongdoing by certain individuals can be attributed to the corporate.

This has been a historic thorn in the side of many prosecutors as it was seen as unrepresentative of how modern corporates are structured, such that it became difficult to isolate a single individual who was the directing mind and will of the business.

A business, no matter its size, will now be guilty of an offence if a senior manager commits the offence while acting within the actual or apparent scope of their authority.

The Act focusses on the role and responsibility, rather than the relevant individual’s job title, when determining who comes under the umbrella of senior manager.

D&O insurers

There is wide scope for businesses to be held accountable for the criminal conduct of their employees.

Notably, the “associated person” can be based outside of the UK or engaged by a non-UK entity, and still fall within the remit of the Act.

Businesses can therefore seek side C cover under a D&O policy for failure to prevent fraud. Similarly, as claims are also expected to be made against directors and officers or the “associated persons”, more civil claims and/ or criminal prosecutions under side A or B cover are likely.

The increased likelihood of investigations against businesses and their D&Os will lead to more claims for pre-investigation and investigation costs. Important considerations for D&O insurers include:

• The definition of an insured person and whether this does, and is intended to cover, “associated persons.”
• Scrutiny of the conduct exclusion given the absence of any requirement for dishonesty for the offence.

In England and Wales, criminal fines and penalties will still be excluded from cover. Nevertheless, D&O insurers and their policyholders shall wish to consider applicable wordings now in preparation for implementation of the Act in 2024 to 2025.

Read other items in Professions and Financial Lines Brief - March 2024