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Class actions: no reprieve for D&O insurers

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The threat of five class actions against AMP and recent reports from Aon and Marsh have shown that challenges in the directors’ and officers’ (D&O) market will not be dealt with soon.

Take the example of AMP. Its shares dived after a dire week at the Hayne royal commission, where it was revealed the company unfairly charged service fees and executives had lied and provided misleading information to regulators for years.

The financial group’s chairman, CEO and general counsel have since departed, three other board members have announced their exits and the company’s share price has continued to languish.

The revelations and their fallout were clearly such fertile ground for class actions that the record five suits come as almost no surprise.

Slater & Gordon, in calling for expressions of interest, said litigation funder Therium had slashed its commission to just 10% of net recoveries, throwing down the gauntlet as the various law firms jostled to represent shareholder claimants.

The royal commission has some way to run before it provides a final report by February, in an environment of increased financial services scrutiny.

Investigations and regulatory action regarding add-on policies in general insurance have also prompted a potential class action, with Bannister Law calling for expressions of interest.

A recent Aon Insights paper says there are about 20 open class actions, excluding multiple actions, and class action settlements by listed companies totalled $1.74 billion last year. Marsh puts the number of open actions at 16.

The latest class action flurry comes as the D&O market grapples with increased claims activity that has emerged in recent years, particularly when it comes to Side-C cover typically purchased by publicly listed companies.

Marsh warns the number of D&O claims is now exceeding the premium pool by a significant margin, and some insurers are leaving the market.

Premiums have surged by 200% in the past 12-18 months as class action payouts have soared, according to a review by law firm King & Wood Mallesons. Market participants and analysts suggest further rises are needed.

“Upward premium pressure is expected to continue unimpeded until tempered by competitive forces,” Aon says.

Class actions became part of Australia’s litigation landscape more than 26 years ago, but took some time to start making an impact. They debuted in the federal jurisdiction before states followed. Six class actions were filed in 1992, and the first securities class actions emerged in 1999.

They were given fresh momentum when a High Court judgement in 2006 cleared the way for litigation funding of cases, a review by General Re says.

More than 15 litigation funders are now involved in Australia, and almost half the class actions in recent times are related to securities, financial products and investments.

Class actions are designed to improve access to justice for individuals who may otherwise lack the resources to pursue cases. They have also been acknowledged for putting the heat on companies to improve governance.

Criticisms include that litigation funding commissions are too large, multiple actions take up company time and resources, the growth of actions is an unintended consequence of Australian sharemarket continuous disclosure obligations, and the impact can be detrimental to shareholders still on the register.

Gen Re says the Australian regime has been labelled one of the most liberal in the world. The onus to establish that threshold requirements are met is placed on the defendant, rather than those initiating the action. Requirements include that a minimum of seven people have the same claim.

The Australian Law Reform Commission has released a discussion paper querying whether the Commonwealth should regulate class action proceedings and third-party litigation funders. It will report to the Government by December.

The Australian Institute of Company Directors says licensing and prudential supervision of litigation funders would improve the class action environment, with current “light touch regulation” offering inadequate protection.

“Fixing this is in the interests of all stakeholders, including shareholders, companies and customers. The ALRC’s paper is an important step towards sensible reform,” CEO Angus Armour says.

The Victorian Law Reform Commission has also been examining issues related to the actions, conflicts of interest and other matters.

Recommendations from the reform commissions may lead to some changes, but Gen Re says all stakeholders consider class actions a valuable tool in the legal environment, with no group seeing any reason to abandon a regime that has served the community well since its inception.

“Insurers and reinsurers that write policies that would respond to class actions should price for the fact class actions are here to stay and will continue to be a feature of the Australian litigation landscape,” the reinsurer says.