Company directors face increased scrutiny from shareholders who are now more aware of their legal rights and better equipped to pursue class actions through litigation funders, insurers say.

“Australia now has a class action environment that is second only to the US in the likelihood and severity of such actions,” AIG Australasia Regional Financial Lines Manager Michael Pryce told insuranceNEWS.com.au.

“With little change in the legal and regulatory framework likely and the political expediency in punishing business and its executives for perceived poor performance, corporate Australia is not likely to see any respite in the foreseeable future.”

Last week law firm Maurice Blackburn announced it is investigating a potential class action against QBE over disclosure obligations.

Litigation funders such as Bentham IMF and International Litigation Funding Partners – which may fund a QBE action – are helping to ensure shareholders can join actions.

Mr Pryce says the Australian directors’ and officers’ insurance (D&O) market is worth about $270 million in premiums, while in the past few years class action settlements have exceeded $300 million a year.

“Insurers need to consider how they underwrite company securities, including pricing, capacity deployment and retentions,” he said.

Axis Specialty Australia National Manager for Professional Lines Jason Mann says there has been “no massive increase” in shareholder class actions, but there is now a greater awareness and acceptance of third-party funding as legitimate in the Australian environment.

He says joining class actions is not a money-making exercise for shareholders.

“Plaintiffs have to have sustained a loss in the first place and they’re unlikely to recoup all their losses via a class action.”

He says funded cases are likely to settle rather than going to judgement, with claims set at a high level initially, partly as a scare tactic.

“Premium rates in the primary-layer D&O market have been eroded in recent years because of a significant increase in capacity.

“The excess markets have taken the brunt of the decrease in rates.”

Zurich’s acting Head of Financial Lines for Australia and New Zealand James Stringer says the number of cases concerning continuous disclosure obligations might not rise, even though shareholders are more aware of their rights and a number of litigators and law firms are prepared to take on actions.

“The potential for a class action may result in a greater emphasis on correct disclosure for listed companies than that which already exists, and therefore may actually result in a potential reduction of such actions,” he told insuranceNEWS.com.au.

Maurice Blackburn class actions spokesman Cameron Scott says such actions are complex to run and win and are not undertaken unless there is a strong case.

Research shows the number of actions has remained steady and modest over many years, contrary to the myth of a rapid increase, he says.

“An unmeritorious claims business model is just completely unsustainable. The integrity of the market is what is pivotal here and most of the participants do a good job on continuous disclosure most of the time. But when they don’t they deserve to come under some scrutiny.”