Shareholder class actions are increasingly common in Australia, making it imperative that companies are sufficiently covered by directors and officers’ (D&O) liability policies, according to XL Catlin and law firm Wotton + Kearney.

A joint paper on the matter says Australia “has developed into arguably the most liberal class action regime in the world”, with shareholder actions seen as the principal cause of losses for D&O insurers.

“A capable D&O insurer is critical when a securities class action occurs,” the paper says.

“There is real benefit for a company and its insurance advisers in building a tripartite relationship with its primary D&O insurers, including both the underwriters and claims personnel.

“While many companies and their advisers focus on the sufficiency of the limits and the breadth of coverage, far too few companies put sufficient time into understanding the capability of their D&O insurer.”

Shareholder lawsuits were first allowed in 1992, but it was only in 2003 that the first decision involving such litigation was handed down.

They accounted for one-third of class actions between June 2014 and last year and are the most significant cause of losses in the D&O market, the paper says.

“There is no doubt that in recent years claims relating to securities class actions have had an adverse impact on the profitability and therefore the sustainability of the D&O class in Australia.

“While there are not as many securities class actions as there are in the US, Australia has developed into arguably the most liberal class action regime in the world.”

The second instalment of the three-part paper, to be released in a few months, will detail the impact of shareholder class actions on the D&O insurance market.