2020 Litigation Forecast - Three risks set to pressure businesses (and directors' insurance) in 2020
2019 brought about several challenges for company directors and officers. The D&O insurance market hardened following a substantial increase in claims in Australia, signs of an increase in the presence of litigation funders in New Zealand, and a rise in the risk and number of class actions and the substantial damages award made against directors in the Mainzeal case.
As a result, insurance premiums have increased dramatically, and some insurers have exited the Australasian D&O market altogether.
Looking ahead to 2020, the following trends are likely to place further pressure on the D&O insurance market:
- Securities class action risk
- Regulatory risks
- Climate change risk
These risks should be front of mind for companies’ risk officers in the year ahead and considered when D&O insurance cover is purchased or renewed.
Securities class action risk
In the last ten years, Australia has seen an increasing number of securities class actions. Sixteen class actions were filed in 2018, up from an average of four per year just a decade earlier.3
A recent article written by our firm’s Andrew Horne, insurance broker Marsh and the Institute of Directors noted the impact of this on insurers’ financial performance and the market:4
The D&O insurance market for publicly listed companies (especially where Company Securities ‘Side C’ cover or Statutory Liability is included) has incurred the greatest scrutiny over the last two to three years. This change has been driven predominately by the impact of Australian securities class action claims on insurers’ financial performance, where the losses incurred greatly outweigh the premium pool available and have done so for several years.
New Zealand is likely to follow this trend
While class actions remain relatively rare in New Zealand, they are on the rise, and may increase further following the Court of Appeal’s decision in Southern Response v Ross that permitted ‘opt-out’ class actions where prospective claimants are deemed to be included in a proceeding unless they expressly opt out of it.
The effect of this decision on the incidence of class actions is not yet clear, as Southern Response has obtained leave to appeal to the Supreme Court (see page 18). However, class actions are nevertheless increasing and expanding to include securities claims.
Directors are likely to be targets. For instance the Supreme Court’s 2018 decision in the Feltex case that a forecast in a company prospectus was untrue permitted a class action to proceed against its directors. Additionally, a law firm and litigation funder is presently building a book for a claim against the former directors of Intueri Education Group Limited.
Effect: Given this, and the trends seen in Australia, we expect to see an increase in securities class actions and a further hardening of the D&O insurance market.
Regulators’ focus on conduct and culture is likely to continue into 2020. The Financial Market Authority (FMA)'s 2019/2020 Corporate Plan identified that it will be following up the Banking Conduct and Culture review and its Life Insurance Conduct and Culture review. The FMA and the Reserve Bank have both made it clear that they will be “expecting to see much deeper accountability of boards, executives and senior managers”.
Effect: Again, this presents an ongoing risk for directors and officers, and the availability of insurance cover.
Climate Change risk
As discussed on page 5, climate change risks are also increasing.
Effect: Directors will need to consider carefully their risk profile for climate change liability. We expect that insurers will increasingly factor in these risks, particularly from a class action perspective, when pricing D&O cover.
Directors and Officers Insurance: Trends and Issues in Turbulent Times (June 2019) at 5.