D&O class action trends in 2022
D&O pricing peaked in late 2021 and since then new capacity has flowed into the market boosting competition and reducing rates with premium increases softening.
Here we discuss the increasing trend of insureds reducing limits and, in some cases, opting against procuring Side C coverage. Some insureds are still struggling to procure adequate and competitively priced coverage including those adversely impacted by COVID-19, with open claims and weak balance sheets.
This last financial year there have been 54 class actions filed, which is down from 64 last year, and is the lowest amount there has been since 2017-18. The most common form of class action this year was shared equally between the securities and consumer sectors at thirteen each.
Change in Government
- Repeal the previous Government’s amendments to continuous disclosure obligations under the Corporations Act lowering the bar for director liability
- Removing licence requirements imposed on litigation funders making it easier to fund litigation in Australia.
Changes to class action funding
The newly elected Government has drafted new regulations to revoke the August 2020 regulations which required operators of litigation funding schemes to hold an Australian financial services license (AFSL) and imposed a general requirement that these litigation schemes be subject to the managed investment scheme (MIS). The Federal Court held that the concept that funded class actions are indistinguishable from managed investment schemes is “plainly wrong”. The new regulations will re-establish the long held exceptions from the need to hold an AFSL and be characterised as an MIS.
Securities claims
Data from leading Australian law firms indicate that 13 securities class actions were filed in 2021/22, up from 8 the previous year but nonetheless sighting a trend of decline over the past 5 years where 22 were filed. Of all class actions filed, securities claims made up less than a quarter of all cases filed compared to almost half in 2016/17.
Furthermore, with only three approved claims settlements and a final judgment in favour of the defendant in one case, there is a suggestion that defendants are now more willing to litigate than settle.
The importance of boards’ continuous disclosure requirements was reaffirmed within this field. In Bonham as Trustee for the Aucham Super Fund v Iluka Resources Ltd [2022] FCA 71, Jagot J highlighted that the established requirement for disclosure of market sensitive information by listed entities – when they become aware of it – refers more to the determination as to whether the entity possessed information which it may have reasonably drawn upon to reach an opinion which ought to have been disclosed. This ultimately resulted in a rejection of the Plaintiff’s claim that a disclosure is simply required when an opinion is ‘actually held’, as there was a lack of evidence that Iluka could be aware of contrary information regarding their sale forecasts.
In Crowley v Worley Limited [2022] FCAFC 33 the Federal Court reiterated that entities can be found to be ‘aware’ of an opinion based on evidence that facts were made known to them which ought reasonably to lead them to the opinion, regardless of whether the entity actually held that opinion.
Changes to the Corporations Act in 2021 under the previous government brought the entities’ states of mind into consideration for these cases. While this amendment has not yet been applied in any decisions, going forward plaintiffs must prove that the entity had knowledge of, or was reckless or negligent regarding information which it is required to disclose; this fault element also applies for class actions relating to deceptive or misleading conduct. However the newly elected government is expected to unwind these amendments paving the way for more class action lawsuits in this space. We may not see any decisions based upon the current state of the law.
ESG and duties of care in climate class actions
While it is likely that there will be an increase in climate related class actions in the future, the establishment of duties of care in this field has not eventuated yet. In saying this, ASICs deputy chairman Sarah Court stated at the Annual Forum in November 2022 that ASIC will closely monitor misleading conduct and claims of greenwashing, a clear indication that ESG risks remain front and centre for regulators. For more on this topic see our recent article here.
Notwithstanding this, the Federal Court ruling in Sharma[1] somewhat eased concern over this as a significant risk. Beach J did, however make it clear that it was open to the High Court to establish new duties of care in future cases where it saw fit.
Currently, there is an ongoing case brought forward by Torres Strait First Nations leaders regarding the claim that the Australian Government has failed to adequately protect the Torres Strait Islanders and their local environment and way of life by not reducing greenhouse gas emissions effectively. It will be interesting to see how this case is decided; particularly in wake of the historic U.N. Human Rights Committee finding that the Islanders’ rights were violated as a result of the climate inaction, which is the first time a country has been found to violate human rights law as a result of climate change inaction. The UN has consequently asked Australia to compensate the people affected and put appropriate measures in place to protect their community and environment. This will undoubtedly support the Torres Strait Islanders’ case.
Employment
Cyber litigation
Australian organisations face increasing frequency and severity of cyber attacks. In May 2022 the Federal Court found an Australian Financial Services Licensee breached the obligations of its licence, to have adequate risk management systems in place, by failing to manage cyber security risk following a number of recurrent cyber incidents. See our article here for further details on this case.
In September and October 2022, two major national companies, Optus and Medibank suffered significant ransomware attacks that resulted in the exposure of millions of individuals’ personally identifiable information. Class actions against Optus and Medibank have already been foreshadowed for breaches of privacy laws and health information.
Cryptocurrency
While only three class actions were filed in this field in the last 12 months, it is a growing space which will likely see the most development amongst the other areas, as has been the case in the US. It is predicted that if proposed cryptocurrency regulations come into place – such as the Digital Assets (Market Regulation) Bill 2022 – the number of cryptocurrency class action cases may rise. To read more about this development see our recent article here.
Outlook for the directors’ and officers’ liability market
The past 12 months has seen an overall softening in insurance market conditions for D&O although savings are very much dependent on individual risks. As a result insureds are taking advantage by reducing their level of cover with some reducing or deciding not to procure Side C coverage given the downward trend in securities actions. It remains to be seen how this will develop if the Federal Government acts on its intentions to unwind the 2021 ‘continuous disclosure’ amendments.
Insurers are increasingly applying insolvency exclusions for companies impacted by economic challenges.
Increased capacity from London at higher layer attachments has moderated overall premiums. We expect premium relief to continue over the remainder of the financial year, ceteris parabus.
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