In recent years, D&O underwriters have been hit by a number of high profile securities class actions against their Australian policyholders. Securities class actions are typically covered by “Side-C" D&O cover, which is often bolted on to the more standard Side-A and Side-B covers. Whilst these actions usually settle long before trial, the sums claimed are huge, as are the sums spent in defence costs in advance of settlement.

Australian securities class actions are usually founded on either alleged misleading or deceptive conduct, or a breach of companies’ continuous disclosure obligations. The securities class action regime in Australia has developed such that a breach of these obligations is akin to strict liability – there is no need for a claimant to show he or she relied on the misleading conduct when investing in the company.

Another difficulty for underwriters arising from Australian securities class actions is that, unlike in the US, “opt-in" class actions are allowed. Thus, claimants can decide whether they can opt in to an existing class action, or commence their own action, which in turn can lead to several competing class actions based on the same cause of action.

These features make securities class actions attractive to litigation funders who, due to the likelihood of early settlement, have good prospects of a swift return on their money. Litigation funding is one target of potential reform of the class action market, with the ALRC proposing stricter regulation of funders. They also propose tighter regulation of class action law firms, including prohibiting them from having any financial interest in the litigation funder funding the claim.

The ALRC has also proposed measures for dealing with competing class actions, including requiring all actions to be brought as open (opt-out) class actions, and rules providing that only one competing class action will be permitted to proceed at any one time. It is also investigating measures to ensure a fair distribution of settlements to claimants, as opposed to funders, and one option it is looking at is permitting contingency fee arrangements to ensure solicitors and claimants are aligned. Finally, the ALRC is looking at whether the law on misleading or deceptive conduct and continuous disclosure ought to be subject to statutory reform, given the way it has developed in recent years.