After many years of ‘soft market’ conditions, the 2017 D&O market in Australia has shown increasing wariness in underwriting side-C cover, with some insurers no longer providing terms, or many remaining active, seeking to impose dramatically increased premium rates.

A key factor in side-C wariness is insurer’s increased exposure to securities class actions. This year saw the 25th anniversary of the introduction of the Federal class action regime in Australia, and with more than 25 federal class actions filed in its 25th year, this continues to be the jurisdiction of choice for major securities class actions. These cases are commonly large in quantum or class member sizes, as shown by the recent shareholder claim against Bellamy’s Australia Limited and the close to resolution claim against Slater & Gordon. The shareholder class action against the Commonwealth Bank of Australia will be the next major cab off the rank.

From 2011 onwards, we have also seen evidence of an increase in the frequency of securities class actions[1]. The vast majority of those are resolved through the payment of multimillion dollar settlements, and it is reported that D&O insurers are wearing the major share of these (now averaging $40 million, including defence costs).

Historically, the main drivers of securities class actions have been:

  • shareholder activism promoted by plaintiff law firms
  • the increasing role and prevalence of litigation funders
  • the resourcing and enforcement priorities of the regulators.

There is little to suggest that these factors will diminish in the coming years. Litigation funders, and those stakeholders that benefit from their involvement, will be buoyed by the recent decision of Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited [2016] FCAFC 148, approving the conduct of class actions on a ‘common fund’ basis. In addition, ASIC’s key strategic priorities for 2017 and 2018 - including technology, risk and resilience, conduct, and effective capital markets[2] - will guarantee its continued role in enlivening potential litigants to possible claims.

Indeed, there may be further pressures on the D&O insurance market in 2018 and the years to come. This year, the Supreme Court of Queensland introduced its class action regime for the State based court, providing an additional forum and process available for Queensland based class actions. The key features of the regime include:

  • there must be seven or more members of the group
  • the claim must be brought by a single representative on behalf of all members of the group
  • the claim must arise out of similar circumstances and raise a substantial common issue of law or fact
  • the consent of a person to be a group member is not required, although all group members must be notified of the action and their right to ‘opt out’.

Further, the Federal Government’s recently announced Royal Commission into Misconduct in the Banking, Superannuation and Financial Services will be closely monitored by the banks, general and life insurers, AFS license holders and superannuation funds, as well as those who may seek to claim against them.

Finally, the Federal Government’s data breach notification regime will also come into effect from 22 February 2018. This will require organisations covered by the Privacy Act 1988 (Cth) to notify the Australian Information Commissioner and any individuals likely to be at risk of serious harm by a data breach. The new regime, coupled with the increasing prevalence of data breaches, means that directors and officers could be the target of individuals (including shareholders and as part of a class action) who have been harmed by a data breach purportedly as a result a director’s failure to exercise care and diligence in relation to the effective operation of the company’s cyber systems. This has been the experience in the United States, including the high profile case against Target.

As the foregoing demonstrates, pressures on the D&O insurance market (and particularly side-C exposure) continue to be present, and many insurers are responding by temporarily withdrawing from this corner of the market or by significantly increasing premium rates. In some cases, premium increases of 300% (or more) over 2016 renewal rates have been reported. It is expected that even higher premium increases will be required, given some reports that the quantum of recent losses has exceeded the total premium pool by more than 600%.

Against this background, it seems inevitable that insurers will continue to closely scrutinise their side-C risks into 2018 (including the decision of whether to insure them at all) and, where possible, continue to increase their premiums to bring their loss ratios to more acceptable levels.