Managing class action risk is well and truly on the corporate radar. Australia is approaching the 25-year anniversary of having a dedicated class action regime to manage mass consumer disputes. In that time, a specialised “class action” industry has developed, fuelled by sophisticated plaintiff law firms and the introduction and rapid expansion of litigation funders into the class action landscape. As class action jurisprudence has matured, so have the strategies for taking aim at specific class action targets and for managing the risk of class action litigation. The implementation of those strategies involves engaging with a range of stakeholders, both internal and external. Important stakeholders in this context are the company’s liability insurers and, in many cases, the response of traditional liability insurance policies has not kept pace with the strategies that have been developed to manage class actions. This can create some complexity in developing and implementing appropriate resolution strategies.
This article examines some of those strategies and issues which are often overlooked in the effective management of insurance coverage issues.
Alternative processes for managing class actions and mass consumer disputes
While some disputes will end up in contested class action litigation, companies are increasingly adopting proactive strategies for resolving mass consumer disputes. In recent years, we have seen the formation of proactive remediation schemes, often with the involvement of plaintiff lawyers, to resolve consumer disputes. For example, the Commonwealth Bank of Australia implemented its Open Advice Review Program which enabled any customer who had received financial advice over a nine-year period to have that advice reviewed. Another example is 7-Eleven which established its own Wage Repayment Program to investigate all claims of underpayment of wages by 7-Eleven franchisees and make appropriate payments to affected employees.
Of course, the resolution of class actions and mass consumer disputes involves the application of huge resources, whether they are the costs of class action litigation or the establishment of private dispute resolution processes. Apart from the substantial costs and expenses of defending class action litigation, the settlement of these disputes can involve payment of large sums, primarily because of the aggregation of a large number of relatively small claims. For example, the amount paid to settle the Victorian bushfires class action was $494.7 million, of which $378.6 million was paid by insurers. Similarly, $200 million was paid to settle the Centro class action, with $38 million being paid by insurers.
These various approaches to managing and resolving class actions have given rise to some unique challenges when engaging with the company’s liability insurers. Given the clear importance of insurance to any strategy to manage and resolve a class action, it is essential that companies at risk of being a class action target, and their insurers, come to terms with these issues and ensure that they have been properly considered and addressed.
Relevant insurance policies
The liability insurance policies relevant to a class action or mass consumer dispute will depend on the nature of the claim.
If the claim is a “mass tort” style claim and involves personal injury or property damage, the relevant insurance policies will be the public/products liability insurance policy (PL insurance).
If the claim is for financial loss, such as a shareholder securities claim, the following policies will be relevant:
- the civil liability or professional indemnity policy (PI insurance); and
- if the claim is also against the board and management, the directors’ and officers’ insurance policy (D&O insurance).
Although other forms of liability insurance may be relevant, this article will focus on some of the key issues that arise under PL, PI and D&O insurance policies when managing and resolving class actions.
Class action issues and insurance coverage considerations
The aggregation of a large number of claims into a class action cohort and the strategies for resolution will give rise to a number of challenging insurance coverage considerations.
Class action issue — notification and disclosure
Class actions will often be preceded by a significant event, for example a financial market fluctuation, flood, bushfire, product recall or regulatory investigation or inquiry.
Policy coverage consideration
It is important for the company to identify early whether the event has the potential to lead to claims and consider how that should be managed in terms of giving notice to liability insurers and making pre-contractual disclosure when arranging or renewing liability insurance.
In some cases, assessing whether liability claims are likely will be easy: for example, where a class action law firm advertises that it is considering a class action or if complaints are made by customers or investors. In other cases, it will be less clear. It might have been difficult for the defendants in the Queensland floods class action to anticipate a class action immediately following the floods, but that undoubtedly appeared more likely when residents’ groups appeared at the Commission of Inquiry.
Notification under the PL policy is a matter of policy compliance. As the PL policy is an “occurrence based” policy, it will be triggered at the time of the occurrence which causes personal injury or property damage, even if the claim is not made for many years later. Failure to give notice of an occurrence which may lead to claims against the insured will generally, without more, not give the insurer a right to refuse to pay a claim or reduce its liability to the insured. The insurer will need to establish that it has suffered prejudice and the extent of that prejudice, by reason of the failure to notify or late notification.
In comparison, a failure to make pre-contractual disclosure of an occurrence that may lead to claims covered by the PL policy may give the insurer remedies in respect of the following PL policy: if the insurer can establish that it would not have entered into the policy or that it would have charged a higher premium or imposed different terms.
The issue of notification is more critical for PI/D&O policies as they primarily operate on a “claims made” basis, in that they are triggered at the time the claim is made against the insured, rather than when the events giving rise to the claim occur. The exception is where the policy can be triggered before a claim is made against the insured if the insured becomes aware of facts that might give rise to a claim and notifies the insurer of those facts before the policy expires.
If an insured under a PI/D&O policy fails to comprehensively notify an event that may give rise to claims and does not make adequate pre-contractual disclosure, the insured is at risk of not being covered for subsequent claims. The insurer of the policies at the time the events occurred will not be liable as they were not notified of the potential for claims; the insurer at the time the claims are made may be able to avoid liability for pre-contractual non-disclosure by the insured.
What’s the solution?
It is simple, but requires very careful attention to these issues both before an event occurs and at the time the events unfold.
First, for all relevant liability insurance, it is essential that when an event occurs that may give rise to claims, the company must carefully consider its liability insurance and ensure that it comprehensively notifies its insurers of all potential claims that may eventuate.
A bland “shopping list” or “blanket” notification will not be adequate. The notification needs to be carefully developed and articulated, especially to trigger cover under the PI and D&O policies before a claim is made.
Second, any notification needs to be updated before the relevant policy expires and disclosed to any proposed insurers as part of any insurance renewal, with full disclosure of all new circumstances in order to comply with an insured’s pre-contractual duty of disclosure.
Finally, in the case of PI and D&O policies, the company should review its policies and ensure that the policies contain either or both of:
- a “continuous cover” clause which may provide some protection in the event of any inadequate notification or non-disclosure; and
- a “deemed claim/circumstances notification” clause which is a contractual right to trigger the policy before a claim is made by notification to the insurer of a potential claim.
Class action issue — pre-claim remediation
The events which give rise to class action risk will often involve significant reputational risk and pressure from regulators to remediate customers and minimise the risk of class action litigation.
An example of this was a post-GFC financial loss event involving a fund in respect of which Standard Life was the trustee. Rather than waiting for fund members to make claims and establish liability through litigation, Standard Life sought to mitigate claims by paying $100 million back into the fund to compensate members for the loss of value of the fund by reason of alleged breaches of the investment mandate and by setting up a private dispute resolution process to resolve any claims that payment did not resolve.
Policy coverage consideration
The issues that will arise here for standard form PI and D&O policies are that they require:
- a “claim” against the insured to trigger the policy;
- a civil liability to a third party by reason of that claim;
- the insurer’s written consent to the insured incurring any claim defence costs; and
- the insurer’s written consent to any payment to, or settlement with, the third party claimant.
In high-profile claims, like the Standard Life example, it will often be impractical and regulators will not wait for all these things to occur if the appropriate way to resolve the crisis is to proactively remediate like Standard Life did.
What’s the solution?
It depends on whether, like the Standard Life PI policy, your PI/D&O policies contain a “mitigation extension”.
This clause expressly authorised Standard Life to take proactive action to mitigate the potential for a claim to arise if an event occurred which was likely to lead to claims. This removed the usual requirements for a claim to be made against the insured before the policy was triggered and it allowed Standard Life to resolve claims without needing its liability to be established by a court. Not surprisingly, such clauses invariably require that any mitigation payment should be reasonable, having regard to the liability that the insured would be exposed to if the claim was made and determined by a court.
If your policy does not include a mitigation extension, you will need to carefully review the policy terms to assess whether you can implement such a remediation process without the written consent of the company’s insurers. The risk is that the insurance may not respond if the process you put in place means that you do not meet the fundamental requirements of the policy, but had you allowed the claims to develop in the ordinary way, the policy would have responded.
In either case, as the liability insurer will be a key stakeholder in any remediation process, it is essential that the company carefully ensures compliance with policy terms. Where that is not practical or insurer consent cannot be obtained, the company needs to ensure that the non-compliance does not negate insurance coverage that would otherwise have been available. This requires everyone within the company who is involved in the remediation, including executive management, in-house counsel, and the risk and insurance manager, to work closely together and with external counsel to ensure that the liability insurance issues are being carefully managed.
Class action issue — high volume, small value claims
One of the reasons for the introduction of the class action regime was to enhance access to justice by providing a mechanism which made it viable for the court to determine a large number of small claims. Consequently, the kinds of claims that give rise to class action risk will often involve a large number of small value claims.
Policy coverage consideration
The key policy coverage issue unique to class actions is that it is essential that the liability insurance contains an aggregation clause which aggregates the excess payable. If each claim made is treated as a separate claim for the purposes of the application of the excess, no claim may be large enough to exceed the excess, so the policy will not respond to the class action even though the aggregate amount claimed is substantial. For instance, if the liability policy contains a deductible of $10,000 and the class action covers 1000 claims each for $7500, unless the excess is aggregated so that only one excess applies, the liability policy will not provide any cover.
What’s the solution?
It’s to ensure that the policy contains a clause that broadly aggregates all such claims for the purposes of the application of the excess (and not for the application of the limit/sum insured), so that only one excess applies in respect of all claims arising from or connected with the same original source or cause, or related series of original sources or causes. In the above example, this would make the difference between no cover and securing cover for liability of $7,490,000 and the costs of defending the class action. Careful review of the policy terms is required to ensure that the aggregation clause works in a class action context.
Class action issue — control of proceedings
The value at risk means that the events which give rise to class action risk are typically expensive to investigate and respond to and, if a class action is commenced, the defence of the claim will usually be technical, complex and expensive. The company will want to select the legal team which conducts the defence of the litigation to ensure that it has the best defence. This issue is especially acute with class actions because there are only a small number of law firms and counsel that have adequate class action expertise.
Policy coverage consideration
It is common for liability policies to provide that the insurer has control of the conduct of the defence and it has the right to select the defence team. This can place the company in a vulnerable position as it may have no say in ensuring that the lawyers appointed to conduct the defence have the appropriate expertise.
What’s the solution?
The company must proactively identify, as part of the negotiation of the terms of its liability insurance, which law firm on the company’s own panel (or outside its panel) has the required class action expertise and to seek the insurer’s agreement to that firm acting as defence counsel and to that firm’s rates and charges. It is too late to do this when the class action has been commenced or threatened and, in that event, if the insurer allows the company to select its preferred lawyers, it will likely be on the condition that the company pays any rates differential between the selected lawyers and the insurer’s (usually low) panel law firm rates.
Managing class action risk in the future
The fast pace of the development of class actions and the strategies for managing and avoiding class action litigation have not been matched by the development of liability insurance policies to meet the buyer’s needs. In-house counsel need to work with their insurance team to do the following:
- review the company’s liability insurance policies to ensure that they have been modified to meet the special requirements necessary to manage class action litigation, including:
- continuous cover protection;
- “deemed claims” clause;
- mitigation extension (which should not be sub-limited);
- broad excess aggregation; and
- preferred defence counsel with agreed rates/charges embedded in the policies.
- when an event occurs that may lead to claims, develop a very carefully considered and effective notification to insurers;
- consider whether the liability policies allow for “pre-claim” remediation when assessing the viability and effectiveness of a proposed remediation process;
- ensure that all within the team managing the class action understand the importance of the company’s insurers as a stakeholder and carefully manage the engagement with insurers to maximise recovery under the liability policies; and
- before an event occurs, identify your class action defence team and ensure that it includes class action defence and class action insurance expertise.
This article was first published in Inhouse Counsel, Vol 20 No 8, October 2016.
 AusNet Services “Settlement of Kilmore East bushfire class action (subject to court approval)” ASX & SGX-ST release (15 July 2014).Back to article
 CNPR Group “Conditional settlement of class actions” ASX media release (10 May 2012).Back to article
 For example, the Victorian bushfires class action or the Queensland floods class action: see above n 1 and Maurice Blackburn Lawyers, Queensland Floods Class Action, 2016, at www.mauriceblackburn.com.au.Back to article
 For example, environmental liability insurance if an environmental event or cyber liability insurance if the claim involves a cyber-attack.Back to article
 R Deutrom, Oakey water contamination: residents say they won’t stop fighting, 6 August 2016, at www.couriermail.com.au.Back to article
 This might include the potential for a regulatory inquiry or commission of inquiry as it is not uncommon for these policies to provide cover for legal representation costs.Back to article
 F Hawke “Managing the risk of insurance” (2003) 22 Australian Resources and Energy Law Journal 168.Back to article
 Although these clauses can still be negotiated, they are less common following the High Court decision in FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641;  HCA 38.Back to article
 Standard Life Assurance Ltd v Ace European Group  EWHC 104 (Comm) and Standard Life Assurance Ltd v Ace European Group  1 All ER (Comm) 1371;  EWCA Civ 1713.Back to article
 See CGU Insurance Ltd v AMP Financial Planning Pty Ltd (2007) 235 CLR 1;  HCA 36.Back to article
 See Re Morgan; Brighton Hall Pty Ltd (in liq) (2013) 96 ACSR 232;  FCA 970.Back to article
 To be contrasted with a clause that only aggregates claims if they arise from the “same act, error or omission”.Back to article