Ahead of the release this month of an Australian Law Reform Commission (ALRC) inquiry report into class actions and litigation funding, AICD takes a look at insurance claims data for ASX200 firms and the top five claims for directors’ liability insurance.
In the age of #meToo, cybercrime suits, the banking Royal Commission and a rising number of costly class actions, directors and companies in modern boardrooms are now faced with the highest number of potential liabilities ever seen, according to insurance broker Marsh.
“We are in extraordinary times,” says Craig Claughton, Marsh Managing Director and FINPRO Leader (Australia). “The legislative environment here in Australia is onerous for directors and companies.”
After receiving 70 submissions, the ALRC inquiry into Class Action Proceedings and Third-party Litigation Funders is due to report this month. In a discussion paper released in May this year, the ALRC proposed that the Government commission a review of the legal and economic impact of continuous disclosure obligations of listed entities in the context of funded shareholder class actions. The report will also consider the licensing of litigation funders and lifting a prohibition on contingency fee agreements in class actions.
D&O cover costs millions
The current climate of corporate litigation is unprecedented and this is reflected in much higher fines from regulators and significant rises in insurance costs, says Claughton. “Where companies may have spent hundreds of thousands of dollars previously on Directors and Officers (D&O) cover, now they can spend millions,” he says.
This year, Marsh ASX200 clients will outlay $89 million on D&O insurance premiums, up from $62 million last year. “Financial institutions such as banks are now paying significantly higher premiums than they have in the past,” Claughton told Membership Update.. “And other sectors are not far behind.” Since 2011, insurers have paid out more than $1 billion to settle class actions brought against Australian companies, Marsh says in a submission to the ALRC inquiry.
Costs for D&O insurance have skyrocketed over the past few years, surging by 200 per cent in the past two years alone, according to the submission. Since 2011, premium costs for D&O insurance for Marsh’s ASX200 clients have soared by 250 per cent, the submission adds. Marsh brokerage covers 65% of ASX200 companies in Australia for D&O, according to Claughton.
So what are the main corporate transgressions generating the bulk of claims under D&O cover? Here Marsh identifies the top five D&O claims triggers (class actions account for 90 per cent of D&O claims).
- Errors or mis-statements in reporting and disclosure documents – for example in prospectus and other capital-raising documents.
- Company administration – when a company in financial difficulty is sold off or broken up and enters administration (often banks bring legal action).
- Insolvency. When a company goes into insolvency due to financial difficulty, any creditor can bring a legal action.
- Regulatory inquiries and investigations. (Brought by ASIC, APRA or the ACCC)
- Employment practice claims (sexual harassment, wrongful dismissal, failure to promote a worker)
D&O insurance claims can be lodged to recover losses caused by legal action brought against individual directors or the company/organisation. ASIC’S quarterly enforcement report from August this year shows that 22 civil proceedings against directors are currently working their way through the courts in Australia.
“We believe that the D&O market is at a tipping point, and that class action liability and third-party litigation funders are contributing to a situation that has grown increasingly dire,” says the Marsh submission.
“If Australian companies cannot secure sufficient D&O coverage, then they will struggle to attract, retain, and develop capable and experienced directors and officers.”
Australia’s current class actions regime is subjecting companies and ongoing shareholders to unintended consequences and should be reviewed, an AICD submission to the ALRC inquiry says. The submission supports the proposed review of the legal and economic impact of continuous disclosure obligations and provisions relating to misleading and deceptive conduct on listed entities. The AICD also strongly supports introducing a licensing regime for third party litigation funders.
Claughton says preventing corporate lawsuits “starts and stops with governance”. “Recent Royal Commission findings and judgements into various litigation actions show that directors almost need to become quasi-managers. That’s a real gamechanger.”
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