Introduction

Australia is a federation of states and territories bound together by the Australian Constitution. It has an overarching federal system of government with its own courts, although each state and territory within the federation has its own system of government and courts.

Like most countries that formed part of the British Empire, Australia’s system of government is modelled on the Westminster system and an independent judiciary is a central hallmark. Australia’s legal system was also inherited from English common law.

Insurance and reinsurance law are no different; albeit there have been statutory and regulatory modifications, including the enactment of the Insurance Contracts Act 1984 (Cth) (ICA) and the Corporations Act 2001 (Cth). The ICA aims to strike a fair balance between the interests of insureds, insurers and other members of the public, and to ensure that provisions in insurance contracts and the practices of insurers in relation to such contracts operate fairly.

The Australian insurance industry continues to grapple with many evolving challenges and opportunities, such as the following.

• The softening market and increased competition from new entrants.
• The heightened focus and enforcement by the corporate regulator (the Australian Securities and Investments Commission (ASIC)), and the prudential regulator (the Australian Prudential Regulation Authority (APRA)) in relation to misconduct and governance issues. Particularly, ASIC has become very active in prosecuting greenwashing claims and other misleading conduct in the context of ESG considerations.
• The testing economic environment, including successive official interest rate increases and rising inflationary pressures – with the latter contributing to claims inflation for insurers.
• The prevalence of concussion and other head injury claims, as well as historical abuse claims.
• The increasing frequency and severity of data breach and cyber-related claims, which show no sign of abating and will generate new risk exposures beyond traditional cyber-related losses. Coupled with proposed reforms to privacy laws, this will continue to generate significant claims activity going forward.

This article provides a high-level snapshot of some key issues and the likely trends and developments facing industry participants and various lines of business.

Directors and Officers, Professional Indemnity and Financial Institutions

Class actions

Class actions remain an ever-present danger for financial lines insurers when pricing and considering risks, and when managing the subsequent fallout.

While it is fair to say that the rate of new Side C filings is steady, class actions remain an ever-present risk in the Australian litigation landscape. This continues to be fertile ground for new jurisprudence and legislative reform. In particular, a review is underway in relation to the 2021 amendments to the continuous disclosure regime, which were brought in during the COVID-19 pandemic and which raised the bar for shareholders when pursuing such claims. Corporate Australia and the insurance market welcomed those amendments, but it remains to be seen whether the current Labor government will seek to unwind those amendments in response to the advocacy of plaintiff law firms and litigation funders. Otherwise, plaintiff law firms and litigation funders are looking to move into new areas such as ESG, climate, cyber and data breaches. The latter should be facilitated by proposed reforms to privacy laws in Australia being considered by the Federal Government – this is likely to include a new statutory tort for serious invasions of privacy.

A concerning trend has been attempts by plaintiffs seeking to join insurers to litigated claims, even where the indemnity position is not disputed. One such example occurred in the Virgin noteholder class action.

Following the introduction of contingency fees in Victoria, increasingly more class actions are being filed in that jurisdiction. This trend is expected to continue until the other jurisdictions make corresponding legislative changes, thereby encouraging further competition. However, the Full Court of the Federal Court of Australia recently ruled that settlement common fund orders in favour of litigation funders are legally permissible, and this should generate some competition. The next frontier is whether solicitors’ fund orders (which are not dissimilar to contingency fees) are permissible, and this is to be tested in the Blue Sky litigation. New South Wales is likely to remain an unattractive jurisdiction for new class action filings, given that certain authorities prohibit pre-mediation class closure and related orders, unlike other jurisdictions. That said, in the Lendlease class action, the New South Wales Court of Appeal recently considered whether those previous authorities were plainly wrong, and judgment remains reserved.

D&O

As the Australian economy seeks to navigate the challenging economic environment, this is likely to generate more corporate collapses ‒ especially in the construction industry as it faces significant supply chain and labour market shortages. These economic pressures should lead to more insolvent trading claims, as well as pre-litigation investigations and examinations of D&Os (and, for that matter, professional advisers).

The authors’ experience suggests that there has been somewhat of a cultural shift in the willingness of the big corporates defending large-scale Side C claims – indeed, judgment in a securities class action against the Commonwealth Bank of Australia is reserved. In December 2023, two further judgments were delivered in the IOOF/Insignia and Worley Side C class actions in favour of the respondents. Such outcomes ought to strengthen the resolve of defendants and their insurers in defending such claims to trial. However, there have been some significant court-approved settlements, such as the Side C claim against AMP which resolved for AUD110 million.

Corporate wrongdoing

The corporate regulator, ASIC, continues to prosecute corporate wrongdoing and misconduct in a robust manner. Indeed, ASIC has commenced numerous proceedings seeking pecuniary penalty orders, adverse publicity notices and related orders. Of particular note, ASIC has become very active in prosecuting greenwashing and related claims, and in ensuring climate and cyber-related risks are proactively managed by businesses. It has also signalled an intent to target misconduct in the superannuation sector.

With the recent commencement of the new Financial Accountability Regime following the Financial Services Royal Commission, ASIC and APRA will be looking to increase transparency and accountability in financial firms, and to embed a culture of accountability for misconduct at an individual level. This new regime extends beyond the banking sector and applies to other market participants, such as insurance companies and superannuation trustees.

The High Court of Australia also delivered a decision setting out the correct approach for determining penalties for corporate misconduct, which should lead to higher penalties being ordered against offenders.

Professional indemnity

In the professional indemnity space, financial service providers (including financial planners) and their insurers continue to be frustrated with the external dispute resolution process administered by the Australian Financial Complaints Authority. This has also presented capacity challenges for financial planners. Of particular note, the Quality Advice Review has been completed, and the Federal Government is looking to introduce changes to streamline compliance issues for financial planners and to enhance the provision of financial advice services to consumers. Otherwise, it is expected that professional indemnity claims will continue to be filed at the usual rate, but with a particular emphasis on advisers of failed companies and insolvency practitioners in the context of the global and national economic headwinds.

Rising interest rates will naturally generate mortgage stress and potentially expose valuers and lawyers to an increase in claims. Non-compliant cladding claims remain a concern for construction professionals and their insurers, and there have been some legislative reforms that arguably increase the risk profile for insurers. One notable example is a director of a building company, which installed combustible cladding, being ordered to pay an AUD1.1 million damages award against that company.

Life and Personal Insurance

New duty of disclosure

The authors have witnessed significant changes to the applicant’s duty of disclosure regarding the majority of life insurance contracts.

Previously, the insured had a duty to disclose all matters that they or a reasonable person knew to be relevant to the insurer’s decision about whether to accept the risk and, if so, on what terms. After 27 September 2021, applicants for life insurance (and, indeed, all types of “consumer insurance contracts”) were no longer bound by a duty of disclosure.

Instead, customers entering into a consumer insurance contract have a duty “to take reasonable care not to make a misrepresentation”. Whether an insured has complied with this duty must be determined in respect of all the relevant circumstances.

The following matters can be taken into account when determining whether an insured has taken reasonable care not to make a misrepresentation:

• the type of consumer insurance contract in question, and its target market;
• explanatory material or publicity produced or authorised by the insurer;
• how clear ‒ and how specific ‒ any questions asked by the insurer of the insured were;
• how clearly the insurer communicated to the insured the importance of answering those questions and the possible consequences of failing to do so;
• whether or not an agent was acting for the insured; and
• whether the contract was a new contract or was being renewed, extended, varied or reinstated.

Any particular characteristics or circumstances of the insured of which the insurer was aware, or ought reasonably to have been aware, have to be taken into account when determining whether an insured has taken reasonable care not to make a misrepresentation.

Claims handling – a “financial service”

Claims handling services are now subject to the financial services provisions of the Corporations Act. An insurer is now obliged to do all things necessary to ensure that its claims-handling services are provided efficiently, honestly and fairly. This means that, to satisfy this obligation, an insurer will generally need to handle and settle insurance claims:

• in a timely way;
• in the least onerous and intrusive way possible;
• fairly and transparently; and
• in a way that supports consumers, particularly ones who are experiencing vulnerability or financial hardship.

Insurance claims managers ‒ defined as those who carry on a business of handling and settling claims for one or more insurers – are required to obtain a financial services licence. There is generally an associated obligation to provide the services efficiently, honestly and fairly.

The new obligations apply to persons providing claims handling and settling services in relation to any insurance claim made on or after 1 January 2021 that were still ongoing after the transition period ended on 31 December 2021.

New Life Insurance Code of Practice

A new Life Insurance Code of Practice (LICOP), with enhanced consumer protections, came into force on 1 July 2023, and was the first major overhaul of the LICOP since its introduction in 2017.

The changes significantly enhance consumer protections across sales, underwriting and claims. There is a stronger focus on better supporting the increasing number of customers suffering from mental illness, which has further effects on claims, especially in relation to income protection and total and permanent disability. The major enhancements include:

• reduction in insurers’ rights to access a claimant’s clinical notes, at both the underwriting and claims stage;
• no blanket mental health exclusions on new policies; and
• an insurer can only investigate whether the duty of disclosure has been breached if it has “reasonable grounds” to do so.

Cyber

The past 12 months have seen the continuing scourge of ransomware attacks across corporate Australia. For instance, law firm HWL Ebsworth suffered a ransomware attack, and sensitive material from Australia’s biggest banks, federal and state governments, and regulators was dumped on the dark web. Significant client reaction followed. An attack on Latitude Financial saw 14 million client accounts compromised, and class actions followed against the company.

Fallout continued from two historically large attacks on Medibank Private, Australia’s largest health insurer, and on Australia’s second largest telecommunications company, Optus.

In the Medibank attack, the personal and health data of approximately ten million customers was accessed ‒ the vast majority was released by the hackers on the dark web. Medibank estimated its immediate costs associated with the breach at AUD35 million.

Of a similar scale, the attack on Optus obtained access to the personal data of ten million customers, including home addresses and passport and driver’s licence details. Optus initially agreed to meet the costs of the replacement of those identification documents. The company reportedly set aside AUD140 million as an exceptional expense to cover the customer remediation programme.

Over the last 12 months, there have been significant developments in relation to how consumers and shareholders will react to these breaches.

In relation to both breaches, representative (or class-action-like) complaints were made to the Office of the Australian Information Commissioner (OAIC). The OAIC has the power to investigate data breaches and to make awards of compensation in favour of those affected. However, it is not adversarial and does not allow the use of litigation tools such as discovery.

Around the same time, multiple class actions were commenced in the Federal Court seeking compensation for affected clients.

The Court wrestled with the status of these two overlapping processes. Eventually, Medibank and Optus sought injunctions against the OAIC, seeking to restrain it from proceeding with the investigations on the basis that any findings inconsistent with those in a class action could do damage to the public’s view of the Court.

The Court’s decision is pending, but has set the framework, and the forum, for future claims against companies that are the subject of data breaches.

A substantial issue in these actions will be the assessment of any loss suffered by the class members. A general view is that each class member may have suffered nominal damage. There is significant doubt as to whether class members would be entitled to recover damages for distress, frustration or disappointment that does not amount to a recognised psychiatric illness.

These events have sharply focused the attention of insurers, regulators and insureds. Following the attacks, the Federal Government has passed legislation lifting the maximum fines for repeated or serious data breaches from AUD2.2 million for each contravention to:

• AUD50 million;
• three times the value of any benefit obtained from misuse of customer information; or
• 30% of a company’s adjusted turnover in the period at issue.

The government has also significantly increased funding, with an increase of AUD50 million for the OAIC and AUD600 million across a number of projects identified as critical to Australia’s cyber shield.

As part of this new approach, the OAIC has brought civil penalty proceedings against Australian Clinical Labs Limited (ACL) alleging that it failed take reasonable steps to protect personal information from unauthorised access or disclosure in breach of the Privacy Act 1988. The Commissioner alleges that these failures left ACL vulnerable to cyber-attack. The attack resulted in the unauthorised access and exfiltration of the personal and health records of approximately 250,000 individuals. It is asserted that ACL failed to adopt measures sufficient to its circumstances to safeguard the information having regard to its size resources, sensitivity of the information and consequences of a breach. This points to ACL having revenue of almost AUD1 billion in the relevant year, but only setting aside AUD350,000 for cybersecurity.

The growing losses have resulted in changes to the dynamics of the insurance market. There has been a rapid increase in the number of businesses taking up cyber-insurance. At the same time, premiums have increased and there has been a marked decrease in limits. Some capacity has left the market altogether. Further, insurers continuing to write cover are undertaking much more stringent underwriting analysis, including – at times – the employment of third-party cybersecurity consultants to test the durability of a prospective insured’s systems.

Major insurers have publicly discussed the option that payments to ransomware criminals do not form part of the cover offered by them in the future.

Liability

Historical abuse claims continue to trouble insurers and insureds both in awards of damages and duration. The abolition of limitation periods and the significant awarding of damages have led to a surge in these types of claims in 2023. Due to the volume of claims, some jurisdictions have created a new list in lower courts to hear these matters as the higher courts’ capacity is limited, which means that durations of claims are long. Additionally, the courts have indicated to practitioners in this field that they see a growing area in claims for family and friends affected by the abuse to a victim.

The doctrine of vicarious liability continues to be pleaded against entities in abuse matters and employment matters. While there is significant case law to guide lawyers and their insurers, this area is not entirely settled and continues to be a contentious area for courts in 2023.

Liability insurers continue to be involved in workers’ compensation common law claims, particularly where insureds use labour-hire or contractors. There has been an increase in recovery claims by workers’ compensation insurers and self-insurers to recover the ever-increasing costs of workers’ compensation claims in Australia in these matters.

Concussion claims in sport continue to evolve in Australia. There are presently two class actions before the Victorian Supreme Court on behalf of all professional Australian Football League players who suffered concussion-related injuries during training or games. There are also numerous individual personal injury claims by retired players against clubs. These claims are not just limited to professional players.

Property

The cost of property claims involving damage to buildings has increased significantly. This is tied to increase in the costs of construction in Australia generally. There was an escalation in costs following COVID-19, due to supply chain issues and labour shortages. While this has stabilised, the costs are unlikely to go down.

The increased costs post-COVID-19 have caused builders economic distress, which has seen the collapse of building companies in Australia in recent times. There is an increase in request for details of insurance policies to enable claimants to continue or start to pursue their claims against insolvent builders.

Cladding claims continue to increase in all Australian jurisdictions against builders and others involved in the selection and approval of the use of cladding. This is due in part to the lag between the identification of the cladding issue and the rectification. Additionally, there has been a notable new party to claims in Victoria; with the State of Victoria joining litigation to recover money it provided to owners and occupiers to address non-compliance.

Recent and current concerns

There are two main concerns in liability:

• the increase in workers’ compensation recovery claims against related entities; and
• the recent multi-million-dollar awards for general damages in historical abuse matters.

While workers’ compensation recovery claims are nothing new to insurers, there has been a significant increase in claims involving related entities. This is where an insured may employ workers through one company and hold its assets in another. The workers’ compensation insurers now look at the company structure of the employer to see whether there is potential to involve other related entities in the claim. The corollary is that the public liability insurer of the related entity is bought into the claim. The workers’ compensation recovery claims are not limited to one sector – the authors are seeing claims in all the different industries. Underwriters need to look at an insured’s company structure carefully to see whether there is potential for such claims to arise, noting that the limitation period in recovery claims is usually six years from the date of the last payment made to a worker.

There have been two recent jury decisions on general damages in historical abuse matters. The first involved a claim by Adam Kneale against the Western Bulldogs Australian Football Club, and the second involved a claim by TJ (a pseudonym) against the Bishop of the Roman Catholic Diocese of Wagga Wagga.

On 9 November 2023, a jury awarded Mr Kneale general damages of AUD3.25 million; and on 10 November 2023, a jury awarded TJ general damages of AUD1.1 million and exemplary damages of AUD1.3 million. Until these recent decisions, the highest award of general damages in historical abuse matters was AUD525,000 in the matter of Archbishop Comensoli v O’Connor [2023] VSCA 131. In upholding the award for general damages, the Court of Appeal noted that the destructive impact of child sexual abuse is becoming understood.

The high award of exemplary damages in TJ has the potential to create friction between insurers, insureds and their lawyers. Often, policies of insurance exclude exemplary damages because they are punitive rather than compensatory. In TJ, the plaintiff’s counsel advanced its claim for exemplary damages on the basis that there was a prior complaint regarding the priest which was not acted upon, and the failure of the defendant to admit the abuse occurred until just prior to the trial starting.

Marine Law

While the overarching principles governing marine law in Australia are largely settled, a number of decisions in the last year have provided clarity within the marine industry.

Recent amendments to the Competition and Consumer Act 2010 (Cth) (CCA) provided increased protections to consumers, in particular in relation to unfair contract terms. As a result of these amendments, many consignees in both land and sea transport have sought to rely on these amendments to ensure that a recovery is not excluded by the terms of carriage.

The majority of seagoing marine claims in Australia are governed by the Carriage of Goods By Sea Act 1991 (Cth) (COGSA) which gives effect to a modified version of the Hague-Visby Rules governing bills of lading/waybills for cargo being shipped and the associated liabilities that may be imposed on the parties agreeing to the shipment.

The provisions within the COGSA have historically been in favour of the ship owners/shippers, who are the major stakeholders within the marine industry, allowing the ship owners/shippers to contract out of liability.

Charas Constructions Pty Ltd v Megatop Cargo Pty Ltd  (“Charas”) looked at which provisions prevail when the provisions of the CCA and COGSA come into direct conflict.

Charas provided a comprehensive analysis of the application of both the CCA and the COGSA. The court held that Section 18 of the COGSA can override the provisions under the CCA, holding that the COGSA was specific legislation aimed at dealing with liability in international transport which prevailed over the CCA.

As Section 28 of the CCA specifically excludes “a contract for the carriage of goods by ship” when considering the application of unfair contract terms, it appears that the concept of unfair contract terms will not infiltrate the marine industry, at least in Australia, in the near future.

Australian courts have also looked at how liability may be limited in marine claims in the decision of Poralu Marine Australia Pty Ltd v MV Dijksgracht, and the High Court of Australia is currently deliberating as to whether a foreign jurisdiction clause requiring arbitration overseas in Australian marine claims is void.

Due to the ongoing supply chain issues both internationally and throughout Australia, the authors anticipate that there will be significantly more marine claims in the upcoming year, as parties seek to minimise loses and costs in difficult economic times.