Public and product liability sector class actions in Australia raise complex issues for insurers, with manufacturing and utilities at high risk.
Currently, new trends are emerging around climate and environment-related challenges, and the third-party funding market continues to undergo changes in dynamics, especially since Victoria allowed for the use of contingency fees in 2020.
‘Forever chemicals, of which Perfluoroalkyl and Polyfluoroalkyl Substances (PFAS) are currently considered the most significant, are emerging as a key environmental challenge that may present new exposure for insurers. A class of man-made toxins, PFAS is found in everything from cookware to cosmetics and drinking water.
In the US, for example, PFAS litigation has been increasing since DuPont’s 2011 settlement of 3,500 cases for approximately US$670 million. In Australia, the Federal Government last year reached a A$132.7 million class action settlement with landowners over PFAS contamination from firefighting foam.
Funders look for new focus areas
Gareth Horne, Partner at law firm Clyde & Co, says there has been a shift away from more traditional areas like securities class actions in the past five years due to regulatory change and the emerging landscape following Australia’s Banking Royal Commission.
Horne notes that litigation funders and plaintiff firms had sought to invest in COVID business interruption, but that has “fallen flat off the back of the insurance industry’s test cases and the recent declassing of COVID business interruption claims in the Federal Court”.
“As a result, funders and plaintiff firms have been taking stock of new areas of focus, with particular attention being placed on areas such as employment, public interest and casualty lines,” Horne says.
Within the casualty space, Horne anticipates continued growth in claims related to consumer and medical products, which have long been an area of focus for litigation funders.
“With the growing awareness of climate-related challenges, we also expect to see growth in claims associated with environmental risks,” he says.
“This can manifest in a number of ways, including through major catastrophe events and environmental liability including contamination. This includes a specific concern, for example, about the unknown consequences of PFAS use.
“Beyond the casualty sphere, climate awareness also has the potential to see an increase in ESG and climate disclosure-related class actions,” says Horne.
No cover for ESG and cyber-related exposures
Susie Amos, Principal at strategic analytics firm Finity, also expects ESG-related actions to rise substantially, along with cyber-related actions. However, she notes that most general public and product liability insurance policies are not likely to cover these exposures.
“Cyber insurance policies are designed specifically for privacy related breaches and other cyber liability and ESG is more likely to be covered by professional lines insurance” Amos says.
She says the past decade has been dominated by product liability actions against car and healthcare manufacturers.
“We also saw environmental liability actions increase, as well as some of the largest class actions arising from bushfires and flooding events hitting utility companies. In addition, we are starting to see arise in actions towards the government for discrimination, pollution, lost revenue etc.
“The next 10 years will probably see these types of actions continue and Australia is likely to follow the US with litigation related to forever chemicals such as PFAS,” adds Amos.
“This has the potential to hit the industry hard, although a lot of risk could lie with the government.”
Future of third-party litigation funding
With the growth and complexity of class actions in Australia, the mechanisms to funding them also developed.
Third-party litigation funding, where a third party with no connection to a litigation finance some or all a party's legal costs in return for a share of any proceeds, has enabled claims to be pursued by plaintiffs without the financial burden of upfront legal costs.
In 2019, the Australian Law Reform Commission estimated there were approximately 33 litigation funders active in the Australian market. The country’s litigation funding market is estimated to have grown by 9.3 per cent per annum between 2018 and 2023.
Data from IBISWorld shows market revenue was expected to rise at an annualised 9.6 per cent over the five years to 2023-24 to reach more than A$199 million.
“In recent times, there has been a marked increase in competition to support collective redress in Australia, the effect of which is that Australia is now reportedly the second largest class action forum in the world,” says Horne.
Horne describes the influence of litigation funding as “nuanced”.
“In many areas, it serves the core purpose of driving access to justice that might otherwise be unattainable,” he says. “Certainly, that is the romanticised view of funding, and to that end it has a very important place in modern litigation.”
However, Horne says balancing those considerations against a return on investment for funders can sometimes impede effective outcomes and place a significant, and in some cases unnecessary, burden on the court system and policyholders.
“The courts have increasingly recognised this and have been quite active in balancing competing interests, such as through amending funder returns through court approval processes,” he says.
Impact of the contingency fee model
While third-party litigation funding has underpinned the growth of class actions in the past 20 years, Horne says the significant recent spike in cases has been fuelled by factors such as the introduction of a contingency fee model in Victoria in 2020.
While the third-party litigation funding market aimed to drive greater access to justice for Australians, the introduction of contingency fees led to concerns around opportunistic “forum shopping”, where lawsuits are filed in jurisdictions viewed to produce more favourable outcomes.
Contingency fees are a method of billing for legal services through a percentage of the amount recovered by the litigation, rather than through time-based billing. Under the contingency fee model, no fee is charged if a litigation is unsuccessful.
“The effect is that we are now seeing the rise of cashed-up plaintiff firms who are enabled to drive competition in the litigation funding space,” says Horne.
Horne notes that the attempt to regulate the funding industry has had a major influence on the structure and viability of class actions, along with the introduction of contingency fee arrangements in Victoria.
“That has, of course, also elevated forum shopping to a critical position in the debate around the future structure of Australian class actions, a point which will soon be tested by the High Court,” says Horne.
“It is important, however, to also recognise the impact of sector-specific reforms, such as the impact of safe harbour provisions on securities class actions, and, of course, the potential future impact of reform in areas such as privacy law.”
How insurers are responding
Will insurers in Australia adjust premiums and underwriting strategies in response to the growing frequency and complexity of class actions in Australia’s casualty liability market?
Amos says insurers already have a low-risk appetite for areas with high class-action risk, such as manufacturing and utilities.
“I understand most general liability wordings have also been updated a few years ago to exclude cyber liability to limit exposure to privacy breach and other cyber related liability,” she says.
“We’re also starting to see a shift in appetite on exposure to things like forever chemicals,” adds Amos. “For companies explicitly exposed to forever chemicals we see careful underwriting and bespoke wordings limiting insurer exposure. We should expect general market wordings to change more broadly fairly soon.” Find out more about the Australian Liability Conference
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