Australia
In this chapter of our Annual Insurance Review 2024, we look at the main developments in 2023 and expected issues in 2024 for Australia.
Key developments in 2023
In Australia, 2023 was the first 'normal' year since 2019. Public health concerns, however, were replaced by economic pessimism, and accompanied by supply chain issues, continued cyber risks, global conflict, and more discussion and activism around climate change and the journey to net zero.
ESG continued to be a hot topic for Australian companies. But the desire to gain competitive advantage through demonstration of good corporate citizenry has been met with an increased focus from those keen to ensure they stand up to scrutiny.
In February 2023, corporate regulator ASIC commenced its first civil proceedings over allegations of greenwashing against Mercer Superannuation (Australia) Limited for alleged misleading statements about its investment options. ASIC specifically criticised Mercer’s ‘Sustainable Plus’ product that contained holdings of companies involved in the extraction or sale of carbon intensive fossil fuels, the production of alcohol and involvement in gambling. ASIC quickly followed this with proceedings against Active Super and Vanguard Investments Australia and continues this focus (so far successfully too, having secured an $11.3M penalty in its prosecution of Mercer).
It is not just the regulators on the attack. In August 2023, climate advocacy group Australian Parents for Climate Action commenced Federal Court proceedings against Energy Australia over allegations that its 'Go Neutral' product misled consumers due to the company's reliance on fossil fuel production. This will be the first test on claims of carbon neutrality under consumer law in an Australian court.
2023 saw a 23% increase in the number of cybercrimes being reported which, on average, is one every six minutes. On the tail of major breaches of Optus and Medibank Private in 2022 impacting millions of Australians, a cyber breach of one of the largest national law firms in Australia left major corporates and government feeling exposed.
In part of the Australian Government's going efforts to combat cybercrime it unveiled its '6 Shields' to protect Australia which will be rolled out from 2023 to 2030. The shields work towards a cyber resilient region on a global scale, including building stronger businesses and citizens by education and support, promoting safe technology, the creation of a threat intelligence network, a focus on protecting critical infrastructure, build the workforce and research on cyber protection.
In the courts, the decision of Robertson v Singtel Optus Pty Ltd [2023] FCA 1392 has called into question whether forensic IT reports prepared in the wake of a cyber event are subject to legal privilege. The decision held that Optus' public statements about the investigation and how the appointment of the forensic team came about meant that the report was not privileged. The decision is on appeal.
Investment by both government and private enterprises on the development of new properties and infrastructure continues across all states and territories. But increased labour and material costs continue to exert significant commercial pressure on the construction industry, threatening the viability of projects and increasing the risk of disputes and insolvencies. Although cost pressures are now causing government to question the viability of large scale infrastructure projects, demand for construction services in those projects is still resulting in a reduced capacity in residential construction needed to meet the needs of an expanding population.
Additional pressure in this area is coming from the efforts to remediate the damage from catastrophic events. The NSW floods were Australia's most expensive natural disaster ever. And with these extreme weather events here to stay, insurance industry groups are continuing to engage with State and Federal governments to consider short and long term issues raised by catastrophic weather events.
Regulatory improvements to building standards continue, including adoption of the 2022 National Construction Code. In NSW, improved standards for training and accreditation introduced by the Building and Development Certifiers Act and Regulations have come into effect. In Victoria, compliance authorities such as the VBA have continued to show an increased willingness to bring disciplinary action against practitioners for failure to comply with relevant standards of conduct.
The institutional liability claims grew in 2023 as parliaments around the country continue to implement law reform arising out of the Royal Commission into Institutional Response to Child Sexual Abuse and several important decisions in the later part of the year.
The High Court considered for the first time the use of permanent stays in historic abuse cases and overturned a decision of the NSW Court of Appeal in GLJ v The Trustees of the Roman Catholic Church for the Diocese of Lismore. The first civil jury trial decision against an institution in Victoria (Kneale v Footscray Football Club) resulted in staggering verdict for $5.9M plus costs in a case involving abuse by a football club volunteer. An appeal of that decision is expected in 2024. Another jury decision in TJ v Catholic Diocese of Wagga Wagga the following week saw an award of approximately $3.3M plus costs. These widely reported decisions have already started impacting claimant expectations in settlement negotiations.
Class action funding and contingency fee commission rates reduced even further, already of historic lows. In September 2023, the Victorian Supreme Court made an order that the shareholder class action against Star Entertainment would run with a 14% commission. This is the lowest rate of any common fund or contingency fee ordered in Australia.
Following the decision, there has been a range of debates about whether increasingly lower rates are sustainable and/or will lead to better or worse outcomes, particularly in circumstances where defendants are fully aware of the sharp economics that are likely to be involved in running a very costly (and usually long and slow) piece of litigation like a class action.
Common fund orders, however, are back. Overturning the High Court's 2019 determination that the Federal Court did not have the power to make these orders under the Federal Court Act, the Full Federal Court determined that this was not the case. This is a significant decision for funders. It offers more certainty for funding return models and allows class actions to be commenced without large book building exercises that were commonplace before 2016.
The next frontier for plaintiffs will be the ‘solicitor common fund order’ currently sought in the Blue Sky class action. Such an order would allow plaintiff lawyers to receive a commission from any resolution sum, similar to the contingency fees available in Victoria.
Watch this space.
What to expect in 2024
Economic challenges that Australia is facing are not going away, and some experts are forecasting further deterioration. Commercial pressures will continue to be significant, noting wage and material cost inflation and ongoing high fuel prices.
Insolvencies are expected to rise. Following three years of low levels of insolvency, the past 12 months has seen a number of construction, development and increasingly retail businesses go into administration, with October 2023's figures increased by nearly 50% year on year, according to data from ASIC. As a result, financial fallout disputes and litigation is likely to increase substantially over the next 12 months, with potential impacts across a range of lines of business.
One of the most interesting growing risks is cases being brought by social justice and climate change activists to rectify previous social injustices and introduce novel duties of care. This includes the growing use of not-for-profit and social funding models or funders, with the express aim of establishing legal precedent to encourage commercial funders to invest in future cases.
The Commonwealth Government is currently facing one such action, having been challenged over its duty of care in no less than three separate proceedings. The largest of those cases - the Pabai Pabai class action concerning climate change impacts in the Torres Strait - being heard in the Federal Court, seeking to recognise a duty of care to protect the Torres Strait and its communities.
In institutional liability, 2024 will see the landmark case of DP v Bird heard before the High Court testing the scope of vicarious liability and non-delegable duties arising from abuse perpetrated by clergy and it will also consider, for the second time, the use of permanent stays in abuse cases in Willmot v The State of Queensland. A judgment is also expected in the first case testing section 7D of the Civil Liability Act (NSW) attempting to set aside a prior deed which has the potential to impact all prior deeds in child abuse cases settled before recent amendments to the law (abolishing the limitation period and assisting identification of proper defendants).
There will continue to be vigorous testing of the limits of discovery in various jurisdictions as plaintiffs and defendants seek to obtain records. The High Court's recent permanent stay decision has already led to lobbying for the implementation of legislation enabling prior revisitation of claims where a permanent stay was argued. The Federal Government has also proposed legislative reforms enabling survivors to access the superannuation funds to obtain contribution from offenders. A new category of claims is also growing - secondary victims - which is anticipated to be tested as parents and family members of abuse survivors seek compensation for nervous shock.
If adopted in 2024, Privacy Act Review Report's 116 amendments to the Privacy Act will change the reporting obligations for small businesses who experience a cyber breach, removing an exemption that covers employee records and change what is considered to be 'personal information'.
Generative AI remains an intriguing development - not least how it will help us work smarter. It is expected to result in more sophisticated cyber-attacks and also form the cornerstone of cyber resilience and the ability to defend against attacks.
A series of comments by ASIC has put boards on notice to prioritise cyber resilience, including preparing a cyber pulse survey. It is likely that there will be an increase in the number of prosecutions where this is not taken on board, and there are repeated or flagrant breaches.
For construction insurers, legislative and regulatory changes coming in 2024 will be positive. The Victorian government has foreshadowed the introduction of new offences for builders that receive money under a Major Domestic Building Contract without taking out domestic building insurance. The State's combustible cladding rectification authority will take first steps to join proceedings against builders and building professionals to recover cladding remediation costs.
In NSW, the effect of legislative changes aimed at enhancing consumer protection has increasingly been felt. While this has slowed down approvals, it is likely to lead to better long term results and lower clams.
Expensive and complex worker to worker claims are expected to trend upwards, particularly in Brisbane where a large number of major projects underway for the 2032 Olympic games, due to an increasingly agile workforce, is resulting in more labour hire arrangements to get projects completed. There is a definite upward trend in plaintiff costs and claims of damages, especially in Victoria.
Extreme weather continues to be a concern. 2024 is predicted to see increased risk of severe bushfires due to El Nino conditions, forecasts of lower than average rainfall and higher than average temperatures. Some parts of Australia are already experiencing this.
Between this and the catastrophic flooding of 2023, that is likely to remain one of the most expensive natural disasters to remediate. Damage caused by other extreme weather events (such as wind) can also be expected to continue. Through collaborative efforts of government and insurers, new arrangements will need to be reached to protect residents in high risk zones.
Written by Jonathan Newby.