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 impact of the COVID-19 pandemic on business interruption claims, with mixed success for the market in the test case proceedings heard in the New South Wales Court of Appeal and the Federal Court ‒ something that has also attracted attention from the corporate regulator and the Australian Financial Complaints Authority in terms of assessing pandemic-related claims in a fair and efficient manner;
• the change in the federal government in May 2022 and the new Labor government implementing its progressive agenda;
• the devastating floods that have ravaged parts of Australia in 2022, exacerbating supply chain and labour market shortages and increasing costs and delays for claims;
• the testing economic environment, including successive official interest rate increases and rising inflationary pressures – the latter of which is contributing to claims inflation for insurers; and
• the increasing frequency and severity of cyber-related claims, which show no sign of abating and will generate new risk exposures beyond traditional cyber-related losses – the Optus and Medibank cyber-attacks are two recent and notable examples.

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.

D&O, Professional Indemnity and Financial Institutions

Class actions

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

Before the new Labor government came to power in mid-2022, some balance was being restored to the D&O market and, in particular, the Side C market. However, following the change in the federal government, the pace of legislative reform has slowed ‒ with some of the former Conservative government’s reforms being unwound or jettisoned.

If anything, any further reforms are likely to favour third-party claimants and the litigation funding industry. Specifically, the new Labor government has announced proposed changes for the winding back of the licensing requirements for litigation funders and the registration of funding agreements as managed investment schemes. Such changes are likely to remove safeguards for group members and to lower barriers to entry for litigation funders.

However, it remains to be seen whether the new federal government will proceed with the former government’s proposed legislative reforms seeking to cap the returns to plaintiff law firms and litigation funders or, instead, seek to modify or remove the previous reforms aimed at modifying the materiality standard for Side C Claims, which raised the bar for plaintiffs. Otherwise, there has been a steady rate of new filings for such claims, including at least two arising from the COVID-19 pandemic (Virgin and IAG).

Following the introduction of contingency fees in Victoria, more and 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. Western Australia has also introduced a class action regime, which is likely to mean representative proceedings will now be filed in that jurisdiction. 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; however, there is a competing line of authority in the Federal Court jurisdiction to the effect that such class closure is permissible.

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).

In relation to the latter, in February 2022, the High Court ruled by a majority that shareholders were entitled to summon former directors and officers of failed companies for public examination (pursuant to section 596A of the Corporations Act). That power was previously understood to be limited to external administrators. This ruling, however, increases the likelihood of shareholder plaintiffs using this examination power to marshal evidence before claims are commenced against failed companies or their directors and officers.

Corporate wrongdoing

The corporate regulator (Australian Securities and Investments Commission, or 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 successfully brought a proceeding against an Australian Financial Services Licensee for breaching its licence obligations to act efficiently and fairly after it failed to demonstrate adequate risk management systems to manage its cybersecurity risks.

Cyber-risks and ESG

Cyber-risks and ESG issues have assumed greater prominence in recent times. Specifically, ASIC has become more active in monitoring such matters from a regulatory perspective and is expected to prosecute companies and D&Os for misconduct for misrepresenting their ESG credentials (ie, greenwashing claims).

Professional indemnity

In the professional indemnity space, financial services 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. 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.

Falling property prices, combined with rising interest rates, will 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.

Life and Personal Insurance

New duty of disclosure

There has been a significant change to the applicant’s duty of disclosure with regard to 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. From 27 September 2021, applicants for life insurance (and, indeed, all types of “consumer insurance contracts”) will no longer be bound by a duty of disclosure.

Instead, customers entering into a consumer insurance contract will 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 may 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, are 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 is still on foot 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, will come into force on 1 July 2023. This is the first major overhaul of the LICOP since it was introduced in 2017.

The changes significantly enhance consumer protections across sales, underwriting, and claims, with a particular focus on better supporting customers suffering mental illness. The major enhancements include:

• reduction in insurers’ rights to access a claimant’s clinical notes, both at 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 a significant jump in the number and severity of cyber-attacks and, in particular, ransomware. Australia experienced two historically large attacks on Medibank Private, its largest health insurer, and on Australia’s second largest telecommunications company, Optus.

In the case of the Medibank attack, the personal and health data of approximately 10 million customers was accessed ‒ the vast majority of which has now been released by the hackers on the dark web. Medibank has estimated its immediate costs associated with the breach at approximately AUD35 million but has not quantified further potential customer and other remediation, regulatory and litigation related costs.

Of a similar scale, the attack on Optus obtained access to the personal data of 10 million customers, including their home addresses and passport and driver’s licence details. Optus has agreed to meet the costs of the replacement of those identification documents. The company has set aside AUD140 million as an exceptional expense to cover the customer remediation programme following the breach.

These events have sharply focused the attention of insurers, regulators and insureds. Both companies face investigations by the Australian Information Commissioner in order to determine whether they “took reasonable steps to protect the personal information they held from misuse, interference, loss, unauthorised access, modification or disclosure”.  Numerous other investigations are underway. Both companies are facing imminent class actions by their affected customers and potentially from shareholders.

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.

The growing losses have resulted in changes to the dynamic 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 the 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. With this in mind, the Australian government has set out its ransomware action plan, in which it states that it “does not condone paying a ransom to cyber criminals”.

The government notes that ransom payments demanded from insured organisations are often tailored to the insured amount under a cyber-insurance policy. The government is currently considering whether to outlaw the payments of a ransomware demand. Major insurers have indicated their support for such a legislative step.

The Federal Court recently handed down its decision in Inchcape Australia Limited v Chubb Insurance Australia Limited (2022) FCA 883. This decision dealt with the scope of cover that might be available for cyber-risks, albeit under a Financial Institutions Electronic and Computer Crime Policy. Inchcape had been the target of a ransomware attack and sought indemnity for AUD2.3 million in costs. It had incurred costs to:

• investigate the ransomware and prevent further attacks;
• replace hardware;
• reproduce destroyed data;
• perform ancillary tasks in reproducing data and the manual processing of orders.

The insurer declined cover and successfully defended its position in the Federal Court. The policy in question was not a standalone cyber-insurance policy. The policy did not include specific cover for the costs of incident response. The court found that the cover was limited to “direct financial loss” ‒ that is, the cost of blank media and the costs of transcribing the lost data onto it. Costs relating to incident response, business interruption or hardware loss were not direct financial loss.

This decision is a salient lesson of the risks of relying on ‘silent cyber’, where cyber cover is sought under policies not specifically designed to cover cyber risks. In this case, one would imagine that many of the costs incurred would have been covered under a stand-alone cyber policy. Given the substantial losses suffered by Medibank and Optus discussed above, one would imagine that brokers and insureds will undertake more sophisticated scenario testing when purchasing cyber cover in the future.

Liability Claims

The nature of liability claims changed with the 2017 Royal Commission into Historical Institutional Child Sexual Abuse, which led to a surge in historic abuse claims against state departments and religious bodies. While the National Redress Scheme provides for no-fault compensation, the abolition of limitation periods for such abuse claims and the ability to set aside prior confidential settlement agreements has facilitated these challenging claims being brought.

Further, latent/exposure injury claims have not diminished, despite the use of asbestos products effectively being banned approximately 40 years ago – no doubt owing to the presence of those products from prior use (Australia has the highest use in the world) and the emergence of fibrotic silicosis claims for workers in the artificial stone industry.

The complexity and uncertainty surrounding liability for work-related accidents continues, with diminishing no-fault workers compensation benefits and limitations on recovering damages from employers encouraging injured workers to pursue non-employers and attempts to maximise their potential compensation. This is further exacerbated by the increasing use of contractors or labour-hire workforces (eg, on mining and infrastructure projects), which effectively shifts liability to entities not directly involved in the work system or site – including by means of contractual assumption of risk. The permutations of potential outcome for these claims add to the uncertainty for insurers.

The prospect of claims for sports-related concussion and chronic traumatic encephalopathy loom for liability insurers. Sports organisations are taking steps to minimise the risk of this condition, in light of the suggestion of potential class actions.

Property

Australian property insurers continue to be affected by volatile and increasing natural risks, with bushfire, storm and flood damage claims a prominent feature of the past few years. 2022 was characterised by floods again affecting many areas of the East Coast and the industry was hit with increased construction costs and delays.

Prior uncertainty and inconsistency surrounding flood cover has mostly been resolved through the use of a standard definition of the exclusion. Against the background of climate change concerns, the insurance industry continues to call for improved regulation and action to avoid or mitigate the impact of these natural risks as a more economic approach than increased premiums.

The industry’s exposure to COVID-19 business interruption claims appears to have largely receded following the dismissal of the policyholders’ appeals to the High Court in the “second test case”. The first test case in late 2020 was unfavourable for the industry after it was unanimously held (including on appeal) that standard pandemic exclusions in business and industrial special risk policies that referenced the repealed Quarantine Act ‒ rather than the current Biosecurity Act – were ineffective.

The second COVID-19 test case addressed more specific coverage issues concerning ten particular claims, including whether business interruption cover was triggered for disease outbreaks or by government mandates preventing access. Broadly speaking, it was held that:

• cover was not triggered without a local outbreak within the vicinity of the premises (which could not be proven);
• the mandates were issued to protect public health more broadly, rather than specifically from a disease (contrary to UK findings); and
• causally, the closure of premises and consequent losses were not suffered as a result of an outbreak.

Recent and current concerns

Combustible cladding claims have been emerging for the past four years, as building owners and the construction and insurance sectors grapple with the unexpected cost of replacing cladding. Recent judgments, including at appeal level, have so far dismissed technical arguments that cladding was potentially compliant with applicable building codes and that consultants who specified such cladding have “peer professional opinion” defences based upon most industry participants specifying the same products.

Continuing concerns pertaining to the performance of engineers and builders, and challenges with legal recourse against them for defects, led to the introduction in New South Wales of legislation to impose (if not confirm) a duty of care on builders and designers with a ten-year retrospective limitation period. The object is to improve building standards or otherwise hold participants responsible, but an incidental effect is increased exposure of insurers to building defect claims. Further reform to building law is now proposed to increase owner protection and likely to result in increased liability to professional indemnity insurers.

The past year also saw a revival of claims based upon policy rectification, estoppel and alleged breaches of the duty of utmost good faith (with a significant matter currently reserved by the High Court) – possibly indicating a more aggressive attitude to pursuing claims against insurers.

Marine Law

“Supply chain issues” is a phrase that became extremely common for everyone in everyday life in 2022.

COVID-19 has continued to have a huge effect on all aspects of the marine industry globally, including destabilising the global container freight supply chain, delaying air transport, delaying shipments and causing air and freight rates to continue to rise. This has been particularly the case recently, with goods being shipped from China as a result of lockdown orders.

Supply chain issues have been further exacerbated by the Russian invasion of Ukraine, which has reduced shipping and air pathways and also the accessibility of materials and products – in particular, all goods that are being shipped to and from Europe.

Locally, border restrictions have limited and delayed road transport of goods around the country. All these factors have put intense pressure on Australian exporters and importers.

Although there has been a number of new scenarios facing the Australian marine market, marine law in Australia remains relatively settled. The majority of claims are governed by the Marine Insurance Act 1909 (Cth) (MIA); however, the other relevant legislative acts in relation to marine claims in Australia are:

• the Admiralty Act 1988, which extended the admiralty jurisdiction from the Federal Courts to the State and Territory Supreme Courts; and
• the Carriage of Goods By Sea Act 1991 (COGSA), which gives effect to a modified version of the Hague-Visby Rules ‒ a set of international rules adopted by countries in relation to:
1. the governance of the bill of lading/waybill for cargo being shipped; and
2. the liabilities that may be imposed on the party agreeing to the shipment.

Two recent cases that have looked at COGSA are Carmichael Rail Network Pty Ltd v BBC Chartering Carriers GmbH & Co. KG (The BBC Nile) (2022) FCAFC 171 and Poralu Marine Australia Pty Ltd v MV Dijksgracht (2022) FCA 1038.

In Carmichael, the Full Court of the Federal Court determined that parties to a contract for the interstate carriage of goods by sea cannot be prevented from arbitrating a dispute overseas where they have agreed to do so. In making this decision, the Full Court held that Section 11 of COGSA, which precludes foreign jurisdiction clauses in sea carriage documents, does not apply to interstate carriage of goods – meaning it is possible to exclude the jurisdiction of an Australian Court for disputes arising out of bills of lading for interstate carriage.

In Poralu, the Federal Court held that the incorporation of only part of a convention (here Articles I-VIII, but not Article IX of the Hague Rules) is not sufficient to overcome the applicability of COGSA and the Hague-Visby Rules. It also held that COGSA does not apply to the carriage of goods by sea under a charterparty unless a “negotiable” sea carriage document is issued for the carriage. In this case, the operators were able to rely on their limitation of liability clause to limit their liability to GBP100 per package. The owners of the vessel were also able to rely on this limitation as a result of the Himalaya clause contained in the Booking Note, which had been validly incorporated.

Finally, it does not appear that any of the supply chain issues will resolve any time soon. Further, Australian ports may be closed or significantly slowed down if companies such as Svitzer decide to proceed with the lockouts they were contemplating in late 2022.