There is the potential for an increase in class actions against insurers, increased regulatory involvement in the intermediary market and an increase in funded claims involving insurers.
Class actions
New Zealand’s “class actions” regime has been developing for some time now. We see a real likelihood of an increase in this form of litigation in 2018, particularly involving insurers as defendants or as insurers of companies that are sued.
The present version of the High Court Rules permits “representative actions”, which are different in some respects to the traditionally understood US “class action”. In order to proceed by way of representative action in New Zealand, all members of the proposed class of plaintiffs must have the same interest in the subject matter of the proceeding. The court acts as gatekeeper in determining whether this requirement has been met by granting or declining leave to the representative to proceed at the outset. In a class action, by comparison, all that is required is a common issue.
The requirements for leave have recently been clarified by the courts, culminating in the Court of Appeal’s decisions in Cridge v Studorp Ltd and Southern Response Earthquake Services Ltd v The Southern Response Unresolved Claims Group.
The Southern Response case involves allegations that the insurer developed and implemented a strategy to minimise claim payments made to insureds in settlement of their claims. The situation is perhaps factually unique as it arises from the Canterbury earthquakes and involves an insurer with no ongoing reputational concerns. However, the principles that the Court of Appeal addresses are relevant to any representative action brought against an insurer.
We see the following principles as relevant in considering the risk of an increase in representative actions involving insurers:
(a) In determining the baseline requirement of whether the class of plaintiffs have the same interest in the subject matter of the proceeding, the court will “take a liberal and flexible approach in determining whether there is a common interest”. The commonality of interest requirement is not a high threshold;
(b) However, there must be a truly representative plaintiff for each alleged breach of contract by the insurer – if the breach is made out, each individual claimant must still prove that the breach affected them personally and establish individual damages. In Southern Response, the Court was prepared to allow the division of the claimant group into sub-groups that involved the same alleged breach of contract, each with their own representative plaintiff;
(c) In cases alleging breach of a more general duty, such as a duty of good faith, the representative action process is more appropriate. This is particularly so where each individual claim is relatively modest, making it uneconomic to pursue in isolation. The court will weigh the benefit to the class if the representative is able to prove the existence of conduct by the insurer and whether that conduct was in breach of the insurer’s obligations, leaving each claimant only to prove that they were the subject of the conduct and an entitlement to damages;
(d) When considering the merits of any proposed claim, the court need only consider “whether there are obvious defects in the causes of action as pleaded” – it is not appropriate to undertake a detailed review of the merits of the proposed claims; and
(e) Significantly, the court could compel an insurer to notify insureds with unresolved claims of the existence of representative proceedings. While the Court of Appeal in Southern Response declined to require the insurer to provide the details of all of its insureds with unresolved claims to the representative group by way of discovery, it left open the possibility of future orders requiring the insurer to communicate directly with such insureds to make them aware of the proceedings.
Increased risk of claims involving insurers
Given the obvious efficiencies of properly brought representative actions, together with the fact that they open the door to claims that would be uneconomic in isolation, insurers (or insured defendants) seem a clear target. Class actions may also be brought against insurers where they have treated a number of similar claims in the same way, such as insisting upon certain repair methods or calculating indemnity value in a particular way.
More generally, we see a real possibility of an increase in representative actions involving insured defendants with large numbers of customers or investors. Two particular areas of focus are likely to be cyber claims, where a large number of small claims may be made by affected information holders, and securities claims, although there have not been any significant representative action claims that we are aware of since the Feltex litigation.
Regulatory oversight
We anticipate greater regulatory involvement in the insurance intermediary market in 2018.
The FMA addressed its concerns with churn in the life insurance market in its June 2016 report “Replacing Life Insurance – who benefits?” This report followed its 2015 Strategic Risk Outlook, which included a focus on conflicted conduct in a vertically integrated distribution model for financial services.
In summary, the FMA identified a small number of financial advisers with a high volume of life insurance policies on their books and a high rate of replacement of that business, which could be an indicator of churn. The FMA reported that it was, among other steps, working with market participants and financial advisers to ensure that they are complying with their obligations, together with providing guidance to advisers and consumers.
The FMA has shown a continued intention to focus upon conflicted conduct in its 2017 Strategic Risk Outlook. The FMA has said: “Our review into life insurance sales practices has given us a benchmark to guide similar reviews into sales practices and the impact of incentive structures in the future.”
We anticipate that the FMA will use its experiences in the life insurance sales space to review practices in the insurance intermediary market more widely, including in relation to the impact of remuneration structures on adviser conflicts. As the FMA noted in its 2017 Strategic Risk Outlook: “Remuneration and incentive arrangements can also reinforce conflicts of interest. This occurs when sales staff are incentivised with bonuses solely based on sales volumes without considering the overall customer experience.”
Litigation funding
Finally, we anticipate an increase in funded litigation involving insurers, as funders target well-resourced defendants supported by insurance policies.
Litigation funders have been active in both large-scale claims, such as the recently settled claim against PwC by the liquidators of Property Ventures Ltd (in liquidation), and in volume-based cases such as those that remain unresolved following the Canterbury earthquakes.
The Canterbury earthquakes saw an influx of offshore claims consultancy firms who funded the investigation, lodgement and litigation of claims against insurers, for a percentage cut of the proceeds. We saw a recent flurry of filings by funded claimants shortly before September 4, 2017, timed to beat a potential limitation argument following the expiry of some insurers’ agreements not to rely upon limitations defences before that date.
All forms of litigation funding have now become commonplace in the New Zealand market, including in insurance group litigation. We think that the twin prospect of representative action against insurers, together with funding arrangements for that litigation, give rise to a real risk of a rise in funded claims against insurers. We see the existence of funding as increasing the frequency of claims against insurers that might not have been made in the past.
In the Southern Response representative action claim discussed above, the Court of Appeal considered the courts’ role in policing funding arrangements in representative actions:
…the court is not required to give prior approval for a funding arrangement. The court will be concerned to see detail of the funding arrangement and the information provided to prospective class members, to reassure itself that there is no obviously unfair, oppressive or misleading aspect to the arrangement. The grant of leave does not amount to an approval of the arrangements, because approving the arrangements carries the risk that a prospective class member will be falsely reassured by the court’s approval and so not undertake the due diligence that they should do, to protect their own interests.
