Emerging risk trends informing the insurance litigation landscape

Bellrock Managing Director, Marc Chiarella, was recently invited to take part in a Think Tank event discussing current trends, as viewed from a risk advisory perspective, and what may cause the next “swell or tsunami” in insurance litigation. The event was hosted by law firm Colin Bigger & Pasiley, and covered insolvencies, AI, construction defects, non-compliant cladding, data breaches, climate change, ESG and directors’ duties more broadly.

Marc was joined by panellists including His Honour, former Chief Justice of the Federal Court, James Allsop AC; Kathy Sozou of McGrathNicolIsabelle Reincecke of the Grata Fund; and Joe Donovan from Arch Insurance Group Inc.

Below we summarise Marc’s responses to questions posed by Think Tank moderator, Debbie Kaminskas.

In the context of insurance intermediated services, what are some of the trends you are seeing in the market at present?

In providing risk advisory services, we inform clients across a broad range of industries and professions. Our advice is also specific to product. Current issues we have observed include:

Material damage
  • Further catastrophic losses expected this summer – if not flood, it may be bushfire.

  • Insurers have sought to mitigate against exposure to catastrophe by the imposition of exclusions, sub-limits or aggregate limits.

  • Parametric and derivative alternatives are being explored but are often cost prohibitive.
  • The Federal Court recently found that a products liability insurer has a case to answer. See our article here. In that decision, the Court has deemed affixing of defective cladding “property damage” under a general liability policy. This may challenge what the insurance market would traditionally consider “physical damage” or an “occurrence”. We await final determination of this issue at trial. This decision may exacerbate consumer based cladding class action exposure the market did not anticipate.
  • Construction insolvencies are the highest since 2014. This causes significant issues in transferring project risk to the market. The Design and Building Practitioners Act 2020 (NSW) (the Act) imposes a wider scope of liability for design and building professionals who provide services that fall within the scope of the Act. See article here. It is expected that insurers will take these broader duties of care imposed on Insureds under the Act under consideration when rating professional indemnity premiums.
Financial services
  • Increased cost of living is starting to put pressure on investment - investment managers and advisers being “put on notice”.

  • In a landmark decision the Federal Court has ruled that Financial Services Licensees who fail to implement effective cyber security risk management systems will be in breach of their statutory obligations under the Corporations Act 2001 (Cth) to have adequate risk management systems in place. (See article on ASIC v RI Advice judgment here).
Company, executive, and non-executive risk
  • Following Medibank’s October 2022 Data Breach compromising 9.7M customer records, a consumer class action has been brought by Baker McKensie on a “no win, no pay” basis.

  • D&O insurers are concerned with developments likely to materialise and predict insolvencies.

  • ESG (particularly developments with activism and potential climate change) – boards are learning as they had to with cyber risk, about company obligations and the evolving liability likely to materialise. Insurers seek accurate risk maturity and assurances that ESG risk is being managed appropriately.

  • A trend is emerging which sees the shifting of risk to professional consultants advising on risk maturity and risk transfer.
Professional services
  • Underwriters on lawyers’ and other consultant schemes are asking pointed questions around the use of AI, how it is monitored and the extent to which it is peer reviewed.

  • Law firms saw increased scrutiny at renewal in the aftermath of the April 2023 cyber attack on HWL Ebsworth Lawyers.
Financial services transacting
  • The trend towards online transacting of financial services is exposing inherent risks. Misuse of online systems (both with direct insureds and intermediaries) has been observed.

  • Insurers are favoring businesses that can demonstrate specific risk advisory expertise.

  • Boards which are more educated on insurance market cycles are showing loyalty to insurers who have demonstrated long term commitment to an industry / class.
  • Claims inflation is causing an uplift in reserves and is putting pressure on loss ratios. This is across all classes of insurance, but specifically construction and material damage (now driven by labor costs).

  • Capacity has returned to the insurance market meaning greater availability of cover and some premium relief. This has been brought on by investment returns available to insurers’ resultant of the high interest rate environment. Some insurers are attracted to writing top-line revenue on long-tail classes to reap the benefit of those returns.

  • There is some skepticism in the market around the longevity of the current soft market symptoms.

  • Bellrock’s July 2023 market update can be viewed here.
How do you see the shape of the economy at the moment and what is happening under the surface, i.e. changing behaviours of banks, lenders, regulators. In the context of the current landscape, what are you seeing in terms of the risk appetite of insurers, particularly in the D&O and construction space?

There is an undeniable return of capital to the insurance market.

There are two characterisations of insurers presently: (a) insurers competing for top-line revenue; and, (b) insurers seeking long-term sustainability across an industry/policy class.

Those with the objective of sustainability have regard to:
  1. The guidance offered by government, regulators, industry bodies and the judiciary.

  2. Access to better empirical data.

  3. Mitigating against events or practices susceptible to losses.

  4. Properly assess and underwrite insureds/risk in respect of the above.
In the context of D&O, insurers want to understand more about risk maturity. What has the board done to turn its mind to the current economic conditions, trending and emerging risks?
  1. Additional broader “insolvency” exclusions, exist; simultaneously ASIC has provided financial reporting directions to boards for the upcoming reporting season. See article here.

  2. Cyber wordings are becoming narrower, exclusions on D&O and PI policy are becoming broader. Adherence to guidance on data and privacy and use of third party experts to assess maturity. ASIC has released its cyber resilience guide; there was the decision in RI Advice; and most recently there has been the ASIC Cyber Pulse Survey.

  3. ESG – guidance from the Federal Court and the responsibility of Government; guidance from the ASX insofar as reporting.
Having regard to construction:
  1. Insolvency: even material damage insurers are assessing financial viability in the course of their underwriting - financial statements supply agreements, suppliers, stakeholder (upstream and downstream and their financial viability).

  2. Frequency claims: worker-to-worker for instance exposure is managed by significant excess structures.

  3. There are broader obligations imposed under the Design and Building Practitioners Act that provide better guidance and governance across the industry.

  4. Insurers are varied in the approach to coverage: some are imposing wide exclusions, others are reverting to broader wordings.

  5. Contractual liability: insurers are considering maturity on liabilities assumed under contract.
There has been a record number of insolvencies which are seeing a raft of litigation recently. Do you consider that shareholder, social and consumer activism has contributed to this and from a broker's perspective, do you see any other particular risks evolving which may challenge the market and take it by surprise?

I do not think the gravamen of the insolvencies are resultant of shareholder, social or consumer activism.

I think insolvencies have materialised due to an uplift in the cost of living as a consequence of monetary and economic policy. I think the genesis of that policy was COVID-19 exacerbated by emerging geo-political matters.

I certainly do think that government policy is heavily influenced by social and consumer activism. This has caused broader obligations to be imposed across industries, companies and directors (in their personal capacities).

The law makers rely on the insurance market to transfer liability for breach of those obligations. Now days insurers just say “no” to certain risk that is immeasurable or lacks any ability to reasonably mitigate against.

In the “hard market” we had examples of companies that could simply not get coverage and had to close their doors because insurers said “no”. You will all also remember D&O rates increasing 500% and boards ‘carrying’ that risk.

Where novel duties of care are imposed, or again risk presents as unquantifiable, insurers will just say “no”. Indeed this may be the “stick” for companies and boards to “conform” but relying on “liability” for “compensation” to be transferred to insurers for activism seems moot.

With the changes that we have discussed this evening, how will insurers react? Do you foresee changes in policy wordings and/or underwriting appetite in certain areas and which ones?

There will be changes in policy wordings, application of new endorsements and reactionary changes to underwriting appetite pending the outcomes of matters: we saw this happen after COVID and the Business Interruption Test Cases.

By way of example, we have seen:
  1. wording excluding liability under the Design & Building Practitioners Act;

  2. imposition of broad insolvency exclusions on D&O;

  3. A.I. exclusions (or at least conditions) being introduced under practitioners policies;

  4. crypto currency exclusions.

It is very likely insurers may look to specifically exclude loss in connection with certain climate liability, for instance arising out of “Greenwashing” and “Bluewashing”.

That said, I think insurers will react in a way that the property insurance market has worked for years. Ask risk maturity, identify weaknesses, set a remediation plan and only then coverage will be available.

Those who lack risk maturity will not have access to cover.

To discuss these trends and how we can assist your business or your clients mitigate against them, and thereafter design an adequate insurance programme, please contact Bellrock via the form below.

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