Justice, insurance and class actions

Justice, insurance and class actions | Insurance Business New Zealand

Justice, insurance and class actions

The New Zealand Law Commission is currently exploring whether the benefits of a class actions regime can be realised while also balancing the risks and concerns a statutory regime presents. ICNZ’s recent submission to the Law Commission on this topic supports a comprehensive, statutory class actions regime over the current ad hoc development of the law.

There are, however, some important points to keep in mind when considering the introduction of any regime.

While class actions may improve access to the courts, that does not necessarily mean access to justice. Litigation funders are attracted to profitable claims which may not improve access to justice for those on low incomes or with low financial literacy. Indeed, public interest claims, which may pursue a low, or non-monetary outcome, often run a distant second to a funder motivated by financial gain.

We support improving access to justice, particularly for those who would otherwise struggle to access the legal system. To make sure that a class action is the most appropriate way to achieve the intended outcome there should be a certification process to ensure that there is a sufficient number of class members, commonality of issues, and that the plaintiff is able to provide security for costs. This process would also help to filter out opportunistic claims and ensure defendants have protection for their legal costs in defending unsuccessful claims. In addition to the certification process, there could be a public interest test to assess whether a class action is the best avenue for compensation, rather than, for example, regulator action.

A class actions regime that balances the interests of plaintiffs and defendants is also required. Plaintiffs should be able to bring deserving claims, and defendants should be protected from undeserving claims. It will therefore be essential for the courts to carefully supervise funding agreements, conflicts of interest, and settlement agreements. There will also need to be strict limitations on litigation funder control of proceedings to ensure that plaintiffs can instruct their lawyers, settle if and when they want to, and receive a fair proportion of any settlement funds.

We accept that litigation funding may allow access to litigation for smaller plaintiffs who would not otherwise access the courts. However, experience shows that returns from such litigation are heavily weighted toward the funder. Australian data shows the median return to class members in a funded action is only 51%, compared with 85% in non-funded actions. We do not want to enable a situation which would undermine the integrity of the justice system by allowing the court’s processes to be used for profit-making. To this end, we have recommended that the Law Commission consider the application of a cap on funder commissions.

Many class actions in Australia against boards have been launched on the commencement of a regulator investigation, even before a breach has been found. A common area where this has happened is around continuous disclosure obligations, with the risk of opportunistic class actions so prevalent that the Australian government has introduced legislation to amend the obligations to provide greater protection to directors. In New Zealand, we believe that, as a minimum, civil class actions should be stayed until the regulatory process is completed to avoid the same situation with speculative actions.

Our preference is that the default for class actions be on an opt-in basis, that is, members of the action must affirmatively consent to join it, so only those who wish to join it do so. This would reduce speculative actions on behalf of large classes when only a small number are motivated to participate and make funding arrangements fairer as it would prevent ‘free riders’ who have not signed the funding agreement but will receive a share of any proceeds of the action.  

The rise of funded class actions is irrefutably linked to the significant increases in liability, and, particularly, D&O insurance premiums. In addition to D&O, policies providing public and product liability cover may also be adversely affected by the increased risk of class actions. It would not be socially desirable for liability insurance to become unaffordable or unavailable. From a plaintiff’s perspective, they may be left in a worse position if insurance is no longer available. A good dose of common sense will need to be applied to the review to keep the balance right.