Insurance practice groups are gearing up for an influx of work off the back of the GFC, writes Michael Pollak.
Insurance work across the spectrum of Australian legal firms is spreading its wings in many directions, both locally and internationally. Key developments which are expanding - and changing - the nature of insurance work involve the recovery (by individuals and companies) of investment losses caused by the global financial crisis, the arrival of foreign insurance companies in Australia, the increasing need by companies to take out political risk insurance if operating in unstable countries and the growing use of a controversial entrepreneurial tool known as litigation funding.
Insurance claims generally lag behind what's occurring in the economy, so the wash-up from the GFC has yet to be fully determined, says Moray & Agnew Sydney partner Geoff Connellan.
"When talking insurance, something that hits on January 1 comes to a head on December 31," says Connellan, whose portfolio includes construction and engineering insurance, professional indemnity and financial risks, public liability, product liability, sports liability risks and property insurance.
"Insurance claims follow movements throughout the economy. We've been handling different kinds of work in that the nature of claims is different when the economy is going down compared to when times are good."
Connellan has seen an increasing number of claims related to individuals and organisations suffering financial loss alongside a continuing drop in personal injury claims since 2002, when tighter rules were introduced in all Australian jurisdictions on how much compensation can be awarded.
"With the GFC, more and more people have suffered significant declines in the value of their investments, resulting in legal action against mortgage brokers, financial advisers and other professionals across the financial services industry," he says.
"The greater the failings in the economy, the greater the number of claims against professionals."
Moray & Agnew is a firm specialising in insurance, which accounts for 80 per cent of its national revenue, and in June reported that in the 2008-09 financial year new instructions in the sector had increased, with gross fees showing double-digit growth. Connellan, with 27 years' experience as an insurance specialist, has been involved with insurance matters for Australia's leading insurers, brokers, underwriters and blue-chip corporations and has seen the insurance environment change through the evolving economy. He is on the panel of lawyers appointed to Comcover, the Commonwealth's self-managed fund, under the arm of the Federal Department of Finance and Deregulation.
Another key aspect of Moray's activities is directors' and officers' liability coverage and representation, reflecting significant exposure for insurers in this class during economically troubled times.
Directors' and officers' liability is also a cornerstone of work for Blake Dawson Sydney insurance partner Rehana Box, whose ambit is expanding locally and internationally. Her scope covers advising the insurance industry on establishing Australian operations, strategic relationships, mergers and acquisitions, portfolio transfers, regulatory compliance and product development. She also has a large practice advising insurers.
"My insurance practice is very busy, especially in the areas of directors' and officers' liability and professional indemnity, with notifications and claims flowing out of the impact of the GFC and increased stresses put on organisations, including major corporates," Box says.
Box has a growing insolvency-driven practice - advising liquidators, administrators and receivers, and directors and officers on protecting insurance coverage.
She has dealt with "more notifications in the past 12 months than at any time in the last decade" and is constantly liaising between insurers, brokers, liquidators, receivers and insureds regarding claims and potential claims.
The GFC has spawned several corporate collapses, which, says Middletons Sydney partner Erin Devery, have "changed the face of client practice" and resulted in litigation across a broad spectrum of interests.
"A large corporate collapse may generate a class action whereby claimants look to recover losses from directors and officers and then the insurer, and this has resulted in a steady work flow since the GFC struck," says Devery, an insurance expert specialising in product liability, professional indemnity and general insurance.
"When things are tight in the general economy, there is a tendency for an increase in insurance claims. A change in economic circumstances mean an individual who's lost his or her job will seek suitable compensation, or join a class action to recover financial loss."
Growth of litigation funding
A key catalyst in Middletons' insurance work is the increased incidence of litigation funding whereby individuals, acting at their own behest or as part of a class action, don't pay legal fees but instead share with a broker the settlement amount.
In a 2006 submission to the Standing Committee of Attorneys-General, the Law Council of Australia gave its qualified imprimatur to the process, noting that litigation funding allowed the pursuit of legitimate claims which otherwise might be financially prohibitive.
Since then, five large litigation funding companies (LFCs) have sprung up, acting as brokers and prepared to meet a plaintiff's significant legal bill but in return to reap anywhere between 15 and 40 per cent of a settlement.
"Litigation funding has become an accepted part of the legal landscape," says Devery, who assists clients with a range of scenarios on insurance matters.
Connellan, although not involved in acting for litigation funders, sees the process as a "fact of life in modern times and one which must be responded to", and says it is one without which many lawsuits might not have been undertaken.
"Litigation funding is behind many of the class actions [taken] in Australia over the past decade and has provided an impetus for cases which otherwise mightn't have proceeded," he says, adding that the next 12 months are likely to see an expansion of the process, requiring the provision of "legal services to all aspects of the insurance industry".
"A large corporate collapse may generate a class action whereby claimants look to recover losses from directors and officers and then the insurer, and this has resulted in a steady work flow since the GFC struck"
Erin Devery, partner at Middletons
Overseas action and inward movement
A global dimension to Box's insurance work is political risk, an outflow from the real and potential economic ravages of the GFC.
Political risk applies particularly to developing nations in which economic stresses threaten political and social stability and which, in turn, put a strain on Australian companies' ability to conduct business in a fraught environment.
Banks, enterprises with infrastructure projects and energy and resources companies are vulnerable to strife in such varied regions as some of our near neighbours and throughout Africa, and Box is increasingly involved in arranging political risk insurance.
"Political instability is growing amid economic uncertainties," says Box. "Increasing poverty and straitened circumstances can lead to disorder and Australians doing business in volatile regions need to be protected as best they can."
Financiers are imposing stringent political risk insurance requirements on new projects, especially in the resources sector, she says.
Box observes that among the hazards detailed by the Australian Government's Export Finance and Insurance Corporation are expropriation, war damage and political violence, the inability to convert currency and the blocking of exchange transfers.
On the global front, much of the action has also been in the opposite direction since last year as a result of legislative changes which allow overseas insurers to write business in Australia if licensed to do so.
Insurance specialists such as Moray & Agnew advise overseas insurers on compliance within Australian jurisdictions, and among its assignments has been guiding a large European insurer in its bid to obtain an Australian licence, as well as acting for insurers from the UK and the US on matters arising in Australia and the South Pacific.
The immediate future of insurance practice remains in considerable flux, and many issues such as litigation funding need to be resolved.
When talking insurance, it's too soon to dissect the effects of the GFC and the various legislative changes of the past decade, but what seems certain is that the wave of new challenges will need innovative and proactive solutions.
"Insurance claims follow movements throughout the economy. We've been handling different kinds of work in that the nature of claims is different when the economy is going down compared to when times are good"
Geoff Connellan, partner at Moray & Agnew
"My insurance practice is very busy, especially in the areas of directors' and officers' liability and professional indemnity, with notifications and claims flowing out of the impact of the GFC and increased stresses put on organisations, including major corporates"
Rehana Box, partner at Blake Dawson