Australia

Written by Jonathan Newby

Key developments in 2024

It was a case of 'another year; another tough economic outlook' in Australia. Wafer-thin economic growth, cost of living pressure, higher than forecasted inflation, flatlining productivity and decade-high interest rates, combined with non-economic concerns around climate change, social inflation and cyber risk, has left the insurance industry with a smorgasbord of uncertainties to balance.

Insolvencies have continued to rise with the SME market worst hit. ASIC data shows ongoing record highs with 3,000 companies entering external administration each quarter since the start of 2023 - close to double the long-term average. With the majority of companies on the Eastern Seaboard, industries such as construction, food and retail services, and manufacturing are being hit the hardest. Insurers writing D&O and management liability cover for these companies will be keeping a close eye on trends in these industries.

The massive cost of input hikes has hit the construction industry particularly hard, with a number of high-profile companies leaving projects only part completed and owners and sub-contractors in limbo. While the true impact of this from a professional indemnity perspective is likely to be seen down the line, there has already been an impact where claims were already on foot.

Regulators have continued to broaden their oversight, as the wider community looks to this arm of the government to ensure that Australians get the 'fair go' that is entrenched in the domestic psyche and that companies are compliant and genuine in their claims. ASIC, ACCC and ATO have all been active this year.

ASIC had a significant victory in its continuous disclosure case against the ANZ over its $2.5 billion institutional share placement in 2015. On appeal, the Full Court of the Federal Court held that ANZ failed to fully disclose material information and was required to pay a $900,000 penalty (against a maximum fine of $1m per breach), plus ASIC’s costs.

Greenwashing has been another hot topic, with ASIC and the ACCC having been separately pursuing cases both through investigations and court prosecutions. This year alone we have seen ASIC succeed against Mercer Super and Vanguard for greenwashing in the investment space, and ACCC commenced greenwashing proceedings against Clorox Australia Pty Ltd for greenwashing claims about its products.

The ATO is also increasing is regulatory enforcement, particularly over Director Penalty Notices (DPN) to directors and officers of impecunious companies. In 2023/24, the ATO issued in excess of 33,000 DPNs and garnishee orders to D&Os, a near-100% increase on the historical average.

Looking to cyber, the volume of incidents in Australia held steady with 87,400 reported for FY24. There have, however, been significant shifts in the legislative framework with the government going on a legislative blitz. In the past few months we have seen the introduction of a Digital ID Act, along with the AI Safety Standards setting the groundwork for more fundamental changes with the introduction of the long overdue first tranche of amendments to the Privacy Act. Passed in November, the changes to the Privacy Act introduce a tort of privacy. The amendments, however, fell short of removing a small business exemption (where turnover is less than AU$3 million) and employee records exemption which are expected in the next wave of amendments.

Also passed by the government was the Cyber Security Act which introduces mandatory reporting of ransomware payments for critical infrastructure assets or businesses with >AU$3m in revenue along with a framework for minimum security standards internet internet-enabled smart devices.

Cyber is another area of interest to the regulators, with ASIC issuing several pieces of guidance to companies and their directors to put them on notice that those who fail to adequately prioritise the risk, will be subject to prosecution in the event of an attack.

In the casualty market, economic pressures are also making an impact. This has been rising for several years and continues to do so driven by a range of factors. Cost of living pressures and rises in unemployment are one such factor, increasing the likelihood of plaintiffs refusing to settle early, and pushing through to litigation in the hopes of a bigger settlement. There is also a rising number of claims involving psychological injury which are often by nature more complex and take longer to resolve, and complex worker-to-work claims, involving the cross-over between workers' compensation and public liability insurance, driving claims costs and premiums up.

Institutional liability claims involving allegations of historical abuse against governments, faith-based institutions across denominations, schools, care homes, and other institutions continue to keep courts at all levels busy. In November, the High Court of Australia handed down three decisions that have been hotly anticipated by both sides of these matters.

The first, DP v Bird, considered the issue of whether a vicarious liability should be expanded beyond an employment relationship, an issue which the High Court unanimously ruled that it should not. This has been noted as out of step with the UK and Canada and has led to a push for legislative reforms on this issue.

The second two - Willmot v State of QLD and RC v Salvation Army - dealt with the use of permanent stays and affirmed that these will only be used in exceptional circumstances and be highly fact-specific, with the evidentiary onus on the defendant.

The NSW Supreme Court,  EXV v Uniting Church in Australia Property Trust (NSW) heard the first case to consider Part 1C of the Civil Liability Act 2002 (NSW) which was introduced to enable prior deeds of settlement to be set aside in historical child abuse cases. The court found that it would be unjust and unreasonable to set aside the deed and disturb the legal rights and obligations of the parties contained in that document, a decision that stands in contrast to the approach in Victoria.

Finally, insurers succeeded in a test case involving claims by Melbourne businesses for business interruption losses they suffered during COVID-19 lockdowns. While the matter is on appeal, hopefully, it will be the last we see of the pesky bug for some time.

Looking towards 2025

How the economy performs in 2025, and in particular how long businesses and consumers have to wait for much-needed interest rate reductions, will impact the performance of the Australian insurance industry in the coming 12 months. A looming federal election, likely to fall as early as May, will also have a bearing on the economy.

D&O insurers will continue to feel the pressure for the time being. While class action filings are down - in particular shareholder class actions - the economic climate will continue to throw up claims arising from insolvencies. The only positive point is the defendants' 5-0 result in recent shareholder class actions involving Myer, Iluka, Worley, Insignia and CBA, demonstrating the difficulties in establishing liability, causation and loss. However, class actions arising from employment issues, privacy and data breaches, consumer and products and mass torts are on the rise.

New mandatory reporting regimes in Australia will be on some insures watchlists. Climate-related disclosures will start from 2025, including financial disclosures mandated through amendments to the Corporations Act 2001 (Cth) and will require companies to issue an annual Sustainability Report, which requires the director to issue declarations of reasonable steps of compliance. It is also expected that there will be an increase in the scope and obligations of mandatory reporting of data breaches under the Privacy Act and modern slavery under the Modern Slavery Act.

For cyber, we expect the push for legislative change will ease and the focus will shift to the implementation of the string of changes, and it seems unlikely that we will receive the second tranche of changes to the Privacy Act until 2026.

Cyber incidents will continue unabated, and evolve with multifaceted extortion and infostealer malware. We expect to see AI featuring more readily in breaches, increasing the speed at which vulnerabilities are exploited.

Economic challenges also present risks for other professions. With the increase in insolvencies, comes an increase in claims against business advisors, accountants and lawyers as directors, shareholders and creditors try to recoup losses and spread the losses by joining others in proceedings.

The expansion of the allied health and wellness industries is also resulting in emerging risks and increased claims, but in particular where rapid growth in market segments means the regulators are playing catch up. A particular issue here is where the name of the profession - for example, the use of the word "surgeon" - leads to the expectation of a certain level of training and qualification, with the reality not meeting this expectation.

Claims are continued to arise across the construction and infrastructure industries. In NSW, 2024 finished with a 4:3 split High Court decision in The Owners – Strata Plan No 84674 v Pafburn Pty Ltd [2023] NSWCA 301) which was confirmed that developers and head contractors cannot seek to exclude or limit their liability via the apportionment regime. Insurers and defence and plaintiff lawyers will be studying this judgment to understand how the majority and minority views might help or hinder claims waiting in the wings for mediation and hearings in 2025.

The construction sector continues to see increasing regulatory scrutiny (and regulation) which is starting to yield positive changes in practices, but picking the 'tipping point' as to when those cultural changes have become enmeshed will be the biggest challenge.

The workplace relationship landscape continues to ever evolve. The Right to Disconnect, having rolled out to large and medium businesses, will be extended to small businesses from August 2025  and other aspects of the Closing the Loop Act will come into effect, most notably a new federal criminal offence for wage theft and increased maximum civil penalties.

The institutional liability lists are now some of the busiest in the courts around the country, particularly in Victoria and New South Wales. Plaintiff firms are increasingly litigious including a number of class actions launched against a community legal center established at the time of the Royal Commission to assist survivors of child abuse and other plaintiff firms for "under-settling" claims. Consequently, plaintiff firms are reluctant to recommend settlement unless they can be shown to have extracted every possible dollar from the defendant. This is causing fewer matters to settle at mediations and to run to the first day of trial. We expect this trend to continue in 2025.

Further case law is expected to be set in 2025. The High Court will consider the issue of setting aside a prior deed in the matter of DZY (a pseudonym) v Trustees of the Christian Brothers, where a plaintiff is looking to relitigate a claim to seek damages for economic loss. And while the Victorian Court of Appeal reduced a jury award of record damages from $2.4M in total to just $550,000, there will still be a close eye kept on creeping quantum.

Explore Annual Insurance Review 2025