It’s no surprise that law firms are busy with disputes relating to the financial services industry. Investors everywhere are looking for ways to supplement their GFC losses and failing businesses have triggered claims on directors and officers liability (D&O) and financial lines policies. “There has been a steady increase in claims generally, with a large spike in financial lines claims and, in particular, claims against financial planners, mortgage intermediaries and others involved in what was a fairly rabid lending cycle,” says Adam Chylek, a partner at Wotton + Kearney.
“Claims against valuers are also on the increase – claimants in that area are becoming more sophisticated and organised.”
Aggrieved investors are also gathering together and engaging plaintiff counsel to fight their case. “They are geared up and ready to go,” says Linda Murphy, a partner at Colin Biggers & Paisley. Some are looking to make claims against financial advisors who have professional indemnity policies behind them. “It seems to be a nice, neat way for the funders and the investors to go,” she says.
This seems to be fairly consistent across the board. “Our experience is reflective of what’s been happening in the insurance industry,” says Geoff Connellan, Moray & Agnew’s professional indemnity national practice group leader and head of the general insurance practice in Sydney. “Two or three years ago we were working on claims relating to the construction industry. Those are now ending and people haven’t been doing so much construction in the last few years. Now we are seeing more disputes arising out of the financial world.”
The major financial collapses affected not only corporate investors but also trickled down to hit the ‘mums and dads’ investors. Moray & Agnew is working across this spectrum, dealing with a volume of claims by individuals to major class actions, including the A$150m class action arising from the collapse of Pan Pharmaceutical.
Increase in regulation
“When things go wrong, governments react and they have reacted pretty promptly to the GFC issue,” says Connellan. The regulatory focus on the insurance industry really began to escalate following the collapse of HIH – since then there have been a number of regulations introduced with respect to the financial services industry. “There are claims for breaches of those new regulations and from a legal perspective there is a need for lawyers to provide services to all those involved in that industry, for example, in relation to compliance and so forth,” he explains. “We have identified and embraced the need that our insurer clients have for receiving regulatory advice.”
Now faced with a global financial mess, regulators are left wondering how best to avoid another crisis. “There has certainly been an increase in the focus by regulators on the role of corporations and directors and their obligations,” says Kemsley Brennan, special counsel at Colin Biggers & Paisley. “Globally, [the regulators] are all on the warpath.”
This leads to discussion about directors’ duties and how they are to balance their obligations under law and their own exposure when things go wrong. Lawyers are combining legal advice about the legality of a director’s course of conduct and their resulting exposure under D&O policies.
Pro-active advice
“The days of keeping a file open for a long time and hoping nothing happens are over because insurers are keen to understand their exposure,” says Wotton + Kearney’s Chylek. “It’s very much a hands-on role. This is slightly different to the passive role that PI and FI insurers have taken in the past. The environment is such that if some of the worst-case scenarios develop and you’re not ready for it, the numbers can be quite devastating.”
This means that lawyers are working closely with their clients to assist in the management of risks. “The lawyer can offer contributions about identification of risks and how they might be dealt with effectively. That sort of assessment is far better, in my opinion, made by a team where you have the technical people, commercial people and the legal people all working together,” says Greg Skehan, a partner at Colin Biggers & Paisley.
The concept of risk management in insurance matters is not a new one, and certainly has always been a part of the insurance lawyer’s role. Yet insurers and underwriters are now looking to actively manage their claims earlier rather than later. “We have always been engaged early [to advise on a claim]. It’s not a new phenomenon for us,” says John Moore, partner at Thynne & Macartney. “But one thing I would note is that, where there is an exposure, underwriters are trying to manage the risks in-house. They are getting in and tidying it up if they can… and there is definitely a focus on not letting matters just get caught on the litigation treadmill.”
Litigation is costly and time-consuming and early resolution is one important aspect of effective claims management. “There’s been a big push, independent of the GFC, to make strategic decisions to head off class actions at the pass and to make fully informed decisions on how to deal with individual claims which arise for strategic benefit,” says Richard Midgley, partner at Moray & Agnew.
Of course, each individual claim has to be assessed on its merits, says Moore. It’s not just about the early settlement of each and every claim – legal expertise plays an important role in estimating the net result. “Resolve a claim on its merits and be pragmatic where you need to be and that comes with experience in different classes of claims,” says Moore. “Sometimes you have to swallow your pride and move on and resolve a case … but you can’t apply generalisations. You have to be careful to look at it on a case-by-case basis.
The great debate – boutique or full-service?
Insurers are notoriously sophisticated and savvy purchasers of legal services. They are fully aware that they provide a steady source of legal work for an insurance law practice and this has traditionally created pressure on fees. As a result, the legal services market for insurance work has evolved. “The vast majority of work seems to be undertaken by a smaller number of firms, and particularly those with a focus on insurance,” says Chylek. “That is probably highlighted by the growth and increasing presence of boutique insurance practices.”
That’s not to say that insurance law practices within full-service firms are losing out. “At the lower end of the claims market, the boutique firms have less overhead and can handle [low-cost claims work]. But you start getting into the higher end of town –class actions, big D&O claims, corporate collapses – and they are going to be way out of their depth, both in relation to capacity and resources,” says CBP’s Skehan.
“We know they’re in the market, but have we lost work? No.” Colin Biggers & Paisley is pitching at a different level to those boutique firms that offer cost-effective, high-volume work solutions for insurers, explains Murphy.
It is this reputation for high-volume, low-cost work which plagues the boutique insurance practice. “There seems to be a very large lag in market perception in this area,” says Henley, who says he joined Moray & Agnew, in part, because he wanted to work on more complex professional indemnity matters. “Five years ago and probably for the next five years, people will have the same perception of Moray & Agnew as they did 20 years ago. It takes a long time to gain a reputation and it also takes a long time to lose one.” While the firm may have a certain market reputation for its volume work, Connellan says this fails to recognise that it has, for years, been involved with large and complex matters as well.
Having spent around 18 years with Chubb Group Insurance Company, Brennan has gained a great deal of experience as a purchaser of insurance legal services. “You are actually looking at the expertise that the lawyers can provide and you don’t necessarily look at the firm itself,” says CBP’s special counsel Brennan. “You focus on the firm that has the best expertise to offer the insurer or the insured… although [insurers] are looking at [low] rates, those dealing with [more complex cases] tend to accept that they have to pay a higher rate.”
