Climate and Class Action: Who bears the cost?

Date: Tuesday, October 22nd, 2019 by Michaela Hickson.

Fire, tempest, flood, earthquake; natural disasters are part of life in Australia. The 2018 World Disasters Report released by the International Federation Red Cross and Red Crescent Societies estimated that natural disasters in Australia over the past 10 years have resulted in a US$27 billion damage bill A$39.73 billion).

The instance of natural disasters is only increasing. The burden of this is being acutely felt by the insurance industry. As at August 2019 the Insurance Council of Australia had released figures that put the claims cost at A$2.51 billion across the February 2019 floods in Townsville and severe hail in Sydney in 2018.3 The director of the Climate and Energy Program at the Australia Institute, Richie Merzian, has publically expressed concern that the increased instance of natural disasters in Australia may lead to premiums becoming prohibitively expensive. To manage this, do first party insurers spread their risk by looking to third party claims?

The obvious mode to conduct such recoveries is by class action litigation. The instance of class  actions in Australia has increased over recent years, particularly following the High Court endorsing contingency fee arrangements for litigation funders in Fostif’s case. While shareholder class actions make up the bulk of class actions, class action activity around natural disasters is by no means novel.

Class actions are common in the case of bushfires. However, avenues for recovery in the case of bushfires can be difficult. The 2014 ACT Bushfires decision held that agencies responding to bushfires do not owe a duty to prevent the spread of the fire, and at any event, statutory intervention of the Civil Liability Act 2002 and Rural Fires Act 1997 (NSW) offers substantial protection. Similarly, recent decisions in Victoria and Western Australia have found that the imposition of a private common law duty for those affected by bushfires would conflict with the statutory regimes in which energy distributors operate. Relying on well-established principle, the courts refused to recognise a duty of care to prevent ostensibly healthy trees from striking lines or to inspect power poles generally. As such, there was no right of action against the energy distributors.

These decisions follow settlements of actions against energy distributors in New South Wales and Victoria where those defendants made no contribution to the settlement (albeit bearing their not insignificant costs). Conversely, contractors to whom energy distributors delegate responsibility for inspection of trees or power poles have either contributed to settlements or sustained adverse judgments. Indeed, in the Western Australian Parkerville Bushfire action, a home owner was found liable on the basis that they did not detect termite damage to a power pole when the pole fell and started a fire.

While the risk of proliferation and ignition of bushfires is increased by climate based changes, those catastrophes uniquely lend themselves to class action litigation given intervention by humans has the ability to prevent the disaster itself (i.e. removing the ignition source). The position is more difficult with floods, cyclones and earthquakes. Actions are less likely to involve a question of causing the catastrophe, but rather the failure of steps that were taken to mitigate the effects or spread of such a catastrophe.

An example of this is the concurrent Queensland flood class actions of Rodriguez & Sons Pty Ltd v Queensland Bulk Water Supply Authority and Lynette Joy Lynch v Queensland Bulk Water Supply Authority litigated in the NSW Supreme Court. The plaintiffs in those actions allege that the negligent operation of the Wivenhoe and Somerset dams in the lead up to and during the 2011 flood significantly contributed to the extent and the level of flooding downstream of the dams. In turn, the plaintiffs say this created a flood that was much worse than it would have been if the dams had been operated competently. The matter has been heard and judgment is presently reserved. This action demonstrates that human intervention in the management of natural disasters means that the increase in climate based natural disasters is not only a risk for first party insurers, but third party insurers who bear the ultimate financial burden of their insured’s conduct.

The Government is, as always, an insurer of last resort. As mentioned in the July 2019 GILC Risk Radar, France and Norway are both exploring the best methods of managing catastrophe cover; with Norway introducing a Natural Perils Pool with parallels to the Australian Terrorism Reinsurance Scheme. But even if the introduction of a Reinsurance Scheme aids to partially relieve the burden on first party insurers, class actions are here to stay and the risk profile of third party insurers will continue to develop on that basis.