WTW’s Financial, Executive & Professional Risks (FINEX) Practice collaborates with professionals throughout the directors’ and officers’ (D&O) liability insurance industry to gain perspective into the many facets of our business. In our “D&O Professionals Series,” we feature professionals from various corners of the industry, from executive D&O underwriters to securities litigators to coverage counsel and others. Our objective is to discuss how ever-changing conditions in the broader economy and in business have impacted D&O risk, securities litigation and our industry more broadly.
In this edition, we feature Celia Wright, Principal of Gilchrist Connell, a leading Australian insurance sector law firm.
WTW: What do you consider to be the emerging risks for directors and officers?
Climate, cyber and AI are at the forefront of the emerging risks facing leaders of businesses and not-for-profits in Australia.
Climate related risks manifest in different ways. For example:
We expect to continue to see environment groups and other claimants, with the assistance of activist law firms, testing the parameters of the existing laws to pursue an environmental agenda. The misleading or deceptive conduct laws have already proven a flexible tool generally in Australia and breach does not require an intention to mislead. In 2022 the Full Federal Court declined to recognise a duty of care to protect groups (such as children) from potential harm from climate change. [1] However, this issue is again before the Courts, with judgment pending in a claim brought on behalf of Torres Strait Islanders against the Commonwealth of Australia and regardless of the outcome in that case, is unlikely to go away. [2]
WTW: What are the emerging risks impacting business profitability?
Australian businesses face increased compliance burden and cost due to new laws, including forthcoming cyber and privacy laws (touched on below). While clarification and greater cohesion of the laws and policies in these areas is welcome, this is occurring at a time when many businesses are already facing pressures on their bottom line.
Additionally, the benefits associated with AI create a tension with climate responsibilities. AI is a large consumer of resources. The power required to train large language models and maintain data centers to support AI 24 hours a day, 7 days a week is far greater than traditional technology. Deloitte states that, on average, a gen AI–based prompt request consumes 10 to 100 times more electricity than a typical internet search query. [3] This adds an additional layer of complexity (and therefore costs) when measuring scope 3 emissions or assessing a business’ carbon footprint.
Thirdly, there has been a sustained increase in the costs of attracting and retaining talent across many sectors in Australia. This was acute in the immediate aftermath of the COVID-19 lockdowns and was attributed to the opening up of borders and pent up demand. However, it shows few signs of abating and may be ‘the new normal’ in some industries, such as law and other professions. Jobs and Skills Australia reports that 33% of occupations experienced a shortage in 2024, slightly down from 36% in 2023.[4] The most impacted industries were professionals (48%) and technicians and trade workers (35%), consistent with 2023. Of the top 20 largest employing occupations in shortage, 15 have been experiencing a shortage continuously for the last 4 years.
The challenges for businesses are exacerbated by a series of new workplace laws commenced from December 2023 and set to continue throughout 2025, described as the ‘Closing Loopholes’ laws (being part of a commitment to improve workplace conditions and protections for employees made by the Labour Government during the last election). The laws introduce significant and widespread changes, including from 26 August 2024, a new right to disconnect which permits an employee to refuse to respond to contact or attempted contact from their employer or a third party (such as a client) outside their working hours, unless the refusal is ‘unreasonable’. The right to disconnect has yet to be tested in the Courts.
WTW: Cyber has been a hot topic in past years. In WTW's 2024 Global Directors’ and Officers’ Survey, for the first time in many years cyber-related risks were not at the very top of the list as a concern. Do you think cyber risks have abated?
Now is not the time for business leaders to be complacent about cyber risks. Regulators expect businesses to have a robust risk management framework which addresses cybersecurity risks and are using their powers to investigate and prosecute business that don’t. We also expect to see a growth in class actions and other claims with the introduction of new laws.
In terms of regulatory action:
Australia does not have a human rights charter or legislation, and its appellate Courts have yet to recognise a common law tort of invasion of privacy. Therefore, historically, the avenues for private claims were limited. However, this is about to change. Notably:
WTW: Do you think artificial intelligence will be a material D&O risk over the next three years? Why or why not?
In the medium term, the opportunities offered by generative AI come with significant risks particularly for C suite executives.
A key risk is a gap in knowledge and a lag in upskilling. This presents challenges for directors in implementing effective, safe and responsible AI governance, while remaining competitive through the responsible adoption of AI.
This issue was highlighted in a recent ASIC report following a review of 624 AI use cases by 23 financial services licensees. [7] ASIC found there was a shift towards more use of AI. However, less than 50% of the licensees had policies in place for AI that referenced fairness or related concepts such as inclusivity and accessibility and even less had policies that referenced disclosure of AI use to affected customers. Amongst the risks identified by ASIC was a trend for some entities to assess risks through a business lens, rather than the potential harm to consumers.
Australia does not currently have mandatory bespoke laws governing the development or use of AI. In September 2024, the Department of Industry, Sciences and Resources commenced consultation on proposed mandatory guardrails for ‘high risk’ settings. 9 of the 10 proposed guardrails overlap with the guardrails currently set out in the Australian Government Voluntary AI Safety Standard. Irrespective of whether a company considers it comes within a ‘high risk’ category, all entities and directors should familiarise themselves with the voluntary standard.
An overarching risk is that business leaders take a siloed view of the areas where AI use can lead to exposure. If not properly understood and managed, AI can lead to claims under existing laws relating to privacy, defamation, anti-discrimination, unconscionable conduct, misleading representations, product liability, negligence amongst other areas and in turn, can lead to allegations of breach of directors’ duties in failing to assess and govern risks to the company.
WTW: What do you envision the securities litigation environment looking like in the next 12 to 18 months?
Some commentators suggest a reduced enthusiasm for shareholder class actions in Australia is leading to reduced filings. [8] This is being attributed to five decided cases between 2019 and 2024, each of which were dismissed. [9] Two of those decisions are the subject of an appeal. [10]
The judgments are significant for being the first shareholder class actions in Australia to go to a trial on common issues, rather than settlement. They will have undoubtedly led to adjusted expectations amongst funders and class action lawyers about the willingness of defendants and their insurers to run appropriate matters to a trial.
In our view, the judgments are an aspect of the maturing of the class action regime and development of the law in Australia. Each case was unsuccessful for individual reasons, reflecting the inherent risks in any litigation involving highly complex and factually dependant issues (and subject to the outcome of the appeals). A common feature of all the claims was that the applicant relied on market based causation to seek to establish loss.
The judgments demonstrate that the Australian courts will take a rigorous and principled approach to causation in shareholder class actions and suggest that market based causation (or fraud on the market) may have only a limited role. However, market based causation is merely one of a number of alternative ways to approach causation. We do not expect funders or class action lawyers to be overly discouraged by the judgments.
In 2024 a number of new entrants (funders and solicitors) entered the Australian market, leading to renewed calls for regulation. With the increased availability of After the Event (ATE) insurance and recent judicial clarification that group costs orders are available at settlement stage, Australia remains an attractive market for funders. In our view, securities class actions, in one form or another, will remain an aspect of the class action landscape in Australia for the foreseeable future.
