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AUSTRALIA: LAWSUITS ON THE RISE DOWN UNDER

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SYDNEY, Australia-Litigation in Australia is increasing, though it has yet to harden insurance prices.

Australians are starting to take advantage of class actions, introduced through an amendment to the Trade Practices Act five years ago. And there has been an increase in negligence claims against professionals, particularly doctors and property appraisers, leading to higher professional liability premiums for those occupations.

Some appraisers have seen 100% increases, and some obstetricians no longer will deliver babies because the premiums are unaffordable. Rates for other medical care providers also have risen, though not as high.

Still, most insurers and attorneys agree there is no "explosion" of litigation, nor is the market hard for product or professional liability insurance products.

The Australian legal principle that an unsuccessful plaintiff pays a defendant's court costs remains a disincentive to sue, lawyers and insurance industry sources say.

But, at the same time, no one predicts a decrease in litigation. Many defense attorneys say the growth in plaintiffs law firms, and their willingness to work on a no-win, no-fee basis, or for a percentage of a settlement or court award, means actions will increase, even though courts order plaintiffs to pay costs.

And that means risk managers must take steps to protect their companies from legal actions.

Stuart Clark, product liability partner with the Sydney office of law firm Clayton Utz, said Australia has "adopted everything that's bad about the U.S. legal system," including active plaintiffs lawyers who are copying actions in the United States.

The increase in litigation is due to increased awareness by consumers of their rights and a willingness to press their rights, says Kathryn Rigney, a defense lawyer with the Sydney office of national law firm Phillips Fox.

Brian Crews, insurance and risk manager with Sydney-based manufacturer Unilever Ltd. and national president of the Assn. of Risk & Insurance Managers of Australasia, agrees.

"Consumers today see their solicitor before their doctor" if they are injured, he said. "Consumers are more aware of their rights," and the climate now encourages lawsuits. "That's all very well, but someone must pay, and there's a hidden cost in every claim that will be reflected in product prices," he added.

Ms. Rigney said that, for the most part, the increase in litigation is directed against professionals. "I'm not sure the (attorney) ambulance chaser is alive and well, but there's certainly an increase in claims against professionals, and they are now more willing to give expert evidence for plaintiffs," she said.

In the past, "professional solidarity" stopped professionals, such as doctors, from testifying against their own in malpractice and professional negligence cases, but there is now more sympathy for plaintiffs and an increased feeling that they are entitled to compensation, she said.

Ms. Rigney said media coverage of litigation also contributes to the increase and "sometimes people can have unrealistic expectations" about the level of damages they may be able to receive.

Liability claims are on the increase because claimants are "becoming more audacious, aggressive and innovative," suggests John Van Wetering, liability division manager with the Melbourne office of loss adjuster GAB Robins.

Claims handled by his firm are most often brought by adults between 20 and 30 years of age. Only 38% are older than 50, Mr. Van Wetering said.

"We now live in a society where a significant portion of the population believes someone else should accept the blame for their misfortunes," he observed.

An addition to Australia's Trade Practices Act in March 1992 paved the way for class actions in Australia. Several are in the works:

Melbourne law firm Slater & Gordon is pursuing a class action on behalf of 550 claimants alleging they were injured by eating contaminated peanut butter. The action is against Kraft Food Ltd. and General Foods Pty. Ltd., manufacturers of the peanut butter (BI, Sept. 2, 1996). A mediator has been appointed in an attempt to resolve the claims.

Melbourne-based manufacturer Pacific Dunlop Ltd. faces a Federal Court class action from up to 1,200 claimants who allege they were fitted with heart pacemakers with faulty leads. Foreigners have been excluded from a case being pursued in the United States against the former Pacific Dunlop subsidiary Telectronics, which made the pacemakers, prompting Australian plaintiffs lawyers to take action here.

Cattle farmers in Queensland and New South Wales are suing Melbourne-based chemical manufacturer ICI Aust. Operations Pty. Ltd., alleging cotton plant trash, fed to drought-starved cattle, led to their meat being infected with the chemical helix, reducing the export and domestic value.

Peter Thomas, a consultant with the Gunnedah, New South Wales-based law firm Peter Long & Co., said the case for 450 identified farmers and up to 3,000 others starts March 24 in the Federal Court of Australia in Sydney.

The farmers are seeking $125 million Australian ($95.6 million) in damages. Mr. Thomas said the New South Wales and Queensland state governments had been joined as defendants because they are responsible for the registration of chemicals like helix. ICI has filed cross-claims against cotton gins and cooperatives, alleging they were negligent in allowing the trash to be fed to cattle. That action will be heard when the current proceedings, expected to take six weeks, are completed.

The United States banned some Australian beef shipments in November 1994, when the helix contamination was discovered (BI, Oct. 16, 1995).

Other actions, being contested in the states' supreme courts on behalf of groups of consumers, include:

A New South Wales Supreme Court action by nine women alleging that their use of Copper 7 intrauterine birth control devices resulted in infertility. Clayton Utz is defending the U.S. manufacturer, G.D. Searle & Co. Mr. Clark said 270 women sued Searle and nine cases were taken as test cases. Mr. Clark, who said he expects the case to resume April 14, is confident of a win, noting Searle prevailed in the vast majority of actions taken against it in the United States.

Cases are listed for hearing in several state supreme courts for women claiming injuries from silicone breast implants.

Mr. Clark said the first Australian trial is expected to start in Victoria next year. Most are against the Australian arm of Dow Corning Corp.

Ms. Rigney said class actions are "a powerful weapon" for plaintiffs, and she predicted they will increase in popularity.

Class-action suits are a concern for insurers "because of the unknown scope of the claim, at least in the early stages of proceedings," Ms. Rigney said.

She said insurers and their policyholders often prefer to settle the claims early on rather than pursue the cases, thus avoiding bad press and high legal bills.

Michael McGarvie, product liability partner with the Melbourne-based plaintiffs law firm Holding Redlich, agreed. Defendants and their insurers are "willing to deal directly, and at an early stage, with product liability claims made against them where injuries are identifiable, the presence of defects hard to dispute, and claimants' settlement expectations are not excessive," he said.

Unilever's Mr. Crews said if a case is "clear cut that we are responsible, we will pay a reasonable figure. If we are not at fault, we'll fight it."

Apart from the product liability cases, other class actions in the Australian courts stem from corporate failures in the 1980s and early 1990s.

On Feb. 3, a case that could drag on for a year if it isn't settled began in the Victorian Supreme Court. Investors in a failed Melbourne-based investment company, Estate Mortgage Ltd., are suing former directors of the trustee, trading group Burns Philp & Co., its auditors and other advisers, alleging a failure in their duty to ensure there were no breaches of trust. Estate Mortgage failed in 1990, after 45,000 investors had placed $650 million Australian ($497 million) in unit trusts with the company.

Ms. Rigney said the Estate Mortgage case is just one of several major corporate cases. Several others are against property appraisers over large assessments given on properties in the 1980s, which were devalued quickly post-1987.

In Sydney's Federal Court, the Australian Securities Commission, which regulates companies, is taking action against investment manager Permanent Trustees Pty. Ltd. on behalf of 23,000 investors, seeking $210 million Australian ($160.6 million) in damages. Permanent Trustees authorized investment in property that was subsequently devalued.

In the D&O market, there are several high-profile actions. Gerry Power, directors and officers liability manager with Sydney-based AMP General Insurance's Corporate & Special Risks Division, says the U.S. statistics in the latest Watson Wyatt Worldwide survey should concern all Australian company directors.

"Australia is following the U.S. trend towards a dramatic increase in corporate litigation," he said. In the United States, 25% of respondents to the most recent annual Watson Wyatt survey on D&O liability trends reported they had received at least one claim. He cites the following as examples of the trend:

A $340 million Australian ($260 million) negligence action by the Australian Securities Commission against five ex-directors of Adelaide Steamship Co. and its auditors is expected to go to trial in the Federal Court late this year. The High Court last year dismissed an appeal for a judicial review.

A mediator is being used in a bid to resolve a $66.5 million ($50.8 million) dispute between Fosters Brewing Group Ltd. and directors of Fosters' former parent, Elders Ltd. The directors were successful last year in defending charges that they conspired to defraud Fosters shareholders through sham foreign investment exchange payments. A judge ruled the National Crimes Authority investigation unlawful and evidence from it inadmissible.

But, despite the increase in corporate litigation, the D&O market in Australia is soft. Ms. Rigney said the fact that capacity has increased faster than demand is responsible. All directors should consider buying D&O coverage and coverage for legal expenses, Ms. Rigney said.

Defense attorneys warn that when the inevitable happens and contingency fees become legal in Australia, litigation will increase. For now, plaintiffs lawyers are barred from taking a predetermined percentage of a settlement, though they can operate on a no-win, no-fee basis.

Peter Coldbeck, senior partner with Melbourne firm Hall & Wilcox, said it is only a matter of time before contingency fees are legal in Australia.

He also said insurers have contributed to consumers' propensity to sue, saying insurers are keen to curtail legal costs, so they are "adopting a commercial approach endeavoring to settle claims" early. But that "encourages claims with little or no merit," he contends.

Mr. Coldbeck, who also is national president of the Australian Insurance Law Assn., predicts an increase in litigation for medical negligence, for premises liability, accidents in public areas, claims against professionals, and for superannuation funds' trustees if the funds have not performed well. Superannuation is a compulsory, employer-funded program to finance retirement income.

In the meantime, the message to risk managers is clear.

Australia's Competition and Consumer Commission, a Canberra-based federal government body, is anxious to take action on consumers' behalf if it considers companies "disinclined to take their responsibilities seriously" on product safety, said Allan Asher, deputy chairman.

Lessons must be learned from Garibaldi Smallgoods Pty. Ltd., Kraft and Woolworths Ltd., he said. "Product safety is a risk and must be recognized and managed." Company directors from manufacturer Garibaldi initially faced manslaughter charges over the death of an infant who ate allegedly contaminated meat products (BI, Oct. 16, 1995). The charges were dropped late last year.

Sydney-based retailer Woolworths had to recall a range of children's nightgowns in 1995 when it was found they did not comply with required fire safety standards.

Ms. Rigney suggests major companies must address their legal compliance and risk management strategies to keep themselves out of court, and they must make sure their insurance coverage is "appropriate and covers all their risks."

Risk managers must pay attention to quality control and recall procedures, ensure they are fully documented, and constantly monitor them to improve them, said Mr. Crews.

He advocates cooperation with health authorities and others when the need for a recall occurs, as it can mean a faster, less-publicized solution to a potential problem.