With legislation clarifying class actions making little progress since 2008, Supreme Court stepped in allowing flexible use of High Court procedural rules to expedite legal action by over two thousand Christchurch AMI policyholders who allege mismanagement of their earthquake insurance claims. An ‘opt-out’ class action procedure is best, the Supreme Court ruled. Insurers and litigation funders argued for an ‘opt-in’ procedure.
Class actions overcome a David and Goliath problem. Large corporates hold an economic advantage when challenged by a customer. They have the legal muscle and the financial resources to stonewall threatened litigation, tying up one individual in petty legal time-wasting until the litigant runs out of ready cash and gives up. Where there are multiple similar complaints against a large corporate, each affected customer has to reinvent the wheel, at personal expense, to pursue a legal remedy. Most aggrieved customers do not bother; the potential return is outweighed by the cost in time and money. Australia, Canada and the US devised rules allowing similarly affected consumers to band together, taking legal action in one combined class action. Insurers are no fan of class actions. Large corporates insure against litigation risk, leaving insurers to fight their battles in court. In New Zealand, insurers have been working hard to stall development of class actions in this country. The first major class action in New Zealand was filed by aggrieved investors following Feltex’s 2006 collapse. Millions have been spent to date on legal fees. This class action remains unresolved.
Litigation funders get involved. They co-ordinate and control class actions; signing up affected consumers and charging a sizeable proportion of the final payout as their fee. Litigation funders compete to get work. It becomes a ‘beauty parade’ as rival funders tout their litigation skill and expertise when seeking to sign up customers. Since CBL Corporation went into liquidation in 2018, two class actions have been filed in court, each funded by a different litigation funder.
Several thousand Christchurch AMI policyholders allege Southern Response mismanaged their earthquake claims. Taxpayer-funded Southern Response is meeting the insurance obligations of insolvent insurer, AMI Insurance. The High Court agreed these multiple AMI claims be consolidated into one class action. Legal argument followed on whether the class action should be ‘opt-in’ or ‘opt-out.’ Opt-in means only those who specifically sign up at the outset of the class action benefit from the legal outcome. Anyone else with a similar legal complaint is excluded and has to mount their own separate legal action, at their own cost. In contrast, opt-out means in court documents the class of litigants is described generally and anyone fitting this description is included; individuals ‘opt-in’ at a later stage, signing up in order to get a share of the pie.
Litigation funders do not like opt-out schemes. Opt-out increases administrative costs, with identification of and advertising for those entitled to benefit cutting into funder returns. And there is the problem of free riders; litigants who appear out of the woodwork, opting-in at the last minute claiming a share of the payout without having contributed any funding along the way. Opt-out also complicates out-of-court settlements. Negotiation of a global settlement sum is clouded by the possibility of free riders arriving late, reducing the individual payout to existing members of the class.
In providing a general framework for class actions, the Supreme Court ruled: opt-in class actions are best suited where the potential class is small; opt-out for larger numbers, particularly where the cost of individual legal proceedings outweighs the individual’s potential financial return. In the absence of government legislation governing class actions, courts will have to work through legal issues in specific cases as they arise, the Supreme Court said.
AMI policyholders’ litigation is to proceed as an opt-out class action, the court ruled.
Southern Response Earthquake Services Ltd v. Ross – Supreme Court (17.11.20)
20.178