High Court prefers opt-in for class actions

In a decision released late last year, the High Court permitted two policyholders to bring a class action against Southern Response.1 The Court did not, however, permit this action to be brought on an “opt-out” basis. Following earlier High Court authority,the Court held that New Zealand’s class action regime does not provide for “opt-out” class actions. Potential class members must instead “opt-in” within a prescribed period.

New Zealand is an outlier in this regard. Most common law jurisdictions permit opt-out class actions. However, most of these jurisdictions also have detailed legislative rules regulating those actions, which are missing from New Zealand’s regime. Legislative reform will, it seems, be required if opt-out proceedings are to be permitted in New Zealand.

The facts

This case was brought by a couple whose home was insured by Southern Response3 when the Canterbury earthquakes struck. The plaintiffs house was red-zoned and could not, therefore, be rebuilt on its existing site. The plaintiffs’ instead elected to buy another house, which was permitted under their policy provided that the cost of doing so was not “greater than rebuilding your house on its present site”.

The plaintiffs settled their insurance claim, they say, in reliance on a “Detailed Repair/Rebuild Analyses” (DRA), or cost estimate, provided to them by Southern Response. This DRA set out Southern Response’s estimate of the plaintiffs’ maximum policy entitlement under the ‘buy another house’ settlement option, and reflected Southern Response’s view of the cost items payable.

However, the plaintiffs claimed that Southern Response’s practice was to prepare a second version of the DRA, which included allowances for additional cost items excluded from the DRA version, disclosed to them. The plaintiffs allege that this practice was misleading, and applied for orders permitting them to bring an opt-out class action on behalf of all Southern Response policyholders who had settled their insurance claims on the basis of such a DRA.

While Southern Response consented to orders permitting the matter to proceed as a class action, it disputed the terms of the orders. In particular, Southern Response argued that membership of the relevant class should be determined on an opt-in basis.

Opt-in vs Opt-out class actions

Whether a class action can be brought on an opt-in or opt-out basis can have significant implications for the size of the plaintiff class. The Court referred to research suggesting that approximately 8 per cent of a class might opt out of proceedings, while only 39 per cent might opt in. The parties estimated the number of potential class members at approximately 3,000. Therefore, if the research statistics quoted to the Court were accurate, an opt-out order might result in a plaintiff class of more than 2,700, while only 1,200 might opt in. The difference in these numbers may reflect some apathy on the part of potential class members; if they do not fully understand the dispute or have much at stake, they may see little reason to join.

Notwithstanding this, the Court was not persuaded to make an opt-out order. All class action orders in New Zealand had been made on an opt-in basis, and the Court agreed with the decision in Houghton v Saunders (2008) 19 PRNZ 173 (HC) that the High Court Rule governing class actions, rule 4.24, does not envision opt-out class actions.

In reaching its decision, the Court rejected the plaintiffs’ arguments that:

  1. There is a large potential class of claimants, each with a small claim that might be uneconomic to pursue otherwise. The Court considered that, while this may be relevant to its decision as to whether a class action should be ordered, it was not relevant to whether orders should be made on an opt-in or opt-out basis.
  2. It would be more difficult to notify potential class members of the proceedings, as the class members in this case do not have a “pre-existing community of interest”. However, any potential disadvantage in this could, the Court noted, be dealt with by requiring significant steps to be taken to bring the case to the attention of potential class members.
  3. The plaintiffs did not have access to a register of potential claimants to allow them to notify them of these proceedings. This request was rejected, as Southern Response held that information and most potential class members were likely contactable.
  4. An opt-out was “fail safe”. The Court acknowledged that there was some merit in this argument, but noted that potential class members in this case were unlikely to be ill-equipped to make a decision as to whether to join the proceeding. They were homeowners and likely to have some familiarity with legal and financial matters.
  5. Once a class action is brought, it is brought on behalf of all class members and time stops running for limitation purposes. There was a risk that later claims would be brought if an opt-in order were made, which would lead to inefficiencies in the courts. The Court considered that this concern was slight. Those who are aware of their rights will likely elect to be part of this proceeding, because that would be an opportunity without cost to them.
  6. Opt-out proceedings deter wrongful conduct. Again, the Court was not concerned by this. It was not relevant in this case.

The policy issues discussed by the Court in this case will likely be examined further by the Law Commission, which is currently reviewing the law on class actions and whether opt-out proceedings ought to be permitted. We will be keeping a close eye on the progress of this review, which will be of interest to insurers, banks and other large businesses which may face exposure to class actions.

Footnotes

1 Ross v Southern Response Earthquake Services Ltd [2018] NZHC 3288.2 Houghton v Saunders (2008) 19 PRNZ 173 (HC). 3 Then named AMI Insurance Limited.

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