Is this something that a simple Java update from Apple can fix?
It's not a bug - it's a feature. Java applets are allowed to read and write your computer's hard drive under certain circumstances. This is by design.
When an applet is signed with a certificate, the user can be asked whether it's OK that the applet accesses the computer. The user can either click yes, no, or view the certificate to get information on the people that signed the applet. If you click no, the applet is not allowed access.
If you click yes, the applet has the same access as you have. That is, it can change all the things you can change without an admin password. It can also ask you for the admin password and if you provide it, it has full control over the system.
The problem is that people have a tendency to click yes whenever a popup box comes along.