Ruling rocks the adviser boat

Despite the disco plea of the Hues Corporation in 1974, "Don't rock the boat, Baby", occasionally something happens that gives cause for pause, the placing of hands on the gunnels, and a re-think of what next.

Arguably, a recent court ruling has done just that in respect of what is expected of advisers within the risk insurance advice process.

Considerable discussion has been engaged subsequent to the ruling being made, with much of it focussing on the merit, or otherwise, of the decision. Unfortunately, until a different decision, and thus precedent, is set, merit is immaterial; it should prudently be set aside.

The case is Swansson v Harrison & Ors (2014) VSC 118 (26 March 2014).

A summary of some key aspects, the proceedings and the judgement have been interspersed with thoughts for discussion and debate, and pragmatic examples of possible ramifications.

Background

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In 2004 Richard Swansson accepted the advice of his financial adviser, Russell Harrison, and took out a term insurance policy.

In 2012 when the annual account notice was received, Swansson expressed concern about the premium increase; he asked Harrison to seek out an alternative and less expensive cover.

On 7 March 2012, Swansson met with Harrison to discuss the findings.

The meeting lasted an hour and a half, during which time:

• Harrison recommended that Swansson effect an equivalent amount of cover with a different insurer; Swansson accepted the recommendation;
• An application was completed by Harrison under instruction from Swansson; Swansson signed it; and
• An undated letter authorising cancelation of the existing insurance was prepared by Harrison; Swansson, signed it also.

Adviser responsibility that had already arisen included:

• The well-known need to inform the client of the duty of disclosure, and that it continues until the insurer "has entered into the policy";
• The lesser-known need to physically check the client has understood the duty;
• Advising the client, if appropriate, of the reduced protection enjoyed on the new policy by virtue of Section 29(3) of the Insurance Contracts Act (if unsure, please look it up!); and
• Taking appropriate precautions in regards to the completion of the application form.

A risk also arose, i.e. that associated with obtaining an existing insurance cancelation letter at the same time as completing the application.

In so far that an adviser holds themselves out to be 'skilled', the standard of care expected will be judged accordingly. One alternative might be to represent as 'OK but not really great at providing advice' but clearly this is not going to be a practical solution, let alone a compelling marketing advantage.

While doing this may save time later in the advice process, complications can ensue:

• It signals an assumption that the current insurance is inappropriate ahead of it being reasonable to do so; for example, if the applied-for insurance is loaded or an exclusion applied, it may no longer be appropriate to cancel the current insurance;
• It is not unknown that administration "whoopsies" result in the current insurance being cancelled ahead of the new insurance being in place and even subsequent to an application for insurance being declined; and
• As will be seen, it bypasses an opportunity to make contact with the insured ahead of current insurance being cancelled.

As part of the application completion process, Swansson was required to provide details of the reason for and result of his last medical consultation:

"Sore stomach — giardia — antibiotics resolved."

Although not necessarily material in this case, there are two points worth noting:

(i) Interpretative v factual questions

Some questions in the application form are matters of interpretation. For example, "Have you ever had or been diagnosed with ….."

It may be that an intending insured responds to this type of question in the negative notwithstanding a strictly correct answer would be in the affirmative.

Bearing in mind the reasonable person test within the duty of disclosure, an "incorrect" answer may be acceptable if the event was minor or sufficiently long ago that it is considered irrelevant to the insurer.

On the other hand, some questions are referencing matters of fact; for example, "Please provide details of the reason for and result of your last medical consultation."

Even if the last consultation was for a deemed minor event, there appears to be no opening for an interpretative answer.

(ii) Qualified and unqualified answers

Responses to questions should be in line with the qualifications of those responding. For example, unless someone is medically qualified it may not be appropriate to provide the diagnostic answer "resolved"; a more appropriate response might be "no symptoms since".

An understanding and precision in respect of each of the above might be mistaken for pedantic but it is a pedantic safeguard better appreciated and potentially inportant in a legal setting; refer to Schaeffer & Royal & Sun Alliance, QCA, 9 May 2003.

Subsequent to the completion of the application form, Swansson's circumstances changed:

• On 8 March, he returned to his doctor complaining of a sore stomach; he was referred for an ultrasound;
• On 9 March, the ultrasound gave rise to a diagnosis of ‘pancreatitis; he was referred to a gastroenterologist;
• On 13 March, the gastroenterologist affirmed the diagnosis of pancreatitis; he was referred for an MRCP scan (a type of magnetic resonance imaging); and
• On 22 March, the scan revealed a pancreatic abnormality.

None of the above was made known to Harrison.

On 23 March, Swansson's application was accepted and a policy issued.

On 28 March, Harrison dated and sent the cancellation letter to the previous insurer. No contact was had with Swansson immediately prior to sending the letter.

On 2 May, Swansson had a further ultrasound which led to a diagnosis of pancreatic cancer and within a year his condition had become terminal.

A claim was lodged with the new insurer; however, after some investigation the insurer declined the claim citing a failure on the part of Swansson to meet his duty of disclosure.

Swansson commenced proceedings against Harrison, alleging negligence in so far that he:

• Failed to explain the continuing nature of the duty to disclose material facts;
• Trivialised the significance of the stomach complaint to justify inserting the word ‘resolved' in the application;
• Failed to explain the value of Section 29(3) of the Insurance Contracts Act, and the immunity from the loss of the policy through innocent misrepresentation that provision guarantees; and
• Failed to check with Swansson about his medical condition before finally cancelling the existing insurance.

Proceedings

The presiding judge formed a view that if any of the allegations were proven, then so too would a case of negligence.

The first three allegations revolved around what occurred during the 7 March meeting. These matters were in contention; however, after evidence was heard, judgement was made in favour of the adviser.

In respect of the fourth allegation there was no dispute as it was common ground that no enquiry was made. In respect of this the judge set the scene:

"In contest is whether, in all the circumstances, the lack of enquiry on Mr Harisons's part before taking the step of cancellation amounted to a failure to exercise reasonable care." (Paragraph 43)

"Was it negligent not to make further enquiry about Mr Swansson's condition before cancelling the (other) policy?" (Paragraph 170)

"….whether on the admitted facts Mr Harrison failed to exercise the standard of care that a reasonable and prudent adviser would have exercised in the circumstances." (Paragraph 171)

The basis of the standard of care was clarified:

"Where, as here, allegations of negligence are made against a skilled insurance adviser, the standard of care against which the defendants' conduct is to be judged is determined by reference to what could reasonably be expected of a person possessing such skill." (Paragraph 173)

The judge found that:

"In my view, for the reasons that follow, Mr Harrison did fail to exercise the standard of care required of him and he was thereby negligent." (Paragraph 174)

The reasons followed (in part):

• "Mr Harrison knew of the special value of the (other) policy, compared to the (new) policy, in that it could no longer be avoided for innocent non-disclosure;
• Mr Harrison was aware that Mr Swansson had been to a doctor only two days before the interview on 7 March, a very short space of time in which to be sure of his recovery;
• By the time he was poised to implement the cancellation of the policy, Mr Harrison was aware that three weeks had elapsed since he had heard from Mr Swansson, meaning that the last information he had about his client's stomach complaint was by then out of date; and
• It was a relatively easy thing to make an inquiry of Mr Swansson about his current medical status, he merely had to make a telephone call." (Paragraph 177 & 178)

In so far that an adviser holds themselves out to be "skilled", the standard of care expected will be judged accordingly. One alternative might be to represent as "OK but not really great at providing advice" but clearly this is not going to be a practical solution, let alone a compelling marketing advantage.

Another alternative is to pause; put hands on the gunnels and re-think what next with a pragmatic rather than critical mind, remembering that, once made, a judgement can form a precedent against which both past and future actions will be assessed i.e. in real terms, the judgement is backdated.

Practical manifestations are limitless; however, two case studies may show that the ruling of the bar in this case has raised a different bar.

Case Study No.1

Annie has been on an income protection insurance claim for five years. For most of this time, partial disability benefits were paid and will continue to be paid.

During each of the past five years, the insurer has requested and Annie has provided within a reasonable time, the requisite financial information.

As the fifth year draws to a close, the insurer advises Annie it is undertaking a "routine audit of past benefit payments". Future benefit payments are put on hold while the audit is undertaken.

Several months later, the insurer writes to Annie claiming inconsistencies between the unaudited monthly and the audited end of year accounts throughout the duration of the claim. This, it is further claimed, resulted in an "overpayment" of $45,000. Bearing in mind the suspended benefits due now total $50,000, the insurer is pleased to attach a cheque for $5000 in settlement.

Annie is suddenly placed in a position of financial duress as she only received 10 per cent of what she expected by way of a current benefit payment. Also, believing she had been paid the correct amount in the past, any so-called overpayment is long spent.

Setting aside the ethics and reasonableness of the insurer's actions, if Annie was to act in line with the judgment above, her next steps might be to ascribe negligence to her adviser for failing to go back to the insurer each year after financial evidence was provided and obtaining validation of payments to the end of that financial year.

Had the adviser not "failed" in this duty, any issues in respect of overpayments would have been identified and corrected immediately rather than up to five years later.

Case Study No. 2

Bob is claiming under his income protection insurance policy subsequent to suffering a major depressive episode.

Bob's insurer advises him they have some matters they would like clarified, so they have arranged for a "factual interview" to be conducted by an external person who specialises in this area.

Apart from being given details of when and where, Bob is told nothing more.

Bob speaks to his adviser who indicates this is reasonably common, so provided Bob is open and honest in what he says, everything will be fine.

In the days leading up to the interview Bob becomes increasingly nervous; he does not know what to expect, what matters are to be discussed and how long the interview will take.

Bob attends and his concerns immediately manifest as he is asked if he has any objection to the interview being taped. Unaware of his rights, Bob stammers "no".

The interview (or closer to a relentless interrogation from Bob's perspective), continues with apparently random topics being raised and questions being asked. Bob is quite simply unsure of what is going on but he does his best to follow the adviser's instructions and answer honestly.

Two physically and emotionally draining hours later the interview ends. Bob is so shaken by the experience he suffers deterioration in his mental condition and his doctor increases his medication.

Two weeks later Bob's condition worsens when his insurer advises that information provided during the interview has led to a reassessment of his claim, which has now been closed.

Bob and his adviser struggle to understand what has happened and it is only Bob's solicitor who can explain: Bob's adviser failed to exercise a reasonable standard of care.

The adviser did not:

• Obtain details of what matters would be covered in the interview, how long it would take, who would be undertaking it and what was their background and qualifications;
• Take into consideration Bob's known medical condition and suggest he speak to his doctor about his fitness to attend the interview;
• Inform Bob that he could have a support person with him during the interview and did not organise for a qualified person to attend; and
• Ensure a copy of the transcript of the interview tape and the report to the insurer were made available to Bob at the same time they were provided to the insurer.

Summary

Court rulings like this can cause waves of sufficient size to rock the boat.

The temptation might be to critique, criticise, and try to carry on sailing.

A better strategy is to recognise that risks exposed within these rulings reveal otherwise hidden opportunities to:

• Up the ante in client services, and in so doing:
• Up the ante in the adviser value-add proposition and competitive advantage.

Counterparts reflecting on the upped ante may call on the Hues Corporation again with pleas of envy: "I'd like to know where you got the notion …?"

Col Fullagar is the principal of Integrity Resolutions Pty Ltd.