Duty of care reality checks
Advisers must be extremely diligent about ensuring they fulfill their duty of care, as two recent court cases have shown. David Glen runs through the post-FOFA adviser checklist.
Two recent court decisions have highlighted the length and width of the boundaries of a life insurance adviser’s duty of care to clients. These duties are comprehensive, and emphasise the community’s expectation that the standard of care required from a life insurance adviser is that of a diligent professional, rather than the more limited requirement of a product seller to act honestly. These decisions emphasise that discharging these duties goes beyond a presentation of a wordy statement of advice (“SOA”) based on a template full of health warnings and caveats of which the client may have limited understanding.
The fact that a client signature appears at the end of the SOA below a declaration that all issues have been comprehensively explained to the client and fully understood by him or her is not a reliable shield for the life insurance adviser.
Advisers should take note of the impact of these decisions, and review their business practices to ensure that their dealings with clients meet the requisite standards. In addition, advisers need to manage client amnesia and misunderstandings. The adviser’s conduct will be assessed with the benefit of hindsight. The reality is that clients or family members will be disgruntled when the cover in place fails to meet expectations, and will be on the hunt for someone to carry the consequences of this shortfall.
The Couper case
The first case, Commonwealth Financial Planning (Comm FP) v Couper [2013] NSWCA 444 involved a client who acted on advice of a Comm FP planner. This planner recommended a switch from a Westpac Policy to a policy issued by Comminsure. Unfortunately, the client developed fatal pancreatic cancer a few months after changing his insurance policy, and eventually died as a result of this condition. Comminsure avoided the policy on the basis that there had been non-disclosure of the client’s history of alcohol consumption. Everyone accepted that the avoiding of the policy by Comminsure was valid. The client brought an action against the adviser and the dealership group, Comm FP for compensation for the loss caused by the insurer avoiding the policy.
The Court ultimately held that the adviser’s conduct constituted misleading or deceptive conduct contrary to Section 1041H of the Corporations Act, as the adviser failed to point out to the client the impact of the provisions of Section 29(3) of the Insurance Contracts Act 1984. This section precludes a life insurer from avoiding a contract for reasons of non-disclosure after a period of three years, unless the non-disclosure is fraudulent. If the life insured had retained the original Westpac policy and paid all premiums due under that policy, the policy could not be avoided for innocent non-disclosure because the three year period since inception of the policy had lapsed. The advice of the CFP adviser failed to point out to the client the impact of this rule. Had the client been warned of this rule, it is likely that he would not have made the decision to switch from Westpac to Comminsure.
The Couper decision was appealed to the NSW Court of Appeal by the adviser and CFP. The appeal was dismissed. The appeal judgement dealt extensively with issues of witness credibility. However, some interesting principles can be inferred from this case. All insurance advisers should note the facts and circumstances of the Couper Case, as they grapple to establish the scope of their obligations in a post-Future of Financial Advice (FOFA) world. Although the case was based on the Corporations Act prior to the FOFA amendments, the Appeal Court commented that the ‘unfortunate facts’ of this case tend to bear out the recommendation to introduce a statutory fiduciary duty requiring advisers to place their clients’ interests ahead of their own.
Ravesi decision
The second case, Ravesi v National Australia Bank involved a client who had a range of insurance needs which were identified in the prepared by the adviser concerned. However, the authority to proceed in this case only specified a limited amount of cover which was duly effected. The client subsequently suffered an accident, and the claim proceeds fell below expectations. An action was brought against the adviser for failing to ensure that the cover articulated in the SOA was duly effected, or alternatively that the client was not alerted to the ramifications of effecting cover at the lower levels contained in the authority to proceed. There was no evidence to explain the reason for the differences between the cover originally advised and the cover eventually taken. The court held that the adviser was negligent for failure to address the consequences of the discrepancy between the cover in the SOA and the cover taken. The client was alerted to the actual amount of cover provided via the annual renewal notice and therefore his own negligence contributed to his loss. Therefore, the damages were reduced to recognise the client’s contributory negligence.
Lessons judgements
These cases provide invaluable assistance to advisers who are seeking to manage their professional indemnity risk by implementing appropriate procedures and assessments.
Dollar for dollar comparisons insufficient
Advice which recommends that an existing policy be switched on the basis that the proposed new policy is cheaper on a like for like, dollar for dollar basis should only be completed after an extensive analysis of the provisions of the product being abandoned. Without this type of analysis, a client is not capable of making an informed decision that the original policy should be abandoned.
Challenges for tied advisers
A tied adviser who is precluded from recommending products, other than the in-house product would have an extremely difficult, if not impossible task in providing complete advice. The adviser in the Couper case was limited to recommending cover from Comminsure and was not permitted by his employer to recommend maintaining an existing policy with a competitor.
Stepped versus Level
Any insurance advice should address the question of stepped versus level premium. The SOA in the Couper case recommended stepped cover without clearly articulating the case for stepped premium.
The stepped versus level premium rate option needs to be analysed beyond the impact on the first year premium. The Court in the Couper case did not prescribe the approach to be taken in this comparison exercise, but emphasised that it is misleading to do a stepped/level premium comparison looking at the first year’s premiums only.
The non-disclosing client
SOAs traditionally emphasise the importance of full and true disclosure of health and finance issues, and the possibility of insurers avoiding policies for non-disclosure. Advisers need to be mindful of emphasising the importance of proper disclosure in all discussions.
The provisions of Section 29(3) of the Insurance Contracts Act also need to be taken into account in any switch. This section can result in a freshening of the three-year non-disclosure period where the policy being abandoned in a switch proposal has been in force for more than three years. In the Couper case, Westpac could not have avoided the policy for innocent non-disclosure. The switch to a Comminsure policy created a new three year period. This is not fatal to a client without health issues where the switch to the new product represents more favourable terms for the client.
Comprehensive SOA may not be enough
The tactic of a wordy SOA full of caveats and disclaimers is insufficient in itself as a risk management tool. There is no doubt that there is a place for a judiciously worded SOA canvassing the underlying risks. However, the risks need to be outlined in full to the client verbally, and the adviser needs to ensure that the client fully understands the impact of the underlying risks. In Couper’s case, the Court did not require a delay between the delivery of the SOA and the decision to proceed. Clients are at liberty to make informed decisions immediately. However, a comprehensive and comprehensible explanation is needed if this occurs, and these events need to be documented by a contemporaneously prepared file note.
Where the client is financially unsophisticated, the diligent adviser needs to exercise extra care to ensure that there are no gaps in the client’s knowledge. In Couper’s case, the client was a construction site worker with below average reading and writing skills. The client’s evidence stated that documents were passed over to him for signature without explanation.
Template dangers
Beware of the SOA template. The SOA template used in the Couper case was the standard Comm FP template, and this template did not provide for the impact of the freshening up of the three-year non-disclosure period, even though it envisaged a switch of policies. This means that advisers need to be careful to ensure that the SOA is relevant to the client’s facts and circumstances. Slavishly following the template without question runs the risk of omitting items relevant to the specific circumstances of the client. The idea of value-added advice is based on analysis which recognises the unique circumstances of the case under consideration.
Beware of the template being completed by the paraplanner without proper review by the adviser and the discussion of its contents with the client. The Court in Couper was critical of the SOA template factory operated by a paraplanner. It may be appropriate for a paraplanner to prepare the SOA, but proper adviser review is essential.
Post SOA follow up
Follow up of variances between the requirements as disclosed by the SOA, and the insurance arrangements eventually placed are vital. Advisers are exposed if, as in the Ravesi case, the insurance arrangement adopted falls short of the SOA recommendation.
There is a particular danger in the case of a client who responds to the SOA recommendation by saying that he cannot afford the recommended cover. In this case, the adviser needs to outline carefully the scope and extent of the shortfall plus the possible outcomes of not being fully covered.
Way forward
In broad terms, what is the approach that should be taken following these cases?
Our analytics need to be consistent with those adopted by risk management professionals. The points of vulnerability in the client business and domestic situations should be identified and the potential loss if the risk materialises should then be quantified. Once the risk is quantified, the adviser and the client should then jointly explore the risk management techniques available.
Transferring the risk to an insurer is simply one of the risk management techniques available. Other techniques include the creation of sinking funds to manage a risk, or acceptance that the consequences of the risk will be carried by the client. This approach enables the adviser to document the chosen path of risk management. This also increases the chance of the client understanding the scope of the risks involved, the portion transferred to the life insurer, and the portion carried by him or herself.
The above two cases are landmark cases in the sense that they ring warning bells that the community requires our industry to move to a higher level of professionalism. In a sense, the cases confirm the trend already present towards more onerous duty of care, especially since the introduction of the best interests duty in FOFA. These circumstances require everyone in the life insurance industry to adapt to the new paradigms.
David Glen is national technical services manager for TAL Life.
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