Senior Journalist Emily Saint-Smith examines three recent court cases and considers the ramifications the outcomes pose for anyone working in the risk advice sector. In her report, Emily has documented a cross-section of adviser opinions on the court decisions and the impact they have had on their businesses…
Case 1: Ravesi v National Australia Bank – Read full Case Study
The case
In the case of Ravesi v National Australia Bank (NAB), the plaintiff, Paul Ravesi, argued that he was entitled to damages because his adviser, Peter Moore, an employee of NAB, failed to take out the correct insurance policies on his behalf. Mr Ravesi suffered a serious accident, for which he was entitled to claim on his insurance, at which time he said he discovered that only half the cover he expected had been put in place.
The findings
The Judge found that the adviser was at fault, ruling that Mr Moore had failed to follow the client’s instructions, and was therefore in breach of contract.
The Judge stated that regardless of whether the request had been made by the client, the adviser had a duty of care towards the client to question whether they fully understood the consequences of their decision.
“A cautious adviser was likely to have recorded such an instruction, being a significant departure from the advice…” Judge Mansfield said.
However, the client was deemed to be partly to blame, because he failed to pick up the error by reading the policy documentation issued by the insurer (MLC). Damages were therefore reduced by 40%.
Judgement was for the plaintiff in the amount of $110,460.
The ramifications
1. Question client actions
The Judge in this case found that it was reasonable to expect that an adviser acting in the same situation as Mr Moore would have questioned why Mr Ravesi decided to reduce his cover. Simply accepting that it was ‘the client’s decision’ was not, in the Judge’s mind, an appropriate course of action for an adviser to take.
A number of advisers have commented that they regularly recommend the highest possible level of cover for their clients, or extra benefits and features, with the understanding that these can be ‘dialled down’ if the client has affordability concerns.
One adviser said: “…most advisers would generally recommend more than what the client usually wants as determined by the financial needs analysis. I recommend every cover now and let the clients decide what they don’t want or can’t afford. Of course you never have enough cover at claim time!”
As noted in this case, financial advice clients look to their adviser as an ‘expert’ in their field. Therefore, advisers should be cautious when dealing with clients who request a departure from the original advice recommendation. Our readers shared the view that it is vital to document any changes, along with the reason behind them. While this may add extra time to the process, the adviser has the peace of mind that if the client questions the decision later, they don’t have to rely on ‘he said, she said’.
Adviser, Mark Thompson, shared his process: “I ask clients to email me with instructions when they don’t want to follow recommendations that they had formerly agreed on.” In these circumstances, he also suggested asking the client to re-sign the Authority to Proceed.
Had the adviser clearly documented this instruction, the client is unlikely to have been successful in their claim
2. Keep detailed documentation
Much of the evidence relied upon in this case was the documentation prepared by Mr Moore during the advice process, such as the Fact Find and Statement of Advice (SoA). In nearly all cases, this documentation was incomplete, or unclear. In passing judgement in this case, Judge Mansfield said there was no evidence to suggest the client had instructed the adviser to remove an element of the cover originally recommended. Had the adviser clearly documented this instruction, the client is unlikely to have been successful in their claim.
As adviser, Ken Ryan, pointed out, no matter how small the event or discussion may appear at the time, it is important to document it and, if in doubt about its appropriateness, ask the client to sign-off on it.
3. The importance of reviews
No annual review appointments appear to have occurred between Mr Moore and Mr Ravesi. The Judge did not refer to any additional meetings between Mr Moore and Mr Ravesi after the cover was issued, and on the pro forma document completed at the start of the advice process, the section where the client was to nominate their preferred review meeting arrangement was left blank.
Mr Ravesi also appears not to have read and/or understood his annual insurance renewal notices. This fact led the Judge to determine that the plaintiff was partially negligent, but did not completely exempt the adviser from his responsibility. Similarly, most advisers would attest to the fact that clients seldom read paperwork, and are also not proactive about notifying their adviser when their circumstances change.
Had a review meeting occurred in the intervening three year period, the gap in Mr Ravesi’s cover is likely to have been identified prior to his accident.
Case 2: Commonwealth Financial Planning v Couper (Appeal) – Read full Case Study
The case
Commonwealth Financial Planning (CFP) entered into a legal battle with the executor of the estate of a client whose insurance claim was denied due to non-disclosure.
The client was approached by the bank-based planner and encouraged to switch his life insurance cover from Westpac to CommInsure. One year later, the client was diagnosed with pancreatic cancer and two months later he was classed as terminally ill. His claim was avoided by CommInsure due to non-disclosure.
(The Insurance Contracts Act decrees that an insurer can void a policy within the first three years if the insurer can show it would not have offered cover had the client fully disclosed all relevant information. The non-disclosed issue does not have to be the reason for the claim – it just needs to be a reason the insurer would not have offered cover. After three years, this rule no longer applies, and the insurer needs to prove that the non-disclosure was fraudulent or the misrepresentation was made fraudulently.)
Because the insurer acted within their rights in denying the claim, the client took out proceedings against the adviser (and ultimately the adviser’s licensee) for failing to explain the risks of switching insurance policies.
The findings
In the original trial, the Judge relied on the evidence of Ms Couper (the client’s executor) and her father (the client) to conclude that CFP’s authorised representative engaged in misleading and/or deceptive conduct in two respects: that he misled Mr Stevens into thinking the new policy would protect his estate, when in fact it was avoidable; and that the CommInsure policy was better than the Westpac policy.
This decision was unsuccessfully appealed by CFP in 2013. The Court ruled on appeal that the advice:
- Wrongly supposed a comparison could be made between the CommInsure and Westpac policies, because at the time the advice was given, it was not known whether CommInsure would insure the client and on what terms (the comparison that was included in the advice also incomplete)
- The adviser was not permitted by his employer to recommend the client maintain his Westpac policy
- The advice failed to disclose the consequence of innocent non-disclosure and the ability of the insurer to void the contract within three years if this occurred.
CFP was forced to pay the client’s life cover sum insured as well as additional costs.
The ramifications
1. Research and document product comparisons
In this case, the comparison between the new and old policies was incomplete, and led to the conclusion that the advice provided was misleading.
The Judge criticised both the premium and benefit comparison recorded in the advice documentation. As evidenced by the SoA, the adviser only compared premiums for the first year of the policy, recommending a stepped premium option. If the adviser had recommended the level premium option, this would have appeared immediately uncompetitive against the Westpac policy. The SoA provided the reason for the replacement advice as: ‘existing life insurance more expensive dollar for dollar and no trauma insurance within the existing policy’. The court found this statement could not be made, as the adviser was not in a position to know if the new insurer would accept the client and if so on what terms.
regardless of any rating provided by an external research provider, advisers must understand the features of each product they advise on
BT Insurance’s Senior Product Technical Manager, Katherine Ashby, recommends that written advice to replace a policy based on premiums needs to include reference to any conditions on which the advice rests – for example, acceptance at standard rates. Further, it must include reference to the structure, stepped or level premiums, and consideration of the costs beyond the first year.
The adviser in this case also claimed he was unable to recommend a competitor’s product. This has ramifications for all advisers working under a limited approved product list (APL), particularly in light of the new best interests duty.
In guidance issued in August 2013, the Australian Securities and Investments Commission (ASIC) explained that the best interests duty requires that advisers demonstrate they have conducted reasonable investigations into the financial products that achieve the objectives and meet the needs of the client. But while advisers may rely on investigations conducted by their licensee into the various products on offer to satisfy the duty, ASIC has stated that ‘… it will not be sufficient to rely only on the fact that the product is on the approved product list’.
ASIC said that, regardless of any rating provided by an external research provider, advisers must understand the features of each product they advise on.
2. Clearly articulate the duty of disclosure
While the advice provider and insurer are ultimately the same entity in this case, it should still be noted that the insurer was within its rights to avoid the policy, because of the client’s non-disclosure.
The adviser claimed he was not aware of the three-year ‘innocent non-disclosure’ clause, but this was not a sufficient defence, as a reasonable adviser operating as an expert in this field would be expected to know this.
The Judges’ finding in favour of the client highlights that the adviser must do everything in their power to ensure the client understands their duty of disclosure, especially when switching policies. As one reader commented: “While the Judge found he had non-disclosed (given incorrect information) his motives or actions were not fraudulent. The Judge described Mr Stevens (the client) as ‘unsophisticated’ in financial matters. People like that need to be properly guided and supported through the application process.”
Case 3: Swansson v Harrison and Ors – Read full Case Study
The case
After receiving his annual insurance renewal notice in the mail, the plaintiff, Richard Swansson, asked his adviser, Russell Harrison, to arrange a replacement life insurance policy which was less expensive but offered the same benefits.
Together, they completed an application for a new insurance policy with AIA Australia, which was issued approximately three weeks later. Mr Harrison then forwarded a pre-signed cancellation letter to Mr Swansson’s previous insurer, AXA, cancelling his old policy.
Some months later, Mr Swansson was diagnosed with pancreatic cancer and made a claim on his life insurance for a terminal illness benefit. As in the case of CFP v Couper, the client’s claim was denied on the grounds of non-disclosure. The client sued his adviser, Mr Harrison, for failing to inform him of his duty of disclosure.
The findings
The Judge determined that Mr Harrison had followed appropriate procedure in informing Mr Swansson of his duty of disclosure, and the fact that this duty continued while the policy was being underwritten.
However, the Judge also found that both the client and the adviser were jointly negligent in their duties when it came to the cancellation of the AXA policy, for failing to ask (in the case of the adviser) or disclose (in the case of the client) anything further about the previously identified stomach condition and the additional medical treatment.
Judge Macaulay therefore awarded the plaintiff damages in the sum of $738,727.35 (half of the claim benefit Mr Swansson would have received if his existing insurance was in place).
The ramifications
1. Ensure clients understand their duty of disclosure
This case again highlights the value of implementing a strict process for informing clients about their duty of disclosure. While the Judge was satisfied with Mr Harrison’s evidence that he had discussed the duty of disclosure with his client on three separate occasions, Mr Harrison has subsequently taken steps to amend his advice process to close any potential gaps.
His practice now asks clients to sign the SoA in two places: once against the Authority to Proceed, and the other against the duty of disclosure, which is written in full within the SoA, to confirm that the adviser has discussed the duty with the client, and that the client understands their obligations.
The case also led Mr Harrison’s licensee, Synchron, to develop a client-facing video which explains the duty of disclosure in plain English.
Other advisers suggested utilising tele-underwriting to mitigate any risks of non-disclosure. This is because there is a recording of the information that has both been asked by the insurer and provided by the client.
2. Final check before cancellation
The Judge in this case awarded damages in the amount of half of the claim payment the plaintiff would have been entitled to, had he not cancelled his existing policy. The implication is that it was reasonable to expect an adviser of Mr Harrison’s skill would have followed-up with the client during the underwriting process to check on their stomach condition. If the client had advised that their condition had worsened, it is reasonable to expect the adviser would not have proceeded with the new application, and would not have cancelled the old insurance policy.
Mr Harrison said his practice now sends an email to the client prior to the cancellation of an existing policy, telling the client they’re covered with another policy and warning that if there are any changes or anything they want to let the advice practice (and insurer) know, they have 48 hours to do so before the policy is cancelled.
However, one adviser questioned whether the life insurers have a role to play in confirming cancellations:
“In my view, applicants should be contacted by the life office when cover is ready to issue,” commented Tim Ross. “They should at that time be reminded of their duty of disclosure and answer a brief question as to whether their health has changed or they have sought medical advice since lodging the application… if the client says ‘no’, the insurer should issue cover immediately and the client should be ‘on risk’. If the client has non-disclosed it would be their problem.”
(Important note: Changes to the Insurance Contracts Act and Insurance Contracts Regulations set out that insurers must now issue a reminder notice regarding the client’s duty of disclosure if the period between the original disclosure and the issuing of the policy extends beyond two months. Insurers can adopt this approach voluntarily, up until 28 December 2015, when compliance is mandatory.)
On commissions
This case may also be important in the future when considering the impact of commissions on an adviser’s decision to switch insurance policies on behalf of their client. We received a comment from one adviser which suggested that the three-year non-disclosure clause was not highlighted to clients because it may frighten them off replacing policies, thereby robbing the more dubious of advisers of a regular source of upfront commission. However, the Judge in this case ruled that commissions were not the driving force behind the adviser’s actions.
In his decision notes, Judge Macaulay said:
“Mr Harrison did not shirk admitting that he was entitled to an upfront commission of 110% of the first year’s premium if the AIA policy was instigated, but only lesser trailing commission for the current year if the AXA policy was retained. When it was inferentially suggested to him that he placed his own interests above the interests of his clients, Mr Harrison responded by saying, in substance, that he had operated a successful business for 25 years that generated sufficient commission income as it was, without any need to jeopardise the interests of a client for more. To my observation that response was given candidly and without hubris.
“Further, his counsel also argued with some potency that a professional who puts his own interests above those of clients is generally not long in business. The mere observation that a professional will derive a fee from a transaction is a rather glib way of impugning the quality of the service that earns it. In any event, it was evident that there was a not insubstantial amount of time spent by several Harrisons’ personnel in the course of securing the new policy: namely, the office time spent in preparing the advice; interviewing the client; submitting the application; and following up further queries, and so forth. So it could hardly be said that the commission fee was some sort of windfall.
“In making findings on this case, the fact that Mr Harrison was entitled to a commission on the AIA policy offers little, if any, assistance.”
the courts relied heavily on documented evidence, such as file notes, SoAs and emails. This clearly highlights the importance of maintaining meticulous case files
The future of insurance advice
“The bar has been raised to a new level by these recent court judgements,” JM, 16 April 2014 on riskinfo’s Poll: Do you intend to review the disclosure warnings you give your clients at policy application time? – View comment
Following the conclusion of Swansson v Harrison, we polled riskinfo readers about whether the decision would lead others to change their advice processes. Three-quarters of readers said ‘yes’. There appears to be almost universal agreement that this court ruling has raised the bar of responsibility and accountability for advisers when they counsel their clients on disclosure/non-disclosure matters.
“Meticulously keep notes. Ensure that all discussions and comments to clients and prospective clients are documented. Ensure that everything is signed off and there is a paper trail for everything,” Russell Harrison, 8 April 2014 in Court Verdict Sends Warning to Advisers on Disclosure – View comment
In all cases, the courts relied heavily on documented evidence, such as file notes, SoAs and emails. This clearly highlights the importance of maintaining meticulous case files, and documenting all client conversations, even if they appear trivial at the time.
While no case is ever the same, there are certainly lessons to be learnt from each of the cases profiled above. However, if you have any specific questions relating to the law or compliance with the regulations governing the financial advice sector, riskinfo recommends you speak with your licensee’s legal advisor.
