Commonwealth Financial Planning vs Couper

Background

The client, Mr Stevens, a customer of the Commonwealth Bank, was referred to Mr Galloway following an unsolicited phone call by a CBA employee. Mr Stevens met with Mr Galloway on 27 September 2010. In this meeting, it was established that Mr Stevens had few assets, save for his superannuation and his Westpac Life policy, and that he was unable and unwilling to invest in managed funds. As a result, there was little Mr Galloway could provide in terms of ‘advice services’, except in relation to Mr Stevens’ insurance.

Mr Galloway completed an ‘Insurance Financial Needs Analysis’, in which it was made clear that Mr Stevens would receive advice on the subject of insurance, for which he would not be charged a fee. Mr Galloway noted in this document that he had recommended a full review of the client’s insurances, but that the client had declined as he had a limited budget. Mr Galloway’s notes concluded: ‘Client is looking for a like-for-like life insurance policy & $50k trauma providing such a policy is approx the same price as he is currently paying for life ins with w/pac.’

This document also contained a brief question regarding Mr Stevens’ health, which was noted as ‘Excellent’. Mr Stevens denied being asked anything about his health.

SoA prepared

A Statement of Advice (SoA) was prepared for Mr Stevens, but although Mr Galloway took responsibility for this document, he told the court he did not draft it, but that it was prepared by CFP’s paraplanning team, following the licensee’s templated advice process.

The document recommended a combination of term life with a rider for trauma ‘due to lower overall costs’. The document also stated that premiums be ‘stepped’. Mr Galloway inserted into the form a recommendation to replace the existing insurance because ‘…Westpac life insurance more expensive dollar for dollar and no trauma insurance within the existing policy’. Mr Galloway stated in the section marked ‘Disadvantages of replacement’ that: ‘12 month suicide will restart’.

As part of the standard CFP advice process, Mr Galloway was required to provide an ‘Alternative Strategy’. He listed two alternatives:

• Self-insure – insufficient capital/equity to self-insure
• Full insurance review – client declined

The Judge commented that neither option was a meaningful alternative:

“It is absurd to regard as a serious alternative that Mr Galloway might suggest that Mr Stevens cancel his Westpac Life policy and ‘self-insure’… Secondly, the fact that Mr Stevens had declined a full insurance review is once again not a true alternative; it was stating the client’s instructions as to the scope of the advice sought…

“Mr Galloway did not provide the two most obvious alternatives, namely, merely to take out a CommInsure Life policy (whose quoted annual premium was only $1,097) or simply maintain his Westpac Life policy.”

Product comparison

The SoA presented to Mr Galloway contained the following recommendation:

“I have recommended that you cancel your existing Westpac Life Cover as the recommended CommInsure policy is cheaper on a like for like, dollar for dollar basis and the recommended policy offers you a trauma benefit.”

At the time the SoA was written by paraplanning and finalised by Mr Galloway, Mr Galloway was not in a position to know:

1. Whether CommInsure would insure Mr Stevens at all
2. What the premium would be, and
3. Whether there would be exclusions or loadings

Mr Galloway may have had an expectation that a 47 year old non-smoker who described his health as ‘excellent’ was likely to be accepted by CommInsure automatically at the premium he had calculated.

It appears that while the client’s duty of disclosure was referred to within the SoA, there was no express mention of the fact that, under S29(3) of the Insurance Contracts Act 1984, the insurer has the right to avoid the contract in the first three years if the client is found to have failed to fully disclose all relevant information.

Mr Stevens said of the SoA:

“Mr Galloway did not before I signed this document ever say anything about the insurance company not paying benefits to me, excluding or reducing my level of cover, or possibly having to submit to any health check or have any health details provided. As I have already said the impression given to me from what was said was that it was all a done deal and was in my best interests without anything further having to occur.”

Application for CommInsure policy

Mr Galloway presented the SoA to his client on 13 October 2010, and during the same meeting completed an electronic application with Mr Stevens. There were a number of errors contained within the application, including:

• Incorrectly stating that Mr Stevens did not work from heights about 15 metres for more than 10% of the time
• Stating he drank eight standard drinks a week
• That he had never sought advice for lung complaints, gastric, duodenal ulcer or other bowel disorder, any disorder of the gall bladder or liver
• That he had not consulted a doctor during the last two years
• That he had not received counselling or treatment for alcohol abuse

Cover was accepted immediately, through the electronic underwriting system, at the premium included within the SoA.

Mr Stevens is understood to have cancelled his existing Westpac Life policy that same afternoon.

Conflict of interest?

The Court of Appeal ruling on the case noted that there appeared to be clear reasons for Mr Galloway to place the interests of himself and his fellow employee (who referred Mr Stevens to Mr Galloway in the first place) above those of Mr Stevens.

According to the primary judge, Mr Stevens was paying $1,410 annual premium to Westpac Life, which would rise to $1,482 to CommInsure, for the same level of life cover, but which would additionally include $50,000 trauma cover. There were some advantages in the wording of the CommInsure policy compared with Westpac Life’s, but they were substantially the same.

However, a motivating factor existed from the point of view of CommInsure, being a desire to obtain more business at the expense of its competitor. A motivating factor from the point of view of the CFP employee, Mr Galloway, was the upfront commission he would receive if Mr Stevens were persuaded to take out a new CommInsure policy. The evidence also suggested that Mr Rowley (the referrer) would earn a commission if a new product was sold to Mr Stevens.

The Judges’ notes read as follows: “Seen from the perspective of CBA, CFP, Mr Galloway and Mr Rowley, there was every reason to provide those recommendations. The ultimate questions in this appeal are whether it was misleading or deceptive for him to be advised in those terms, and whether the advice was ‘appropriate’ given what Mr Galloway knew or ought to have known. There was, at the time the Statement of Advice was presented to Mr Stevens, no statutory obligation upon Mr Galloway or CFP to act in the best interests of Mr Stevens.”

Cancer diagnosis and claim

On 30 August 2011, Mr Stevens was admitted to Wollongong hospital with jaundice. He was diagnosed with pancreatic cancer in early September 2011. In November 2011, Mr Stevens was given a terminal diagnosis, at which time he made a claim on his CommInsure policy.

CommInsure sent a letter to Mr Stevens on 23 December 2011, saying it would avoid the policy, due to a number of non-disclosures in his application form:

• That he had never sought advice for lung complaints, gastric, duodenal ulcer or other bowel disorder, any disorder of the gall bladder or liver. In fact, Mr Stevens was treated at the Frankston Medical Centre on a number of occasions between November 2009 and July 2010 for stomach complaints.
• That he had not consulted a doctor during the last two years. Mr Stevens visited Frankston Medical Centre on 27 June 2010 complaining of coughing up blood and black material. He was referred to an ENT.
• That he had not received counselling or treatment for alcohol abuse. In the medical notes from Frankston Medical Centre, the treating doctor noted that Mr Stevens admitted to drinking eight heavy stubbies a night and that he was ‘counselled about alcohol’. Similar comments were noted after doctors’ visits in February, June and July of 2010.

Following this determination, Mr Stevens, via his daughter and the executor of his estate, Ms Couper, sought damages from CFP for providing inappropriate and misleading advice.

Initial determination

Despite a good deal of the evidence and discussion in the first hearing focusing on Mr Stevens’ drinking habits, and whether he had intentionally lied about this and other health concerns, the primary judge did not draw a conclusion as to whether the non-disclosure was the fault of Mr Stevens or Mr Galloway (for not having asked all the questions during the application process).

However, the primary judge found that CFP owed Mr Stevens a duty of care, which included:

“…the duty to ensure the plaintiff was adequately informed of the consequences of potential material non-disclosure of health and related matters, which an underwriter of trauma and life insurance of the kind under contemplation would regard as being material to the risk, in circumstances where he was being encouraged to transact a new policy of life insurance that was intended to be followed by cancellation of the pre-existing policy, once CommInsure had accepted the new proposal.”

The primary judge said the heart of the matter lay in the representations made by Mr Galloway that it would be better for Mr Stevens to have all his financial affairs with one bank, and that he would be better off taking out the CommInsure policy and cancelling his Westpac Life policy:

“In my view, that representation was misleading and deceptive because it meant that Mr Stevens would be giving up a valuable asset, namely a life insurance policy that had remained inforce and under which the right to make a claim in the event of innocent non-disclosure being shown was safeguarded by statute, as that policy had been in force for more than three years since 2003, unlike the CommInsure policy: s 29(3) of the Insurance Contracts Act (Cth) 1984.”

The primary judge ruled that CFP’s 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.

Court of Appeal

The NSW Court of Appeal also found that Mr Galloway’s conduct was misleading and deceptive.

The reasons behind the decision were as follows:

• Mr Galloway could not accurately compare the CommInsure and Westpac Life policies because it was not clear if CommInsure would accept Mr Stevens’ application and at what premium. “The unequivocal advice that the CommInsure policy was cheaper on a like for like, dollar for dollar basis was incomplete.” Mr Galloway also admitted that he had not read the Westpac policy schedule.
• Mr Galloway was ‘forbidden’ from recommending a competitor’s product by his employer, so it was not possible for him to recommend, as a viable alternative, that Mr Stevens retain his Westpac Life insurance policy.
• Mr Galloway did not provide a like for like premium comparison between Westpac Life and CommInsure because he recommended that Mr Stevens take the stepped premium option, and only compared premiums for the first year of the policy. If Mr Galloway had recommended the level premium option, this would have appeared immediately uncompetitive against the Westpac Life policy.
• The SoA failed to disclose the risk of avoidance for non-disclosure in the first three years of a new insurance contract.
• The CommInsure policy was not better than the Westpac Life policy because of the three-year non-disclosure avoidance clause. According to the Judges’ decision notes: “In circumstances where in truth there was little material difference in the policies, that statutory difference was very material to the decision Mr Stevens was being asked to make. It was misleading and deceptive to advise him to do so without drawing it to his attention.”

The Court dismissed CFP’s appeal and ruled that the original judgement stand.

Click to view a copy of the Judge’s decision notes