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IFA slates Lumley over PI

Friday, May 1st 2009, 12:42PM 10 Comments

by Philip Macalister

The Institute of Financial Advisers (IFA) has slammed insurance firm Lumley for unfairly rejecting the professional indemnity (PI) claims of many of the industry body's members. In a statement issued yesterday, the IFA said Lumley had shown "a distressing pattern of behaviour" in rejecting PI claims from financial advisers. Tony Vidler, IFA director, said "several dozen" advisers had provided strong anecdotal evidence that Lumley was "consistently" knocking back legitimate PI claims. "Incredibly, Lumley's has decided to apply some twisted logic in reading its own policy wording to suit its claims management objectives," Vidler said in the IFA press statement. However, Lumley refuted the IFA criticisms in a statement issued to Good Returns. "All claims presented are treated on their individual merits, and in accordance with the specific policy cover," Lumley said. "Given the variety of coverage, and the individual circumstances of each claim, it is difficult to offer generalisations on policy response, but we can offer assurance that all claims are evaluated fairly, and in accordance with the policy wording." According to the IFA statement, Lumley provides PI cover to approximately 75-80% of the financial advisory industry, mainly via group schemes including the IFA's own offering. Vidler said the IFA was in talks with a number of alternative insurers "both here and offshore" to provide PI cover to its members. "We're confident the PI cover is available," he said. "We're also talking to the Financial Planning Association in Australia who recently negotiated a PI solution for its members." Vidler said another option would be to drop the requirement for New Zealand's financial advisers to take out PI cover, which is stipulated by many product providers and is currently IFA policy. "It would be very easy to do," he said. Vidler estimated that New Zealand's financial advisers spend between $800-5,000 each year to secure PI cover. It is understood PI insurers have seen a strong increase in claims and notifications from advisers, chiefly due to the collapse of finance companies and fund shutdowns over the last two years.
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Comments from our readers

On 1 May 2009 at 3:10 pm Geoff Nairn said:
Lumley is not the only insurance company applying twisted logic in reading its own policy wording to suit its claims management objectives. I am aware that both NZI and QBE have adopted the same approach. After shopping around a number of Queen's Counsels, QBE managed to find one who would interpret the standard Investment Adviser Endorsement in such a manner that would deem all claims relating to portfolio losses to be inadmissable, even where those losses were the result of alleged negligence or incompetence on the part of the adviser.

It would appear that we are fully insured until we make a claim!
On 1 May 2009 at 3:28 pm Mike Cole said:
I truly hope that this story is NOT true as I have just submitted a claim based on Finance company collapse and supposedly my "negligent" advice.
My PI cover is through the PAA Group scheme and with Lumley's and I have an expectation they will honour that cover and proceed to defend my case.
If they opt to try and not do so it will yet again signal to all and sundry that the Insurance industry is a shadowy, dishonest industry where insurers will not even protect their own!
What I find fascinating is that the Government of the day stood idly by whilst these companies collapsed and yet now offer the Government guarantee on their funds and this Government now seems happy to stand idly by whilst the industry tears itself apart with 20/20 vision claims of negligence etc - until such time as this mess is sorted out and put to bed NZ will continue to hover in recession - it really is time for the Government to take steps to remove these issues from the agenda and allow all of us here in NZ to concentrate full focus on building a better and brighter future!
If I have problems trust me you will know about it!
On 1 May 2009 at 8:47 pm Peter said:

Aren't you guys supposed to know something about ....... insurance.

You know, terms and conditions, exclusion, coverage . . . . stuff like that?

So where should I go to get advice if you can't organise cover for yourself that works!

Just wondering
On 1 May 2009 at 11:26 pm Peanut H said:
Professional indemnity insurance was never intended to cover the loss of investment value. The cover was to simply provide the Adviser with a means to defend a claim of negligence which may or may not have resulted in a loss of investment value. It would be very unlikely for a plaintiff to seek redress if the negligence did not result in the loss of investment value.

What the insurers are now doing is rejecting any negligence claim where a loss of investment value has occurred. Therefore the Adviser will has no option other than to meet their own costs of defending any negligence claim.

The insurers will still provide the Adviser with assistance with legal fees if the error was an unintentional failure by the Insured to effect a specific investment in accordance with the prior instructions of the Insured’s client. The problem is the insurers are saying the Adviser did effect a specific investment in accordance with the prior instructions of the client, therefore no cover is provided.

The only answer is for Advisers to gather enough critical mass to put pressure on the insurers to go back to the simple rule of providing the Adviser with a means to defend a claim of negligence.

Hopefully all members of PAA, SIFA, IFA , LBA & MBA will be disturbed enough to take action for the benefit of all Advisers.

If any Adviser is facing client action I suggest they request their Solicitor to contact Brian Henry - Barrister, Auckland who has successfully seen off several cases of clients seeking summary judgment from Advisers over loss of investment value in finance companies. What you don't need as an Adviser is to for a Barrister to get up to speed at your expense.
On 2 May 2009 at 9:04 am Independent Observer said:
The industry needs to be prepared for a world without PI cover - as many of the leaders in this space are currently questioning the cost/benefits of offering coverage to this industry in this country.

In the absence of any PI cover, practitioners will need to demonstrate research, understanding, fairness & independence... whilst operating an efficient/profitable business
On 3 May 2009 at 12:05 am Peanut H said:
The Australian AFA (Association of Financial Advisers Ltd) in their 30th November 2006 submission to treasury in relation to professional indemnity insurance for financial planners and dealers in securities contained the following;

A. Product failure.
What Westpoint has highlighted is the need for products offered to consumers to be robust, fair and delivers to its mandate. We have seen that the primary driver of consumer complaints in the past five years has been the failure by product manufacturers of financial services product.

Fundamentally this product failure is partially attributable to the current regulations and also to the regulator, who did not detect the decline of the fortunes of the Westpoint , until it had reached a point of dysfunction. Therefore the reporting process and regulatory process failed.

There needs to be a process whereby the regulator can supervise the entry of product onto the financial services market otherwise these failures in product may continue and manifest themselves as consumer anger against all parts of the Industry.


The AFA recommends that ASIC have requirement & jurisdiction to ensure new products not only meet legal hurdles but comply with sound business and robust princlples.

This is no different to what has occurred in NZ. But what do our regulators do? The NZ Securities Commission decides to regulate Advisers and waive two fingers in the direction of taking leadership and responsibility for having new products not only meet legal hurdles but comply with sound business and robust principles.

The last question that needs answering. Would the problems we are facing have occurred if the NZ Securities Commission had achieved their objectives of overseeing securities market activity, inquiring into suspected breaches of securities law and intervening in the interests of investors?
On 4 May 2009 at 11:52 am Majella said:
Mike Cole: You should have no issues with your PAA PI cover (800 members on the policy): it's a vastly superior policy to that of IFA (100 members on the policy), and if you took the option offered last year, there's also the possibility of up to $50K in recompense for complaints, IF it appears to be the less costly option.

Peanut H: "Would the problems we are facing have occurred if the NZ Securities Commission had achieved their objectives of overseeing securities market activity, inquiring into suspected breaches of securities law and intervening in the interests of investors?"

In my view, undoubtedly NO, or at least not to such a invasive degree. Such robust oversignt would have probably protected many of the very well-intentioned but possibly under-resourced Advisers, and their clients.
On 4 May 2009 at 4:09 pm Hopeful said:
Last year Brian Gaynor astute article on December 20th in the NZ Herald "Diplock strangely silent in rocky year" commented on the problems with regulation of products issued in NZ.

"The financial advisers sector has its weaknesses, but most of the problems in New Zealand are, and always have been, with the first group.
These are the public issuers. Public issuers were the main problem during the 1980s sharemarket boom and bust and they still are."

For the full article please follow this link.
On 5 May 2009 at 1:12 am Peanut H said:
The Securities Commission is a modest government quango, with much to be modest about.
On 5 May 2009 at 10:11 am Tony Vidler said:
I thought it worth clarifying a few points for readers on this topic. As expected, the IFA has been dilligent in checking before speaking publicly on the matter, including working closely with professional advisers on PI.

The issue with the claims treatment is not one of advisers, or the IFA or PAA or LBA or whoever, not understanding or putting in place appropriate cover. I am not sure who the professional adviser is for the PAA scheme, but do know the PI brokers and the executive for the LBA and IFA (and I know most of the executive for PAA), and the people involved are extremely competent and excellent at their jobs in my view. I have complete confidence that they have done their work well. They are unable to directly control how an insurer decides to manage a series of claims however, the best they can do is attempt to influence the insurer to act as everybody expected when the contract was put in place, and in accordance with the contract.

In much the same manner that a dilligent and competent professional investment adviser might be able to read, analyse and discuss a particular prospectus and its financial information, the adviser is not necesarily able to detect deceit or false information. Nor is a broker, in any line of insurance, able to detect the behaviour of an insurance company in managing future claims. You simply have to rely upon the contract terms put in place together with the fundamental belief that an insurer will work for their clients with legitimate claims. That's how insurance works really.

The claims treatment of PI claims is not an issue of scale, or numbers of members in a particular scheme, either. Frankly scale doesn't appear to have mattered too much. The same insurer for instance has provided cover to advisers under the LBA, PAA& IFA banners. Each - arguably - has similar advisers in many respects, yet substantially different pricing has applied - and scale would appear to have little to do with that either. The core wordings are efectively the same in coverage, but one scheme has a cap, others don't, one covers some lines of business better than others, and so on. In my personal opinion only, the association that has had the best PI scheme historically - with the same insurer - has been the LBA - in terms of price and coverage. It happens to be the smallest of the three associations (so it is definitely not about scale), and a number of its members belong to one of the other two as well as the LBA. Those same LBA advisers however, were they to take their PI coverage with the IFA scheme for example, would pay substantially more and have ore restrictive cover - and it is exactly the same person with exactly the same risks with exactly the same insurer. Where is the sensible risk analysis in that?

Regardless of these peripheral issues, which simply highlight the ridiculous nature of the risk asessment and pricing of PI cover in the financial advisers arena in NZ, the simple fact is that there is a grave concern with how claims are being managed, despite the underlying wording of a particular scheme. It is believed that the insurer is not managing the claims in accordance with its own contract, or with the underlying good faith that its clients had a right to expect.

That is the issue.
Commenting is closed



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