Lack of prospectus costs adviser insurance claim

An AFA who held liability insurance was shocked to find it would not pay out when a company he recommended to clients went under.

Wednesday, February 21st 2018, 6:00AM

by Susan Edmunds

The case was dealt with by the IFSO scheme.

The AFA had recommended that some clients use a particular building company to build new residential investment properties.

That company became insolvent and stopped building, and several clients lost money.

The adviser contacted his insurer and said he might be required to claim under his liability policy because clients had made complaints.

But the insurer declined the claim because the policy excluded cover for liability arising out of any claim “… in any way involving, directly or indirectly … any investment otherwise than an investment offered pursuant to a prospectus compliant with all statutory requirements”. Because the investment properties did not require a prospectus, the exclusion applied.

The adviser provided information from his broker regarding past discussions between the broker and the insurer about the exclusion. The broker argued that the insurer never intended to exclude any investment, which did not require a prospectus, but only investments with non-compliant prospectuses.

The IFSO case manager there was no ambiguity in the wording of the exclusion and the advice provided by the adviser was related to an investment, which was not provided pursuant to a statutorily compliant prospectus.

"Although the emails provided by the broker might have raised a question about whether the insurer only intended to exclude investments that did not comply with the statutory prospectus requirements, the emails provided by the insurer appeared to directly address the issue of advice relating to property investment, which did not require a prospectus."

IFSO's case manager noted that most case law involving similar policy wordings was in relation to strike-out applications and the courts had declined to interpret the policy wordings without the benefit of a full trial.

The case manager believed the claim at least “involved directly or indirectly” an investment and the policy was clear that the exclusion applied to any investment, other than an investment offered pursuant to a compliant prospectus. The case manager did not believe the background evidence established the intended meaning was other than what was stated by the policy.

The adviser's complaint was not upheld.

Tags: IFSO