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[Opinion] Trauma reinstatement/buyback advice to client must be accurate

Steve Wright says there are valuable lessons for advisers from a recent complaints ruling in Australia.

Thursday, May 30th 2024, 12:06PM 3 Comments

by Steve Wright

The Australian Financial Complaints Authority (AFCA) has ruled that a client be paid A$162,886 because the adviser gave the client incorrect product advice.  While this adviser was ‘in-house’ I suspect similar principles would apply to ‘independent’ advisers in similar circumstances.

Very basically:

  • the client had previously claimed on her trauma cover for cancer.
  • when reinstating her policy (under a trauma buyback (without medical underwriting) type option) her adviser told her that she would not be covered for cancer of the same type suffered, but would be covered for different, unrelated, cancer.
  • the adviser was not correct, the client’s policy excluded all cancer on buyback.
  • the client later suffered a different cancer and the insurer sought to decline the claim.
  • the AFCA ruled (notwithstanding significant ambiguity in the PDS and policy wording) that this error by the adviser was sufficiently misleading and the cause of the client’s loss.

The AFCA’s rationale for their decision in favour of the client was the adviser’s misleading and incorrect advice. (I can’t help wondering though, if the client’s adviser had been ‘independent’, more might have been made of the Insurer’s ambiguous wording (which might have been the underlying cause of the adviser’s mistake)).

This case is important because it highlights the level of product detail advisers are expected to know and accurately advise their clients on. I doubt this expectation would be any different in New Zealand.

New Zealand trauma cover (aka critical illness) products, and their options, differ significantly when it comes to what is covered on ‘buyback’ of trauma cover previously claimed on.

In particular, what might be covered following a claim for cancer can be a tricky area. Depending on the provider, the product, or the option selected, trauma cover bought back may have no cover at all for cancer.  In other cases, there might be limited cancer cover, for unrelated incidences of a new primary cancer, for example.

Even in cases where unrelated subsequent cancer claims might be covered, what ‘unrelated’ means might differ between products. 

I suspect it might be sensible to assume that all clients considering whether to exercise a buy-back option following a claim, would be expecting their claim condition to be covered again, so advisers should explain the position clearly and very accurately in their Statement of Advice to the client. (If the policy wording is unclear, get confirmation from the insurer.)

It may also be necessary to investigate any other options available to the client from other providers: a premium loading on a new policy may be preferable to an exclusion on cover bought back.  Here again, my view is that the advice given, and any recommendations made, should be clearly set out and justified in a Statement of Advice – it might make all the difference if any form of complaint is made.

Steve Wright has qualifications in economics, law, tax, and financial planning. He has spent the last 20 years in sales, product, and professional development roles with insurers. He is now independent and helping advisers mitigate advice risk through training and advice coaching.

Tags: Critical illness insurance Opinion Trauma

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Comments from our readers

On 31 May 2024 at 2:27 pm JPHale said:
Good article, Steve. This is a continued reminder to check our assumptions.

However, the contrast between the decisions made when applying to independent advisers is tenuous.

There are two aspects to this:

1. Was it written down? If it’s not written down, then it didn't happen typically applies.

With our advisers you would more likely have a conversation about this rather than writing it down, making it a he said she said situation. Our policy documentation produced by insurers in this area is usually clear on whats excluded.

With this case the adviser concerned likely had some form of recording in the mix, call based, given the direct provider association that has assisted the client’s complaint.

2. The adviser concerned was employed by the insurer, making any statement a statement of the insurer and not a statement of the adviser.

This carries significantly more weight than an independent adviser getting it wrong or making a mistake.

An adviser doesn't represent the decision making and contract terms like an employee of the insurer would.

Yes, there is an agency contract in place, and that specifically excludes advisers making incorrect representations about the product to clients.

It is less likely that this would have gone the same way in the NZ market with an independent adviser. Because of the disconnect between advice and provider including the detail of the call/meeting recording.

This is an example of where offhand comments can have unintended consequences.

If this is the standard expected for our documentation, we’re entering into unreasonable requirements with technology and advice businesses.

Not to mention there are still plenty of clients that refuse to have meeting recorded, video or audio.

I’d be interested to hear the opinion of our DRS providers on this one relative to independent advicers, as there was a representation risk in the advice provided because the judgement has been made.
On 1 June 2024 at 3:58 pm Steve Wright said:
JP. Sadly, I don’t share your wishful thinking.

The law now requires advisers to advise their clients with due care, diligence and skill, while the Code requires that advisers give advice that is suitable and also that advisers take reasonable steps to ensure their client understands that advice.

Warning a client that the trauma cover they buy-back will not cover the same conditions as it previously did, and explaining what will not be covered if they buy-back, is arguably the most important piece of advice an adviser must give a client buying back their trauma cover after a claim.

If an adviser gives a client information and doesn’t make a record of it, I doubt very much that it will be regarded as if it did not happen.

If the adviser’s advice is incorrect and is material enough to cause the client to take action, and they suffer a loss as a result, I suspect someone will be paying something, either the adviser or their FAP, or the insurer (if the law regards the adviser as acting as the insurer’s agent) who then might go after the adviser/FAP.

A client’s refusal to allow a recording doesn’t stop an adviser from making notes of their advice.
On 11 June 2024 at 5:17 pm JPHale said:
@Steve, I appreciate the sentiment, and depending on how things are handled, I can see how this could play out.

There is still the matter of the adviser vs the insurer, where the weight of what the representative of the insurer says with the insurer's "letterhead" or branding holds more weight than the brand of the adviser.

The speaking for vs speaking on behalf distinction that comes with this sort of situation.

As to the rest, absolutely, the adviser should be keeping notes, but understanding that in lieu of a recording, the situation becomes a he said / she said argument, which the adviser taking notes is more likely to argue successfully.

What has tipped the scale with the example is the provider will have had recordings, as they all do. That becomes significant evidence of what the insurer did or did not say.

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