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“A thorough replacement advice process is never redundant”

Policy placement

With the assistance of an adviser, Malcolm took out income protection cover (including redundancy cover) with insurer A, in 2013. In late 2014, Malcolm and his wife Hannah met a new adviser (David) who had taken over their original adviser’s client base.

Malcolm had existing life, trauma, and medical insurance with insurer B, and was happy with his income protection cover with insurer A. David said Malcolm could secure the same income protection cover he had with insurer A, with insurer B, meaning all Malcolm’s policies would be held with one insurer. Malcolm said he told David he wanted and needed to retain redundancy cover.

Malcolm thought by completing insurer B’s application form, the cover he was applying for included redundancy cover. He also thought David would provide insurer B with the information to enable placement of the redundancy cover, which Malcolm had previously given the original adviser at the time he took out the policy with insurer A.

Malcolm was successful in securing income protection cover with insurer B. However, it later transpired that redundancy was not a trigger for cover with insurer B. Also, insurer B’s schedule did not note redundancy cover as a policy benefit.

Contact about double premium payment

About six months later, in May 2015, Malcolm noticed insurer A had continued to deduct premiums from his bank account. He emailed David about the issue and said a few months previously he had changed to insurer B to cover redundancy. Over the next few months Malcolm and David corresponded about the fact the policy with insurer A should have been cancelled, getting a premium refund, and cancellation of insurer A’s policy.

Discovery there was no redundancy cover

In January 2016, Malcolm contacted David about a possible claim, because the company he worked for was restructuring and he may be made redundant. David told Malcolm that there was no redundancy cover under his income protection policy, that redundancy cover is expensive, and that this would have been the reason it was not carried over from insurer A to insurer B.

After this, David tried to secure redundancy cover for Malcolm and reinstate insurer A’s policy. However, this was unsuccessful and there was a breakdown in communication. David was then made redundant from his job effective from the end of September 2016.

David complained to FSCL that Malcolm had not ensured redundancy was covered with insurer B. Malcolm wanted David to pay him the equivalent of the redundancy cover he would have had under insurer A’s policy.

Our review

We said that the complaint should be partially upheld. The reasons for our decision were:

Was redundancy discussed in November 2014?

There was conflicting evidence about whether redundancy cover was discussed during the meeting between Malcolm and Hannah and David at the end of 2014. There was also conflicting evidence from David; in some information he provided FSCL he said redundancy was not discussed, and in other information he said it was discussed but it was decided redundancy was too expensive.

In addition, David had no file notes of the meeting, which meant there was a ‘he said, she said’ situation. It is expected that professional advisers will keep detailed records and notes of what is discussed with clients. We said Malcolm’s recollection of events was more plausible because the situation was unique to him, whereas David would be dealing with any number of clients in one day.

We noted redundancy cover was noted on the summary of cover Hannah was seeking but not on Malcolm’s summary. This could have supported a finding that redundancy was discussed but Malcolm decided not to apply for redundancy cover.

However, on a balance of probabilities, we considered it more likely than not that Malcolm’s redundancy cover was discussed and that he wanted to retain it. This was because the nature of Malcolm’s job meant redundancy was a key consideration for him.

Malcolm also firmly held the belief that he had redundancy cover right up until January 2016. There was also an email David sent Malcolm in May 2016 in which neither mentioned that insurer B’s schedule did not note redundancy. This was another indication that redundancy was discussed in 2014.

It appeared likely David had, in error, noted the redundancy cover on Hannah’s summary of cover meaning no redundancy cover was sought for Malcolm (although for an unexplained reason, Hannah also had no redundancy cover).

Malcolm did not exercise the care, diligence, and skill of a reasonable adviser

We said David had not exercised the care, diligence, and skill of a reasonable financial adviser as required by section 33 of the Financial Advisers Act 2008. Malcolm had not ensured the ‘replacement advice’ sections of insurer B’s application form had been completed. In addition, David did not provide Malcolm with a comprehensive statement of advice setting out:

a)               The reasons for replacing the redundancy cover and why Malcolm’s policy with insurer A was not meeting his objectives.

b)               The key differences between insurer A’s and insurer B’s policies.

c)               Non-disclosure and underwriting risks.

d)               Premium cost difference.

e)               How the new policy would be implemented, including a further discussion of insurer B’s offer of terms.

If these steps had been taken it was highly likely Malcolm would have retained insurer A’s policy.

No statement of advice on file

David said he could not provide a copy of a statement of advice because it would have been completed by the original adviser. However, David had argued that preparing a statement of advice is a standard part of his process. It was therefore unusual that upon taking over the original adviser’s files, David did not:

  • notice there was no statement of advice and,
  • meet with Malcolm to ensure that crucial part of the process was undertaken.

There was also an email where David said Malcolm would not have been able to benefit from redundancy cover in any event, because he was a contractor. However, Malcolm was always an employee. The fact David did not know this was further evidence he did not do enough in 2014 to understand Malcolm’s personal and financial circumstances.

David could also have reviewed Malcolm’s cover when Malcolm contacted him about paying the double premium in May 2015 (when Malcolm mentioned the redundancy cover). Such a review would likely have revealed that Malcolm had no redundancy cover, and it could have been obtained well before Malcolm’s employer began its restructure in January 2016.

David considered Malcolm caused his own loss

David said Malcolm had missed the opportunity to notice he did not have redundancy cover when he applied for cover, and when insurer B sent him information about his cover over the following years. We could understand why Malcolm thought he had the redundancy cover in place. However, we considered he contributed 15% to his loss in that he did miss opportunities to see he no longer had redundancy cover.

The outcome

We proposed the complaint be resolved by David paying:

a)               for the increased premium Malcolm would need to pay for new redundancy cover (as a result of him having had a recent redundancy)

b)               the equivalent of 85% of the redundancy cover that would have been available under insurer A’s policy ($2,600 per month), while Malcolm was unemployed.

c)               Malcolm for inconvenience caused by the errors in his advice process ($1,000).

Taking all the factors into account, the parties agreed that David would pay Malcolm $30,000 in full and final settlement of his complaint.

Our insight

There are inherent risks in replacing a policy held with one insurer to another insurer in consumers losing benefits originally held. When advisers are of the view their client’s best interest will be met by changing insurers, it is crucial advisers have a robust and replacement advice process to ensure their client can make an informed choice about changing insurers.