When David, an insurance adviser with Illuminate Insurance Services arranged life insurance for Joan and Barry he asked them to sign a disclosure statement containing the following statement:
“… I am aware that Illuminate Insurance Services receive commission from various insurance companies for the insurance placed with them. I am aware that in the event Illuminate Insurance Services receive a Claw Back of any commissions (due to my/our cancellations or reductions in benefit or lapse of policy), then I/we will personally be indebted to reimburse Illuminate Insurance Services for the amount of the claw back and will pay Illuminate Insurance Services within 7 days of their provision of any invoice for such an amount.”
When Joan and Barry received their annual renewal the premium increased and they decided to review their insurance cover. Another adviser found cheaper insurance so they cancelled the insurance arranged by David.
David wrote to Joan and Barry explaining the insurer had clawed back the commission he had received for arranging the policy, and their policy cancellation had cost him. David enclosed an invoice for $1,725 for his services.
Joan and Barry contacted David, and said they were not prepared to pay the invoice. Joan and Barry agreed they had signed a contract agreeing to pay any commission clawed back by the insurer, but did not know the commission clawed back would be so much. Joan and Barry also said David had not shown them any proof that the insurer had even charged a commission claw back.
David referred Joan and Barry to FSCL, but before we began our investigation he agreed he would not charge Joan and Barry for the clawback commission. We thought this was a good outcome. On the information available it appeared to us unlikely Illuminate Insurance Services could rely on the wording in the agreement to pass all of the commission claw back on to Joan and Barry.
If David wanted to claw back commission in the event of policy cancellation the agreement needed to specifically set out the maximum amount David would expect Joan and Barry to pay and in what circumstances, for example if the policy is cancelled within two years.
Further, the clawback commission amount the adviser had lost was not the basis upon which the customers’ fee should be calculated. Rather, the fee charged to the customers should be a fee which reasonably compensated David for the time spent on giving advice and services provided to Joan and Barry.