Call us: 0800 347 257

‘Claws out’ – a case about commission clawback

In mid-2017, Sanjali met with an insurance adviser and completed application forms for life, trauma, and medical insurance. The adviser sent the application forms to the insurer, and sent Sanjali a letter of undertaking (the LOU). The insurer accepted Sanjali’s applications and her cover started from September 2017. At the time, Sanjali was under stress because she was separating from her partner. She did not read any of the documentation from the adviser.

The LOU included a paragraph explaining that if the insurance was cancelled within 24 months of implementation, the insurer would ‘clawback’ all the commissions paid to the adviser when he placed the insurance. Further, the LOU said that, in these cases, the client agrees to pay the adviser $1,725 for putting the insurance in place.

In March 2018, Sanjali cancelled her policies because another adviser found an insurer prepared to cover Sanjali’s pre-existing medical conditions (PEMCs), which the original insurer had excluded. The original adviser sent Sanjali an invoice for $1,725. Sanjali did not consider she should pay the invoice, and she complained to FSCL.



Sanjali said the adviser did not adequately disclose to her that there would be a fee if she cancelled the original policy. Sanjali said he rushed her through the documentation in their meeting, which only lasted 30 minutes. The adviser said he adequately disclosed the fee in the LOU, drew Sanjali’s attention to the LOU twice, and emailed her a copy.



We suggested that Sanjali discontinue her complaint. We said that insurance advisers are paid for the work they undertake in placing insurance for clients, by receiving commission from insurers. If clients cancel insurance within a short period of time, generally the adviser must repay the commission to the insurer (known as ‘clawback’). It is common for advisers to try and recover money from their clients in these circumstances.

We told Sanjali it is reasonable for advisers to be paid for work undertaken in arranging insurance if:

a)                  The adviser’s documents adequately explain what might happen if a client cancels insurance within a short period of time.

b)                  The fee is reasonable, based on the adviser’s actual time spent, and their expertise.


Our analysis of the documents

We looked at the adviser’s LOU, and it clearly explained what would happen if Sanjali cancelled the insurance early. The LOU was short, and there was no ‘fine print’. The paragraph said in plain language that a fee would be charged if Sanjali cancelled the insurance within 24 months. The paragraph was also directly above the place where Sanjali signed the LOU. The LOU also specified the actual fee amount.

We could sympathise with the fact that Sanjali was going through a separation at the time she took out the insurance. However, Sanjali had received and signed the LOU, had an opportunity to read it, and the LOU adequately explained the fee that may be charged.

We also looked at the advisers file to see what work he carried out in placing the insurance for Sanjali. Although we thought the $1,725 fee was relatively high for the work carried out (needs analysis, liaison with the insurer, discussing the offer of terms, policy implementation, travel time and other costs), the fee was not so unreasonable that it should not have been charged.



Sanjali did not agree with our decision and said that she felt she was essentially paying $1,725 to secure better cover through another adviser. Sanjali also felt the premium she had paid to the original insurer was wasted, and said she could not afford to pay $1,725.

We spoke with the adviser and, although he remained of the view that Sanjali should pay the full $1,725, he agreed that she could pay him half the fee ($862.50) to settle the matter. Sanjali agreed, and the complaint was resolved.


Insights for consumers

This case highlights the importance of reading documentation carefully and ensuring you understand it, before signing.


Insights for participants

In this case, the adviser’s ‘clawback clause’ was adequate for us to find that he could charge the fee. However, advisers should regularly review their ‘clawback clauses’ to make sure they adequately explain how much a clawback fee will be (or how it will be calculated), and when, and on what basis, a fee will be charged.