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Poor advice leads to considerable loss

Insurance arranged

When Maureen and Brian’s boarder, Judy, suggested she review their insurance needs they agreed it would be a good idea.  Judy put forward a couple of different options.  Maureen and Brian agreed upon life insurance for them both, and Maureen also accepted the following cover for her:

  • mortgage repayment
  • household expenses
  • hospital and specialists costs
  • premium cover, which would cover all their premiums should they need to claim against the policies.

Insurance cancelled

About a year later, Maureen and Brian’s financial circumstances changed and Maureen asked Judy to cancel her hospital and specialist insurance and the premium cover insurance relating to the hospital and specialist cover.  Judy drafted a letter to the insurance company cancelling the hospital and specialist cover as well as the premium cover entirely.  Maureen signed the letter.  A confirmation letter from the insurer came a couple of days later, and Maureen did not notice that the premium cover was missing from the list of policies in place.

Maureen becomes ill and claims against cover

The following year Maureen became very ill.  Maureen’s claim under the mortgage repayment and household expenses policies was accepted, and the insurer started covering these expenses, but Maureen could not understand why her premiums were continuing to be deducted from her account.

Premium cover cancelled by mistake

Maureen called Judy, who was no longer her boarder, and asked what was going on.  Judy said there must have been a mistake, and she would take it up with the insurer.  Judy contacted the insurer and discovered the premium cover had been cancelled at the same time as the hospital and specialist cover.  When she relayed this information to Maureen, Maureen said that she never intended cancelling the premium cover entirely, and only meant to cancel the portion relating to the hospital and specialist cover. 

Judy asked the insurer to reinstate the premium cover policy, but because Maureen was already on risk the insurer declined.  Judy referred Maureen to FSCL.

Maureen’s view

Maureen said that Judy had made a mistake when drafting the cancellation letter to the insurer.  Maureen trusted Judy to draft the letter, and signed it without understanding the implications.  Maureen acknowledged that she had missed the premium cover cancellation on the insurer’s letter but considered this a small mistake compared to Judy’s error.

Maureen wanted her policy reinstated, but failing this she wanted Judy to compensate her for $48,000, being the amount she would have to pay in premiums over the next 8 years, until cover ceased because Maureen turns 65.

Judy’s view

Judy did not consider she was liable for Maureen’s loss saying that Maureen wanted to cancel the premium cover.  Judy said she advised Maureen against the cancellation, and she gave us a diary note recording her advice to Maureen at the time.


Unreliable record

When reviewing this complaint, we discovered that the file note relied upon by Judy recording her advice to Maureen was unlikely to have been made at the time the advice was given.  Judy gave us her original file, but the file note Judy referred to was not on the file.  We considered it most likely that Judy had written the note after the complaint was made.  While it may have been Judy’s memory of her conversation with Maureen, it was not able to be relied upon as a note made at the time of the advice.

Shared responsibility for cancellation

We accepted that Maureen did not intend cancelling the premium cover entirely.  However, Judy did not clarify the extent of Maureen’s instructions, which contributed to the error in the cancellation letter.  We considered Maureen had also contributed to the loss by signing the cancellation letter and not noticing the premium cover was missing from the remaining cover set out in the insurer’s letter following the cancellation.

In our view, we considered it would be reasonable for Maureen and Judy to share the loss.  We suggested that Maureen and Judy meet to discuss their respective contributions to Maureen’s loss and how the complaint might be resolved.  While Maureen was prepared to meet, Judy declined.


Insurer calculates Maureen’s net loss

If the premium cover had remained in place the insurer would have paid Maureen and Brian’s insurance premiums for the next 8 years, when Maureen turned 65.  We asked the insurer to calculate the amount Maureen was likely to pay for all her insurance policies over the next 8 years and the amount she would have paid for the premium cover, leaving Maureen with a net loss of $44,704.92. 

Discounted to reflect contingencies

We then discounted $44,704.92 by one third, to take into consideration the possibility that Maureen’s need to pay the premiums could cease at any point – she could die or return to work meaning she would no longer be entitled to the premium cover benefit (had it still existed). 

Discounted again to take Maureen’s contribution into consideration

We then took the discounted figure of $29,995.29 and deducted a further 60% to take into consideration Maureen’s contribution to the situation.  We decided that Maureen was marginally more responsible for the loss because she had two opportunities to discover the loss and Judy did not.  A 60% reduction brought the compensation to $11,998.

Discounted further because payment now has additional value

Finally, we needed to take into consideration the value of money paid to Maureen now, in advance of her obligation to pay the premiums.  If Maureen were to invest $10,000 earning compounding interest of 5%, paying tax at 17.5%, she would have $12,286 after 8 years, close to the $11,998 already calculated.

We therefore recommended Judy pay Maureen $10,000.  Maureen was disappointed with the amount of compensation we proposed, but accepted our recommendation and the complaint was resolved on this basis.

Our insight

Insurance advisers are providing expert advice that can have serious and far-reaching consequences for their clients.  It is essential that insurance advisers carefully clarify and explain the consequences of their client’s instructions.  When communicating with insurers, and their clients, adviser should ensure instructions are clear and unambiguous.  We also stress again the importance of accurate records made at the time advice is given.