For many advisers, Professional Indemnity Insurance is a necessary evil required to obtain and maintain your Australian Financial Services Licence. If you haven't had the need to make a claim or notify a circumstance, it may be difficult to understand how and where claims come from.
Where it all goes wrong for advisers
Chronologically, it all goes wrong when it all suddenly goes wrong. As you might suspect, claims usually come as a surprise. It may sound obvious, but when they do happen, the situation is usually complex, involves a number of moving parts and isn’t linear as you might sometimes expect it to be.
Here are just a few ways advisers can get caught up in a claim event.
Poor Advice
It’s not that common, but it does happen, poor advice is usually advice that just falls outside what might be expected in the context of a client’s circumstances. Aggressive investment allocations for clients in a phase of life that may be better served with low-risk strategies. Advice or implementing a strategy that isn’t compatible with their tax regime, or simply fails to consider factors that lead to additional costs, problems accessing insurance coverage, or just simply don’t deliver.
Operational Risk
Failures to implement advice or execute an order. Accidental platform allocations that need to then be unwound or accidental cancellations of insurance coverage, errors in SOA documents are just to name a few. Some of the more day-to-day issues can have a significant impact on advice implementation and can carry high costs to remediate.
Product and Market Failures
No one plans to fail, and yet significant failures in the past two decades are still very prominent in memory for many. Some may recall Westpoint, Storm Financial, Opus Prime and Great Southern, to name a few. More recently, a number of highly leveraged managed investment schemes have encountered changing market conditions that their business and capital structures were unable to adapt to and as a consequence, have entered administration. Additionally, some of these products have been exposed to rogue elements and funds are compromised as a result.
3 ways to avoid getting caught with PII
Speaking to your broker each year is highly recommended. Things change, your business may have changed, your clients, your approach, or your services. Speak to your broker about your business and how it has evolved. It’s these conversations that add value to your insurance renewal and allow your broker to uncover small details that can have big impacts on your requirements.
Here are a few points to tick off the list;
- Are all the entities in my business noted? Remember, related entities shouldn’t be assumed to be covered, CAR’s and subsidiaries may be automatically included but those that only have common ownership with directors may need to be specifically noted to have cover.
- Are all your services covered? Do you offer accounting, consulting or provide an activity not captured in the description of services? As an example, if you have a Separately Managed Account service, you may be noted as the investment manager – this needs special attention.
- Exclusions – commonplace for advisers but careful attention is required to understand their impact, these can range from innocuous to critical. Spending time thinking about what is not covered and whether it should be can save you from life-changing consequences.
Working with specialist advisers is always recommended – Financial planning is highly specialised and having a deep understanding of the industry, your services, the products you work with and the way your advice process works can be incredibly valuable when you are considering who the best broker for you is.
Save the date: Numerisk are holding a special edition webinar on Tuesday 26th March at 12:00pm to help advisers learn more about the new data-driven approach to PI Insurance - Register here.
If you would like to speak to one of Numerisk’s specialist brokers about your specific circumstances, call us on 1300 001 283.
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Comments1
"One of the things that still catches out young players is the question that relates to "known circumstances" when moving from one PI insurer to another. Advisers should think very carefully about that question – it's all about disclosure. One of the PI issues that has always annoyed me is that the insurers like to "categorise " advisers into the one box e.g. some PI insurer's categorise risk- only advisers as holistic. It seems there is occasionally a temptation to go "one size fits all" even though the PI risk is clearly different The elephant in the room it seems may well be the remediation that may be available under CLSR"
Bill Brown 14:46 on 22 Mar 24