The Australian Financial Complaints Authority (AFCA) has ruled that a client be paid A$162,886 because the adviser gave the client incorrect product advice.  While this adviser was ‘in-house’ I suspect similar principles would apply to ‘independent’ advisers in similar circumstances.

Very basically:

• the client had previously claimed on her trauma cover for cancer.
• when reinstating her policy (under a trauma buyback (without medical underwriting) type option) her adviser told her that she would not be covered for cancer of the same type suffered, but would be covered for different, unrelated, cancer.
• the adviser was not correct, the client’s policy excluded all cancer on buyback.
• the client later suffered a different cancer and the insurer sought to decline the claim.
• the AFCA ruled (notwithstanding significant ambiguity in the PDS and policy wording) that this error by the adviser was sufficiently misleading and the cause of the client’s loss.

The AFCA’s rationale for their decision in favour of the client was the adviser’s misleading and incorrect advice. (I can’t help wondering though, if the client’s adviser had been ‘independent’, more might have been made of the Insurer’s ambiguous wording (which might have been the underlying cause of the adviser’s mistake)).

This case is important because it highlights the level of product detail advisers are expected to know and accurately advise their clients on. I doubt this expectation would be any different in New Zealand.

New Zealand trauma cover (aka critical illness) products, and their options, differ significantly when it comes to what is covered on ‘buyback’ of trauma cover previously claimed on.

In particular, what might be covered following a claim for cancer can be a tricky area. Depending on the provider, the product, or the option selected, trauma cover bought back may have no cover at all for cancer.  In other cases, there might be limited cancer cover, for unrelated incidences of a new primary cancer, for example.

Even in cases where unrelated subsequent cancer claims might be covered, what ‘unrelated’ means might differ between products. 

I suspect it might be sensible to assume that all clients considering whether to exercise a buy-back option following a claim, would be expecting their claim condition to be covered again, so advisers should explain the position clearly and very accurately in their Statement of Advice to the client. (If the policy wording is unclear, get confirmation from the insurer.)

It may also be necessary to investigate any other options available to the client from other providers: a premium loading on a new policy may be preferable to an exclusion on cover bought back.  Here again, my view is that the advice given, and any recommendations made, should be clearly set out and justified in a Statement of Advice – it might make all the difference if any form of complaint is made.