FAIS Ombud highlights FSPs’ obligations when a policy is replaced

The Office of the FAIS Ombud has drawn attention to FSPs’ disclosure obligations when replacing a policy, particularly when the replacement will affect retroactive cover in a professional indemnity (PI) insurance policy.

The Ombud’s latest newsletter includes the details of a complaint where the Office secured a settlement of R800 000 for a consumer whose PI claim was rejected.

PI insurance covers a policyholder where he or she is liable for financial losses because of the provision of negligent services or advice, provided that the negligent act, error, or omission occurred during the course and scope of the insured’s professional duties.

A PI policy is a “claims made policy”, which means the policy must be in force at the time an incident is reported. It covers claims arising from work performed on or after the retroactive date stated on the policy.

Retroactive cover is designed to protect professionals against claims related to past acts, errors, or omissions that may come to light after the policy has been issued. Without retroactive cover, the policy will only cover claims arising from work performed after the policy’s effective date.

The complainants’ case

In the case that came before the Ombud, the complainants, on the FSP’s recommendation, applied in February 2022 for a combined PI policy specifically covering the misappropriation of trust funds. The policy applied for was a replacement policy.

The replacement policy’s cover for the misappropriation of trust funds was R1.5 million, with an excess of 10%.

After the inception of the new policy, the complainants lodged a claim in respect of the misappropriation of trust funds. The complainants discovered that one of their directors had misappropriated R1 051 972 from the firm between September 2020 and 1 March 2022.

The claim was rejected because the portion referring to misappropriation of trust funds was not retroactive for the period before the inception of the policy.

The complainants disputed this reason for rejection, asserting they were not specifically informed it was not retroactive. The complainants referred to the replaced policy, which provided for the following in respect of the misappropriation of trust funds: “You will note from this policy that although this policy came into effect on 1 February 2021, it had retrospective working back to 10 January 2019.”

The complainants submitted it was not communicated to them prior to the rejection of the claim that the replacement policy did not provide for a retroactive date.

They said the FSP had dealt with both policies, and they had moved to the new policy based on the advice of the broker. If they had been aware that there was retroactive date, they would not have changed policies.

The FSP’s response

In its response to the complaint, the FSP referred to the proposal form that had been sent to the complainants to complete, which stated the following: “Please note that failure to provide accurate information may affect your ability to lodge a successful claim […] If any part of this document is not understood, please contact your broker before you sign it.”

The complainants did not complete or insert a date in the space provided for in the “retroactive date” block.

The FSP further submitted that the complainants had been sent a copy of the schedule of insurance, which stated:

• “Kindly go through this document and advise us immediately of any changes to ensure that the cover accurately reflects the insured’s present insurance requirements. If we are not advised of any errors or omissions, no liability will be accepted for such error or omission in the event of a loss.”
• “The policy schedule and policy wording must be read as one. Kindly familiarise yourself with the conditions, exceptions, clauses, exclusions, and excesses applicable to the insurance classes stated on the policy.”

The complainants had never questioned or queried the cover regarding the misappropriation of trust funds since the inception of the policy.

The FSP also responded to the complainants’ claim that the retroactive date “was never communicated to us before the repudiation of the claim”, and that “if we were made aware of the fact that there was no retroactive date in regard to the misappropriation of trust funds, we would never have decided to move from our previous insurer”. The FSP said that, according to its records, there were no communications wherein the complainants expressly inquired about a retroactive date. The complainants had every reasonable opportunity to ensure that the cover was accurate and met their needs.

Code’s provisions regarding replacement policies

After considering the parties’ submissions, the Ombud’s Office recommended that the FSP resolve the complaint.

Despite the respondent’s claims that the complainant had failed to apply for retroactive cover or provide for a specific date in the application form, this transaction was a replacement. In this regard, the Ombud drew attention to section 8(1)(d) of the General Code of Conduct for Authorised Financial Services Providers and Representatives, which sets out the requirements in respect of replacement policies. These include that an FSP must fully disclose to the client the actual and potential financial implications, costs, and consequences of such a replacement, including any special terms and conditions, exclusions of liability, waiting periods, loadings, penalties, excesses, restrictions, or circumstances in which benefits will not be provided, which may be applicable to the replacement product compared to those applicable to the terminated product.

The Ombud put it to the FSP there was no indication in the documents provided that this was undertaken. If the FSP was unable to show compliance with this section of the Code, it was recommended to resolve the matter with the complainant.

The Ombud was also pointed out that although the complainants were sent the policy schedules, it remains the FSP’s responsibility, in terms of section 8(1)(c) of the Code, to make a recommendation that is appropriate to the client’s needs and circumstances. Simply providing the client with a proposal form to complete, particularly when the transaction was a replacement, did not comply with this section of the Code. It also did not demonstrate that the FSP had acted with the required due skill, care, and diligence in the interests of the complainants, as provided for by section 2 of the Code.

The FSP conceded it did not have any records that it had complied with the above-referenced sections of the Code, and that after having considered the recommendation, it had contacted the complainants to resolve the complaint.

A settlement that equalled the Office’s maximum jurisdictional limit (R800 000) was agreed between the parties.