Property investment advice goes wrong
Jacob provides investment advice to clients and had arranged generic professional indemnity insurance for himself and his business through a dealer group, arranged by an insurance broker.
Jacob advised his clients to invest in property and directed the clients to one developer. When the developer failed, many of those investors complained to Jacob about the quality of the investment advice he had provided.
Jacob did not accept he had given poor investment advice and he referred the affected clients to FSCL.
We investigated the complaints and found that Jacob’s advice had not been the direct cause of the clients’ financial loss, but we found that Jacob had caused some clients stress and inconvenience warranting compensation. The complaints were resolved, but at a cost to Jacob of about $30,000 for:
- compensation paid to clients as a result of our investigation
- case investigation fees
- legal costs.
Insurer declined Jacob’s professional indemnity claim
Jacob contacted his insurer and lodged a claim under his professional indemnity cover. Jacob’s insurer declined the claim because the policy limited cover to investments where there was a prospectus. The property development Jacob had advised his clients to invest in did not have a prospectus. Jacob discovered he was uninsured and would have to meet the cost of his clients’ claims himself.
Jacob complains to the Insurance and Financial Services Ombudsman
Jacob’s insurance broker felt Jacob’s claim should be covered by the policy, and assisted Jacob with his complaint, first to the insurer and then to the Insurance and Financial Services Ombudsman (IFSO). The IFSO scheme found that the insurer was entitled to decline the claim. Jacob then complained to his broker, saying the broker should have told him the policy would not cover the type of investment advice he was giving. The broker did not agree and Jacob referred his complaint to us.
Insurance broker’s view
The broker had some sympathy for Jacob’s position, but considered it was not liable for all Jacob’s loss because it:
- had not misled him about the cover provided, because Jacob did not tell the insurance broker that he was advising clients to invest in property until the last annual policy renewal
- did not have the opportunity to give Jacob individually tailored advice because the policy was generic, provided through a dealer group
- did not accept Jacob had suffered a substantial loss, because he had been well paid by the developer for directing clients to that particular property development.
Jacob maintained his broker should contribute to his loss because:
- although the policy was a group policy provided by a dealer group, it was the broker who was qualified to give advice about policy, Jacob did not accept that the broker could absolve itself of responsibility so easily
- it was reasonable for him to assume that ‘investment advice’ included ‘property investment advice’
- it is irrelevant how much he was paid by the insurer. If the appropriate policy had been in place the insurer would have covered all his loss.
Jacob and the broker were willing to negotiate a settlement, as both could see they had contributed to the costs Jacob had incurred. Both parties were mindful that, apart from this disagreement, they enjoyed a good relationship that they wanted to continue.
Jacob calculated that his loss was approximately $30,000 and after some negotiation Jacob and the broker agreed to split the loss 50/50.
The broker offered, and Jacob accepted, $15,000 in final resolution of his complaint.
Key insights for the participant and the complainant
This complaint was a refreshing example of a situation where both parties could see that their disagreement was ‘just business’. They were willing to be pragmatic and negotiate a resolution both parties could live with.