Our story of the week looks at professional indemnity cover and why financial advisers leaving the industry need to protect themselves against the risk of future claims…
Financial advisers who are opting out of the industry need to remember that a claim could still be made against them by a former client – even if their client is under the wing of a new company.
Katrina Shanks, CEO Financial Advice NZ, says former advisers need to keep their PI insurance in place or seamlessly switch to ‘run-off’ insurance.
“If a financial adviser or former financial adviser allows their PI insurance to lapse then they are not covered – even if a claim is made for advice given to a client when the cover was in place,” says Shanks.
“If an adviser allows their policy to lapse then they will need to buy a new one, and they will need to see if the new policy has the appropriate retroactive date. If the new policy doesn’t cover previous advice then the adviser will be exposed to the risk of a claim.”
Shanks says many advisers leaving the industry are buying ‘run-off’ insurance – something she recommends all exiting advisers strongly consider.
“You can normally buy this to cover for up to five or seven years,” she says. “This type of policy allows advisers to have cover in place for advice previously given.
“Typically, the first year of run-off is 95% the cost of a normal premium, and then it reduces down accordingly over the remaining years –and could reduce by a factor of 10% to 15% each year following.
Shanks believes there is debate among some in the adviser community about the risk of not having PI insurance after leaving the industry.
“There is confusion out there about what it is and what advisers need,” she says. “The most important thing if you are giving advice is that you have got PI cover.
“It is also important to have continuous cover – so a new PI policy is in place before the old one expires. Cover has to be seamless, not leaving a gap in coverage.”
Shanks says while the buyer of an adviser’s book may agree to accept future claims against the new adviser as a condition of buying the book, claims tend to sit with the past adviser.
And for the owners of a former adviser’s book, Shanks strongly recommends they contact all their new clients as quickly as possible to review their status and the advice given.