New PI insurer bundles in retroactive cover
A new entrant to the professional indemnity insurance market, Quadrant PI, is now offering retroactive cover as part of its standard package.
Tuesday, June 13th 2023, 6:21AM 
5 Comments
by Sally Lindsay
Retroactive professional indemnity (PI) cover can be a thorny issue for advisers if they are taking out insurance for the first time or want to change insurers.
Most insurers are reluctant to give retroactive cover to new advisers (cover for advice given before their policy came into force) because they have no insurance history.
If advisers are switching insurers, they will usually get retroactive cover backdated to the beginning of their previous policy if they can prove they had one, albeit with another insurer.
Even if advisers do get cover, insurers will charge a pricey premium for separate retroactive cover to protect the adviser and their business from liability for negligence claims arising from past advice.
For many financial advisers and their businesses, the cost put this option out of reach.
Quadrant director Tony Vidler says every adviser needs retroactive cover though many don’t understand how important it is, and Quadrant has made it easy and cost-effective to access this cover.
“We have built it into the PI contract, as opposed to an optional add-on, which is what most of the market does,” Vidler says. “This ensures that when you are using our product, it doesn’t matter who you had your previous cover with. Your current product will cover you.”
FAP cover
If you’re operating under a FAP (Financial advice provider) licence, Quadrant’s policy will cover individual advisers as well as the licensed business.
Hutchison Rodway senior adviser Phil Mitchell, who is the main point of contact for those wanting to join Quadrant’s PI scheme, says the product is a game-changer.
“In the past, people were buying a PI policy and then wanting retroactive cover for all past advice when they’d never had PI cover in the first place. Insurers were pushing back, saying they would offer retroactive cover only in relation to the PI policy an adviser previously had in force. Advisers had to prove they actually had a policy. If you did, insurers would start the retroactive date from the start date of that earlier policy.”
But, he says, that is not the case with Quadrant.
“We don’t care if you had a policy last year. We’re covering you for everything you’ve ever done, regardless of whether you’ve had a previous policy or not. It’s a massive bonus for advisers and their businesses.”
It is more complex, however, if an FAP has acquired another business or client base.
Liability issues can arise from past advice that was given – maybe years earlier – to clients of the acquired FAP, which likely no longer exists.
The problem is becoming more common as advisers and FAPs choose to amalgamate, or sell up and leave the industry in the wake of the new licensing regime which kicked in three months ago.
“If the original broker is no longer in business and something goes wrong with the policy, who are clients going to chase?”, says Quadrant director Kevin Smee. “You’re the front man. You’ve bought the client base and you didn’t give the advice, but the client sees you in the frame, whether you’re at fault or not. They will have a go at whoever ‘owns’ the client at the time. That’s the issue.”
In this situation, advisers could find themselves in the invidious position of being sued for advice that was given years ago by somebody else.
The answer, Mitchell says, is for those buying or selling FAPs to buy run-off cover. Quadrant offers this as a separate policy, meaning it is not included in its standard PI package.
Typically, run-off cover is bought by either the vendor or the purchaser when a FAP is closing or ceasing to trade. It covers the ‘old’ FAP’s prior history and protects the acquiring FAP which now ‘owns’ the client, even though the person who gave the advice is gone.
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Comments from our readers
Just because the majority say the same something it doesn't follow that they are correct. Nor does it make something more correct simply because one makes more noise about it than others do. And the majority of the noisemakers in this instance are generally not qualified to give legal opinions - including myself - and this entire area is essentialy untested territory (legally) as far as I'm aware.
There are however what appears to be some pretty clear boundaries in some of this;
1. natural justice and common law would suggest that it is difficult to hold someone liable for something they did not do (such as holding an adviser liable for advice they never gave). I think there is a bit of precedent around that issue over the last few centuries.
2. It is NOT difficult to see in the new laws we have that a newly appointed adviser is totally responsible for the advice they give from when they take over, so expressing an opinon on the suitability of the previous advisers work would absolutely bring liability issues to the forefront for the newly appointed adviser - from that point forth.
3. The ongoing servicing expectations from a compliance perspective of an adviser taking over another book of business are just that: servicing expectations. In other words; Be in touch with the newly acquired clients and offer them advice and service...neither of which is necessarily "regulated financial advice" in itself, and neither of which the consumer is obliged to participate in. The obligation on our part however is to offer it and continue to try and advise when they wish it.
Stop confusing compliance and servicing obligations with legal liability for another businesses historic actions or advice.
It is not helpful.
True, it is untested, just like most of the rest of the largest implementation of legislation in New Zealand's history that was also an amendment...
Those that have advised me are where my comments come from, and they are more qualified than you or I to make that judgement.
When the FMA has also said the advice to hold that contract is regulated financial advice, the rules sit around both the appropriateness and performance of that advice; it becomes pretty clear that advising to hold a product with flaws with a lack of investigation and due diligence by the adviser becomes a professional issue when that advice doesn't perform when needed.
Just because this hasn't been picked up and tried yet, doesn't mean it can be ignored. Like everything else going on at the moment, it's all new!
Where we do not agree, or I don't agree with whoever advises you on this, is that an adviser taking over another's book of business is automatically liable for the past advice of the ex-adviser without having given any opinion, recommendation or guidance to the client themselves to the ex-advisers' client.
If the day ever comes that an authority or an institution attempts to hold an adviser legally liable for advice they never gave then we'll all be watching the outcome closely. I don't imagine I'll see that day during my career actually.
In the meantime, and in the absence of any authorative opinion from someone who is actually an expert on the legal position in this regard (which is neither of us), I hold that it is best for the confidence of the industry at large to leave crystal-ball-gazing legal interpretations to those who are actually experts in that area.
Interestingly, genuine authorities are noticeably silent on this topic, which in itself suggests that it is not the issue some imagine it to be.
As to the better qualified not commenting, it's likely because they haven't seen this, don't care enough about it, or because it's untested, they can't provide a clear comment on guidance.
This somewhat makes my point we can't ignore the issues buried here just because they haven't been tested in court yet. We need to take adequate action to ensure risks like this are mitigated.
In terms of your comment about book purchases I largely agree. But there are a couple of bookends to that.
If the clients are transferring from one FAP to another the way the law appears to be written, the liability rests with the FAP, it doesn't say which FAP clearly. More it states the FAP the clients are under.
Which has the interpretation that the new FAP could be liable for unreviewed client base purchases.
I agree it's problematic and it should be the original FAP, but like the way the building laws captured everyone, this is written in a similar way.
And all client base sales at this point should be from FAP to FAP given FAPs have been around for two and a bit years. Only full licenses and education changed in March...
The other one is the bit on base purchases and servicing.
The expectation presently in the market is every client should be seen in 12 months.
We all know that doesn't happen, 30% in any one year respond to reviews, and 10% never reply or engage, so it's not going to happen, you can't force it.
But this also comes with the expectation of both the review and transfer of risk to the new adviser and FAP with that advice happening within 12 months and resulting in the expectation the new FAP Is responsible for the performance of the existing product base.
Is this unreasonable, probably, at the same time it's how it appears to both be written and lacking guidance in the absence of case law.
The idea that the new adviser or FAP is not responsible isn't how FSLAA is written.
As to the historic advice risk piece, potentially the hold advice specifically scoped and disclosed can be limited. The basis that the advice to hold a contract assumes that disclosure and medical history etc was clear, correct, and free from omission, but that also needs testing in court too...
The change in approach to have both FAP and adviser responsibilities, and CoFI to come means we have the challenge both what we know and what is possible with the new rules. It's a new world in ways we still haven't got our heads around
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The funny thing, the new rules, and old rules, define regulated financial advice as advice to acquire, hold, or dispose of a financial product.
The advice to hold triggers responsibly for the performance of that historic contract into the future.
It's not about the advice given historically when it was acquired, it's about the ongoing performance of the contract.
As the adviser when advising to hold the contract you also warrant the disclosure was correct, the contract will respond as intended, and the contract is suitable for their current future needs.
Where the acquisition by the FAP is of another FAPs clients, all of those responsibilities also transfer.
While there is the understanding that FAPs are ultimately responsible for the advice given, the issues with the historic advice before March 2021 to take that contract lie with the original adviser, even though the current FAP will be on the block for the initial complaint.
And by the noise around servicing expectations, all existing clients should have been seen/serviced by an adviser under the new rules, as the new rules started 16 March 2021. Meaning that the liability for historic contract performance is live on all existing contracts under FAPs.
It was only the end of the transitional licensing and education safe harbour that changed on 16 March 2023.