Licensee contracts don’t effectively deal with the issue of Professional Indemnity insurance run-off and it’s an issue that’s going to continue to cause problems for advisers switching AFSLs, according to an insurance broker.
Professional Planner previously reported that licensees had been using PI insurance as a weapon to make switching licensees difficult, with excessive paperwork and the demand for extra coverage that will cover several years after departing the licensee.
But PNOinsurance director Peter Conquest tells Professional Planner PI run-off is not available for an exiting adviser to get when the former licensee is still trading.
“The authorised rep agreements that are currently out there and in place right now don’t address [this], they’re silent on this issue,” Conquest says.
“That needs clarity because there is a genuine risk or cost to the former licensee. In many respects it’s not unreasonable.”
Conquest adds the issue is complex and not well understood by industry participants.
“Run-off for PI cover really only applies when there’s a transaction, so it might be a licensee sells or ceases trading and then there’s a requirement for the business to continue to have PI in run-off mode,” Conquest says.
“The business is not trading but there’s an active PI policy for the period in which they were giving advice.”
All PI policies cover current and former authorised representatives, but Conquest says it’s becoming an issue for advisers who are being told by licensees they need to have run-off cover.
“In actual fact there is no need for cover because the licensee’s existing policy, as long as they are continuing to trade, will automatically continue to provide [coverage],” Conquest says.
“Where it gets tricky is that an insurer should be looking to what is the historical exposure to that licensee. In theory the statute of limitations is up to six years.”
Despite that six-year limitation, Conquest says insurers typically base their premiums on the last couple years of turnover.
“We are seeing licensees… they’re saying you need to get run-off cover for the time you were part of our licensee, and you just can’t get it,” Conquest says.
“It’s not practically available. An insurer will say there is no need… because the existing licensee is already covered.”
If advisers want to switch or exit a licensee, Conquest says the current state of affairs often results in frustration and negotiation.
“The big issue is none of the authorised rep agreements deal with it clearly, so it’s resolved by negotiation,” Conquest says. “What we’re seeing most advisers will leave, but they’ll leave with a bit of a fight.”
He adds it shouldn’t really be an issue for licensees as long as the overall number of advisers in the network remains roughly the same.
“If they lose one corporate AR it shouldn’t impact their premiums all that much but where it will become a big issue is if there’s a mass exodus of corporate ARs,” Conquest says.
When advisers switch licensees, the former licensee is still liable for any negligent for the time the adviser the adviser was licensed.
“This where it’s an imperfect science,” Conquest says. “Yes, you’re paying for that period of time but you’re also getting, in theory, the next six years cover.”
