AFCA Determination Awards Estate $300K

AFCA Case Number 12-24-140667 saw an advice group being ordered to pay almost $300,000 to the estate of a deceased client, highlighting the potentially significant consequences when agreed review services are not delivered.

The case centred on advice originally provided in November 2019, when the client’s life insurance need was assessed at $659,000. Budget constraints ultimately resulted in life cover of $500,000 being implemented.

Of particular significance was a 1.1% ongoing advice fee arrangement, with annual reviews forming one of the services agreed to between adviser and client.

When the client died in late 2023, his estate received approximately $578,000 from the policy originally recommended in 2019. The estate subsequently lodged a complaint with AFCA alleging that, among other issues, the sum insured no longer reflected the family’s circumstances and had not been appropriately reviewed.

…multiple attempts by the clients …to contact the advice firm seeking a review

AFCA noted several changed circumstances, including growth in the client’s glazing business, which justified a higher level of cover. The determination also referred to multiple attempts by the clients between August and December 2021 to contact the advice firm seeking a review.

Importantly, AFCA found the first scheduled review should have occurred in January 2021 but was overlooked. This failure was acknowledged by the adviser in late September 2021 in an email to the client, stating: “We should have been in contact in January 2021 for your first review and I regret this was overlooked.”

AFCA accepted that had a review occurred as scheduled, the need for substantially higher cover would have been identified. During November 2021 the advice firm obtained quotations for $1 million of life insurance with the clients subsequently instructing the firm to proceed with the increased cover.

AFCA concluded that had the January 2021 review taken place, the increased cover would likely have been in force by August 2021. Critically, this would have pre-dated the sudden onset of symptoms in late December 2021 that ultimately led to the client’s death.

While the compensation amount will attract attention, arguably the more significant aspect of the determination is what it says about the legal consequences of ongoing service promises.

The client’s insurance need was originally assessed at a higher level than the cover ultimately implemented, with the lower sum insured appearing to reflect affordability constraints and client instructions rather than a failure to identify the appropriate level of cover. There is an important distinction between the amount an adviser recommends and the amount a client ultimately elects to proceed with.

…had this been a traditional risk only insurance advice engagement remunerated through insurer paid commissions alone, there may have been no obligation…

Interestingly, had this been a traditional risk only insurance advice engagement remunerated through insurer paid commissions alone, there may have been no obligation to proactively revisit the client’s circumstances. AFCA has previously recognised that insurance commissions are not ongoing service fees and do not, of themselves, create a requirement to provide ongoing advice or review services.

However, once an adviser enters into an ongoing fee arrangement and commits to regular reviews, the nature of the obligation changes fundamentally. The liability in this case did not arise because the adviser necessarily recommended the “wrong amount of cover” in 2019. Rather, it arose because AFCA concluded that a promised review was not delivered and that, had the review occurred, the client’s increased insurance needs would likely have been identified and addressed before his health deteriorated.

Also noteworthy was AFCA’s decision to apportion 35% responsibility to the clients for not pursuing the missed review earlier. Nonetheless, AFCA held the adviser primarily responsible and ordered compensation of $299,121.88 to the estate.

For advisers, licensees and practice owners, the determination serves as a timely reminder that ongoing service obligations extend beyond collecting fees. Where review services are promised, practices must have robust systems in place to ensure clients are proactively contacted and offered those reviews.

…service failures can create liabilities every bit as significant as advice failures

The lesson for the profession is clear: service failures can create liabilities every bit as significant as advice failures, particularly where ongoing fees are being charged. As this case demonstrates, a missed review can become far more than an administrative oversight, potentially resulting in a significant compensation payment years after the original advice was provided.

Read AFCA’s ruling here.