Category Archive: Technical

PI Insurance Tips and Traps for IFA’s

Securing competitive price and coverage on your Professional Indemnity (‘PI’) Insurance is easier than many are led to believe. The key to insurance is disclosure and governance. In this article we outline the basic tips needed to optimise your insurance and the traps to watch out for in your policy.


When underwriting a risk, underwriters will use both Quantitative measures and Subjective measures to assess and price your policy. Quantitative measures include your level of revenue, FUA, Products on your APL, Number of clients etc. and cannot be influenced by your broker. The Subjective measures however can have a profound influence on your policy terms, conditions and pricing and this is where a broker will earn his/her stripes through their ability to gather and convey this information in a persuasive manner:

Subjective measures include the following:

1. Detailed Compliance regime. A thorough and detailed compliance plan gives underwriters confidence that errors and omission can be mitigated. If you had a compliance audit in a year which identified some remedial actions, ensure you highlight what steps you took to rectify. Your Compliance regime is not static, ensure underwriters appreciate your firm is committed to a continual process of improvement.

2. Business process documentation. Document your client engagement process (initial and ongoing) to give underwriters a sense for how you operate on a day to day basis. These process documents do not need to voluminous, they should be short, clear and easily read so that your staff can follow the process.

3. Staff recruitment and training. What is your process for recruiting staff and importantly what ongoing development and compliance training do your staff regularly receive. Do you attend regular Responsible Manager training sessions to ensure you are up to date with your responsibilities as an RM?

4. Approved Product List. Product failure leads to claims and whilst Pi does not cover product failure it does cover a breach of your professional duty when recommending a product that failed. To that end, Insurers prefer a clearly defined APL. Whilst you may have a large universe of funds on your APL, what are the 30-40 main funds that you use, or if you have model portfolios what are they comprised of and how do you construct them? A robust documented Investment process to take a fund from your APL universe to your models or client portfolio is invaluable.

5. Direct Shares. More and more advisers are turning to direct share portfolios for their clients. Direct share exposure requires a detailed process to both determine the buy triggers and the sell triggers. Underwriters will want to know what direct equity research do you utilise? Do you have sell price targets both on the upside and downside? How often do you communicate the value of a direct share portfolio with clients? Is there a process to communicate and review a direct shareholding when a stocks price falls by >15%? What are the maximum allocations to any one stock or sector?

6. Historical issues/claims. Like all insurance policies if you have large claims your premiums tend to rise however, do not get trapped in a high premium policy. We all make mistakes and some mistakes are even systemic, however the key to getting your premiums back down is to articulate what steps were taken internally to ensure a similar claim does not happen again. Acknowledge and disclose the past but always move forward. You and your broker should be able to tell a “go forward story” about your business after a claim has occurred. (provided of course that you did take remedial action).

As you can see from the above tips it’s all about your compliance regime and your documented processes. An Underwriters job is to identify and mitigate or avoid risk, so an insurance submission that provides colour on how you mitigate the risk of errors and omissions in your business via a clear process will be looked upon favourably.


Check your policy wordings, exclusions and endorsements and ensure your policy limit keeps up with your revenue to avoid breaching RG 126.

Not all Professional Indemnity policies are made equal so here are some traps to avoid.

1. Policy wording. Read your policy document and policy exclusions.  You will read the exclusions and either be comfortable with what you read or have concerns or queries.  This is an opportunity to raise these concerns before there is a claim,  as your Broker may be able to negotiate a change to a clause that better suits your needs.

2. Costs inclusive vs Costs exclusive policies. Cost inclusive policies include your legal/defence costs in your limit of liability, hence your insurance limit to pay a claim is eroded by those costs. For example, a costs inclusive policy with a $3m limit of indemnity that incurs $500K of legal costs only has $2.5m left to pay a claim. A costs exclusive policy will provide a limit of legal defence costs in addition to your limit of liability hence your limit does not get eroded by those legal fees. Knowing what type of policy you have is important to ensure you do not breach RG 126 which states you are required to hold a minimum limit of indemnity of $2m PLUS Legal defence costs, hence if your policy is costs inclusive your minimum limit of indemnity should be at least $2.5m

3. Aggregation of Deductible. All professional indemnity policies require a deductible (also referred to as an Excess or Retention) to be paid for each and every claim however some policies will ensure only one Deductible is payable for any one Claim or series of Claims arising from the same or interrelated acts, errors or omissions. This is particularly important as you may have a series of claims stemming from the one erroneous piece of advice across a number of clients. Imagine you gave incorrect advice to 30 of your clients and your policy has a $20,000 deductible for each and every claim, that means you must pay $600,000 (30 claims @ $20,000 ) in deductibles before the policy picks up any of the liability. If however your policy has deductible aggregation language then as the claims originated from the same or interrelated error you will only pay one $20,000 deductible.

4. Notifications/Circumstances. If you are sued by a client this is a clear trigger for a claim under the Pi policy. However, what is less clear is when you have a circumstance that may give rise to a claim under the policy.  This is where you, or one of your clients, has identified a potential issue that may give rise to you being sued at some point in the future.  A circumstance can be hard to understand – it’s more than a mild customer complaint but less than being sued – it is somewhere between.  However, it is vitally important that you notify your Insurer of circumstances that may give rise to a claim.  A failure to do so, can jeopardise your rights to cover under the PI policy.  If you are in any doubt then you should always take a cautious approach and discuss the matter with your Broker and Insurer..

5. Product switching.  Ensure your policy has language that contemplates keeping new clients who came to you with existing portfolios invested in products that may not be on your APL. When onboarding new clients with existing portfolios it may not be in the client’s best interest to sell down existing holdings for various reasons including tax liabilities, or sometimes a client feels comfortable with an existing product. Your Pi policy should contemplate this or you should contemplate this in your investment policy and procedures to ensure any issues relating to this non approved product are covered in future.

6. MDA’s.  Given the rise of MDA’s some Financial Planners are appointed as Investment Managers by the MDA operator to their badged Managed Discretionary Accounts (MDA’s). Holding a standard Financial Planners Professional Indemnity Insurance (PI) Policy may not be addressing a crucial aspect of your PI risk – that being, the Investment Management services you provide to the MDA Operator. Check your MDA agreements and if you have been appointed as the Investment Manager to your MDA you should either have your existing Financial Planner PI policy extended to include your activities as the Investment Manager or purchase a separate Investment Managers Professional Indemnity insurance policy.

These are but a few of the traps insureds may unwittingly fall in. It is critical you engage an expert Professional Indemnity broker that understands your industry, the operational context in which you work, including the regulatory environment to ensure a robust insurance solution.

Insurance for Robo Advice

Let’s start at the beginning. The purpose behind the insurance is to protect the consumer from an error in the delivery of the professional service.  So, what happens if the advice is delivered by an algorithm?

Insurers will always ask three key questions. What can go wrong? Who is responsible? and How bad can it get? (For the purposes of this blog we will assume that the Adviser adopts an off the shelf solution rather than building their own).

What can go wrong?

  • Due to the very nature of robo advice where the “client” inputs their own data we may see inaccurate inputs where garbage goes in and garbage comes out.
  • The algorithm is incorrect and that leads to ‘poor advice’.
  • There is an IT glitch (some random /unforeseen matter) that creates ‘bad advice’. The largest software providers in the world have these “glitches” so it is possible that a robo advice solution may experience glitches of their own.

On the flip side humans are prone to error and may inadvertently fail to replicate a compliance process. (IFA Pi claims will attest to this) Humans have proved time and again that we just  can’t stick to the script and often fail to deliver every aspect of the advice.  This is where a smart algorithm can actually reduce risk.  The algorithm never fails to ask the questions and always delivers a consistent experience.  There is no chance of “he said she said” in a dispute. Robo-advice programs also come with the assurance that mandatory disclosures are complete and always given at the right time – a distinct advantage over human advisers.

Who is responsible?

We must consider where the responsibility lies when a person is dissatisfied with the advice from the algorithm that has resulted in an unacceptable outcome. Who do they sue? The IFA or the Robo Advice platform? Ultimately the IFA has earned a fee, “carries risk” and remains responsible for all decisions, actions and potential harm of advice carried out in association with their firm. ASIC has affirmed that at the end of the day, the same laws and obligations for giving advice apply to digital advice. They see the legislation is technology neutral in the obligations it imposes.

Even when the client has incorrectly input data, Section 961B of the Corporations Act imposes a duty on the Adviser to ensure that where it was reasonably apparent that information relating to the client’s relevant circumstances was incomplete or inaccurate, made reasonable inquiries to obtain complete and accurate information. Whilst a human adviser would likely detect a fat finger input error an algorithm may not.

In the event of a claim the questions will be who designed the algorithm, who designed the questions and who assumes the risk?

What is critical for Advisers adopting an off the shelf solution is the contacts they enter into. We often see hold harmless clauses or limited liability clauses inserted by institutions. If you sign a contract that holds a third party harmless or limits their liability, you are prejudicing your insurer’s rights to recovery and could find your insurer may not be willing to pay any claim due to their rights being prejudiced. IFA’s must be very vigilant and ensure before they sign onto anything that they understand exactly where they stand with their insurer with regards to subrogation of rights. This applies not just to robo advice but to all agreements they enter into.

How bad can it get?

It could get very bad. The very nature of robo advice is that it can handle high volumes of lower value clients. What happens if an error is not detected for months and multiple clients are impacted? Let’s assume your robo platform is a raging success and over a 12 month period 500 new clients sign up, however unbeknownst to you there is an error that results in poor advice that only comes to your attention 12 months after launching. Of the 500 new clients 100 are affected. A systemic issue with a robo solution can quickly spread to multiple clients. How does your insurance respond and more importantly how is your deductible structured? Most PI policies deductible are on an each and every claim basis. That means for each of these 100 claims you will have a deductible. If you have a typical $15,000 deductible for each and every claim then you will be liable for the first $1,500,000. This scenario is not only possibly fatal for your business but it will also leave you in breach of RG 126 as ASIC considers whether a licensee has significant cash flow to meet the excess for a reasonable estimate of claims as a key determinant as to whether a Pi insurance policy is adequate.

Robo advice clearly has a place in the Australian financial services landscape, what’s important is that Licensees get the right advice around all the implications of adopting this new technology. Every new advancement in business has its challenges and every challenge has its solution.

Are all policy restrictions contained in the Exclusions?

It’s understandable to assume that all restrictions/limitations to your policy coverage are outlined and defined by the policy exclusions.  However this is not the case.  In fact, many restrictions to your policy coverage are contained in policy definitions (i.e. where key words are defined) and in general conditions (clauses that define items that you and the Insurer need to abide by).

Here are some common examples taken from leading policy coverage’s:

1. Your policy covers professional services in relation to Funds. However, if you look at the definition of Fund, it may well say something like this:

Fund means each managed investment scheme, unit trust, partnership  or investment company anywhere in the world managed, operated or administered by an Organisation but does not include a Hedge Fund, Mortgage Fund or Property Construction Fund unless such fund is specified in a scheduled endorsement to this Coverage Section.

2. Your policy covers Loss. The definition of Loss is often long and comprehensive, but almost all definitions then say “Loss does not include…” and then outline an equally long list of items not covered.

3. Tucked away under ‘General Conditions’ you may find very specific restrictions in relation to ‘Changes in Risk; Other Insurance; Valuation of Losses’. All these items are relatively standard, but each in their own way imposes a restriction on the cover that you have purchased.

Key message: if you take the time to read your policy exclusions to see what you are not covered for, you may as well continue through the rest of the document.  If this doesn’t appeal to you (and we don’t blame you!) then ask your Broker to help you.