Three company directors who claimed they had acquired professional indemnity (PI) and run-off insurance based on “incorrect advice” from their broker have won their dispute. 

They had purchased a financial planning business in 2020, also acquiring the pre-acquisition liability, and planned to restructure the operations after the deal closed. 

Under the planned changes the previous owners’ clients were to be transferred to a new entity called portfolio A, which would be a separate business. Another entity, portfolio B, would be made up of the three directors’ clientele. 

The three directors subsequently took out PI insurance for portfolio B and run-off cover for portfolio A on the advice of an Oracle Group broker. 

They say the broker had advised that portfolio A required long-tail PI indemnity run-off cover and that it was a legal requirement. However, they later found out from the Australian Securities and Investments Commission (ASIC) run-off cover was not mandatory. 

The directors also made enquiries with other industry professionals who spoke with the underwriter who had issued the PI cover for portfolio B. They were told the underwriter believed a change in entity structure and change in insured name would not necessarily mean that a run-off policy would be required for the old entity. 

They were also informed if a claim were to be made against the entity, the three directors would be responsible for responding to the claim since they now own the financial planning business. 

In such a situation the PI policy for portfolio B would respond so long as the claim related to matters occurring on or after 30 June 2015 since the cover’s retroactive date was set at that date. 

The directors were told too that quotes should have been obtained for alternate insurance options. 

Oracle Group said the directors had sought advice on what insurance products were required for pre- and post-sale liability obligations. The broker said it was not responsible for giving legal advice and that the directors did not specifically ask for it. 

But the Australian Financial Complaints Authority (AFCA) dismissed Oracle’s arguments, ruling the broker had failed to exercise reasonable care and breached its duty of care. 

AFCA says the exchanged documents show that the three directors had explained the nature of their business to the broker and provided detailed instructions. 

“Having reviewed the available information I am satisfied that the broker only advised the complainant on the one option of run-off cover,” the AFCA ruling says. 

“There is no evidence the broker presented any other options to the complainant or that it made reasonable enquiries in the market as to what alternate covers may be available.” 

AFCA also said it does not accept the broker’s submission that obtaining separate run-off cover was the best approach. 

“In fact, I do not consider it offered any identifiable benefit to the complainant,” the ruling says. 

AFCA says the broker is to pay the complainants for loss incurred and to return them to the position they would have been in had the run-off policy not been taken out. 

The directors had obtained premium funding which required it to pay monthly instalments of $3,552.51 including interest for the three-year run-off cover for portfolio A. They cancelled the cover in February last year after ASIC said the run-off cover was not mandatory. 

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