‘Out of his depth’ adviser must compensate client

An adviser who was “out of his depth” when he sold insurance to a small golf estate has been ordered to compensate the estate R74 982 after its second-hand machinery and tractor were incorrectly insured, causing it to suffer a loss when the goods were damaged in a fire.

Financial advice ombud Noluntu Bam found that financial adviser Burger Wilhelmus Gericke had failed to tell the insurer that his client’s goods were second-hand and insured on an “agreed-value basis”. As a result, the goods were insured at full replacement value, in terms of the policy’s “old for new” clause.

Gericke’s client, Dolphin Creek Golf Estate in George, complained to Bam that Gericke had denied that an “old for new” clause existed in the policy and had continuously maintained that the estate was properly and adequately insured.

Dolphin Creek had asked Gericke for comprehensive cover, which he placed with Hollard in 2000. In June 2005, Gericke moved the policy to another insurer and increased the sum insured to R100 000.

Dolphin Creek understood that, should it suffer a loss, the sum insured of R100 000 would be adequate to restore the estate to the position it was in before the loss – in other words, R100 000 would be enough to replace equipment that had been procured second-hand with second-hand equipment.

But after the estate was damaged in a fire, the assessor found that the equipment had been insured at full replacement value and was grossly under-insured – by about 75 percent. For this reason, the condition of average (see definition, below) was applied, making the insurer liable to pay only R16 962 of the loss, which was estimated at R96 569.

Furthermore, the claim for damages to the tractor was rejected, because, according to the insurer, it was not insured correctly. Since a tractor is a self-propelled vehicle, it ought to have been insured under the vehicle section of the policy.

Gericke contended that the initial policy was written before the Financial Advisory and Intermediary Services (FAIS) Act came into force and that no record of advice is needed when a policy is moved from one short-term insurer to another.

Gericke said he never claimed that his client’s equipment was new, and that the policy wording should have been amended to state that all equipment was second-hand, as per the inventory of equipment that he submitted to the insurer.

In her determination, Bam says Gericke appeared to be “oblivious to his responsibilities towards his client”. The evidence against him was overwhelming, she says, in that he had helped his client to complete the proposal form and had supplied the value of R100 000 under the sum insured section, which specifically stated that “the sum insured must represent the full replacement value of the contents. An examination of the proposal form, and the accom-panying instructions to place cover, reveals that he merely left it to the insurer to decide how the goods should be insured.”

Bam says the only conclusion that can be drawn is that Gericke did not understand how the policy worked. “This is inexcusable,” she says.

“The sale of commercial insurance requires highly specialised and skilled individuals. By holding out to the general public that he offers financial services in commercial insurance, the respondent implied he possessed those specialised skills,” Bam says.

As a financial services provider, Gericke had a duty to render this service with due skill and diligence, she says. “This means it was the respondent’s duty to fully understand the product he was selling.” It is for this reason that he is allowed to charge a fee or commission for his services. He should have known how short-term insurance works in general and how the particular insurer’s policy works, Bam says.

Addressing Gericke’s claim that no record of advice is needed when replacing one short-term insurance policy with another, Bam says “this is not true”.

Clause 8(1)(d) of the FAIS Act’s general code does not make a distinction between long-term and short-term insurance products, Bam says. “It must be assumed, in the absence of any express contrary provision, that it applies to replacements of any financial product with any other financial product,” the ombud says.

Had Gericke rendered his ser-vices properly, Dolphin Creek would have enjoyed indemnity under the policy, Bam concluded. His “unlawful and negligent conduct was the sole cause of the insurer’s rejection of the tractor claim, and the insurer’s application of the condition of average on the machinery and equipment claim”.

Because of his failure to discharge his duties properly and in line with the FAIS Act’s general code of conduct for financial services providers, Gericke was found liable to compensate his client.

WHAT IS CONDITION OF AVERAGE?

Condition of average is applied when, immediately before loss or damage, the market value of the property insured is greater than the sum for which the property was insured. If a loss occurs in this circumstance, the insured is entitled to be compensated only for a proportion of the loss suffered. This proportion is calculated by dividing the sum insured by the true value of the insured property.

This usually happens when used or second-hand goods are insured; their resale value may be low, but to replace them as new (“old for new”) would require a high payout. In such a case, if the policy is subject to average, the claim will be reduced by the value of the under-insurance.