BizCover offers professional indemnity insurance for over 200 professions. Visit www.bizcover.com.au, you have nothing to lose and a lot to save!

Financial planners are facing a flood of compensation claims from clients who were hit with expensive tax penalties after acting on mistaken advice to put large sums of money into superannuation.

The decision to cut the amount of money that can be put into superannuation, taken two years ago, has triggered a surge in breaches and the Australian Taxation Office has been levying heavy penalties.

Clients, who can be hit with fines of tens of thousands of dollars for breaches of less than $100, have begun suing their financial planners in an effort to recoup the fines.

At least 50 compensation claims, many of which are worth more than $100,000, are being processed by professional indemnity insurers, said Michael Gottlieb, director of Mega Capital [BizCover’s parent company], the largest professional indemnity insurer to the financial planning industry.

“Those that actually go through to claims would be the mere tip of the iceberg,” Argyle Lawyers principal Peter Bobbin said.

The ATO was taking the view that if the person had been advised by a financial planner to make the contribution, they had the capacity to be compensated for the mistake and no leniency would be shown, Mr Bobbin said.

The ATO said individuals were liable to pay excess contributions tax on contributions made to super that exceeded contributions caps.

“The ATO is only likely to disregard or reallocate a contribution if an excess contribution was unforeseeable,” a spokesperson said. “To establish that it wasn’t reasonably foreseeable, you will need to explain how your circumstances affected your, or your adviser’s, ability to understand the law or know a relevant fact.”

Lawyers, accountants and planners have criticised how the tax is levied as unfair and continue to lobby for reform. Financial planners also claim they are the scapegoats for a poorly designed system.

“It’s poor legislation. It was done in a hurry by the government and they didn’t really give full account to what the potential ramifications would be,” Financial Planning Association chairman Matthew Rowe said.

Annual caps on super contributions were introduced by the Howard government to stop wealthy people rorting the tax benefits of the retirement savings systems. The so-called concessional cap was later halved by the Rudd government and the number of breaches of it has risen significantly since then.

Currently people aged under 50 can contribute up to $25,000 and get up-front tax breaks. Those 50 or over can salary sacrifice up to $50,000 a year. On top of those amounts, people can add $150,000 a year, or $450,000 averaged over three years, from other savings or capital generated from the sale of a property, for example.

Mr Rowe said that until the super contribution policy was changed consumers would continue to suffer loss due to inadvertent errors. “It’s affecting mums and dads, it’s not affecting the big end of town.”

The spike in compensation claims is an additional financial burden on the advisory industry as it struggles with regulatory reforms that are already driving business costs higher. It has been forced to abandon sales commissions and to ask clients to sign an annual service agreement, which the industry claims will involve significant extra cost.

Lifespan Financial Planning joint managing director John Ardino said hefty penalties were undermining investors’ and financial planners’ confidence in superannuation as it was easy to make costly mistakes in the complicated system.

“All professionals and all clients affected should take to the streets with placards, this is such a burning issue.  It applies to too many people and it’s absolutely not fair,” Mr Ardino said.

“The government is acting as if people are engaged in aggressive tax planning and trying to put one over the government. Nothing could be further from the truth. The Tax Office and the government are being unjustly enriched through the penalties.

“It’s about time that the government was told to fix it now, provide a tax amnesty and refund the compensation payments which advisers, often through their insurers, have made and pay interest on that.’”

However, the government has so far refused to change the law on the basis that the principles behind the penalty tax are sound.

“According to the ATO, less than I per cent of active super fund members have exceeded the contributions cap. While this number is relatively small in proportion to the total number of super fund members, the people caught up in this are as important as any other superannuation fund member, ‘” a spokesman for Assistant Treasurer Bill Shorten said last week.

“The excess contribution caps were put in place several years ago to protect the integrity of the superannuation system and ensure people on lower incomes are not disadvantaged,” the spokesman said.

In the 2009·10 tax year, 70,613 people breached the caps and 48,721 of them are expected to be penalised. Many are likely to be members of do-it-yourself superannuation funds.

People who breached both caps added an average of $89,861 too much to their funds, although the median amount was much lower at $9532.

For the 2008-9 tax year, 23,059 people are expected to be penalised and for the 2007-8 year, 22,561 could be penalised Professional indemnity insurers have been caught off guard by the number of claims against financial planners but they are bracing for more, Mr Gottlieb said.

“Everyone was so worried about product failures and a material number of claims coming out of product failures, but that probably hasn’t been as bad as anticipated What has been worse than anticipated has been these excess contributions to super,” he said.

The claims, were predominantly against financial planners, but some accountants were also affected.

Mr. Frank Earl who was a leader in developing professional indemnity insurance and who was well known in the Australian markets passed away on July 19, 2010 after a long battle with cancer. While all that knew and worked with Mr. Earl was saddened by his loss The Australian Professional Indemnity Insurance Group, has taken steps to see that Mr. Earl and his Contributions will not be be forgotten by establish an annual award to be given to the financial lines specialist who most defines the precepts Mr. Earl stood for, honesty, integrity, and transparency.

Mr. Earl’s contributions spanned over 40 years, and he was regarded as one of Australia’s most highly regarded insurance brokers. Mr. Earl took a special interest in the education of brokers and set the highest professional standards for all who will follow him. Dubbed the “godfather” of the Professional indemnity insurance lines in Australia Mr. Earl served the insurance industry in a number of positions including serving as a director of the National Insurance Broker’s Association board and as the board’s president in 2003/2004. Through out his life Mr. Earl maintained a strong and clear professional and personal reputation and held true to his vision of what insurance brokering should be all about. He held true to that vision and encouraged others to hold true to it as well.

As with any industry there will always be those who have vast technical knowledge about their chosen profession and the courage and vision to forge ahead and make a difference in the lives around them. Frank Earl was not simply one such person in the field of personal indemnity insurance, but, was heads and shoulders above many who lacked the vision to understand the relationship between the insured and the insurers. In many ways Mr. Earl put the Professional in Professional indemnity insurance and lived up to the standards that he envisioned for the field he had chosen to dedicate his life too.

The many tributes that have been given this many both during his life time and in these weeks following his death, says all there is to say about this man’s integrity, dedication and influence on the world of professional indemnity insurance. He was a rare person, whose contributions are just beginning to be understood by those in the insurance industry.

Mr., Earl was a gentleman of strong values and views but, he was always willing to listen to what others had to say. However, it was the combination of values and his fun loving nature that made him so well liked and respected in the Professional indemnity field. One can only hope that in the years to come some of those who will be recipients of the award designed to honor this man, his dedication and accomplishments will follow in his footsteps and serve as long and honorably as Frank Earl did during his long career.

Under the new policy, those midwife’s in private practice are not covered when they give care during home births. This means, that women wishing to give birth at home, may well have to accomplish this feat with no professional attending should something go wrong. This may well put these woman and their babies at risk. Leaving them little or no option other than giving birth in a hospital.

Unassisted birth can traumatise a first time mother yet an increasing number of women are choosing home births as an option and they are on the rise and would probably be higher if more women had more options.

There are conflicting reports about whether home births pose greater risks to the mothers and infants with reports from different countries offering vastly different viewpoints. However, one thing is sure, providing mothers with medically assisted home birth options will decrease the risk of harm to both the mother and the baby over that of an unassisted birth and one sure way to do that is to provide professional indemnity insurance coverage for those skilled and private practicing midwives who attend home births. Something the new insurance measures that were put into effect on July 1 failed to do.

As things stand now a midwife who agrees to help a woman with her home delivery has no professional indemnity insurance protection should the unthinkable happen. This may make private practicing midwives reluctant to give care to those patients who may need their services the most. It also, puts those patients choosing to have at home birth at risk should something go wrong.

Considering that the number of women who want to give birth at home is growing, and that the care of these mothers and newborn infants rests in the hands of privately practicing midwives that government supported professional indemnity insurance would recognise the benefits of insuring these midwives so that they could care for these mothers, allowing for a skilled professional to be on hand for the actual delivery and thus reducing the risks to both mother and child.

However, government supported professional indemnity insurance for midwives has failed to provide them with such insurance coverage leaving both private practicing midwives and expectant mothers with fewer and more risky choices.

As of July 1, 2010 government supported Professional indemnity insurance became available for all qualified privately practicing midwives. While this offered some good news to those mid wife’s in private practice it failed to address the most important concerns of these midwife’s and that of many of their patients who wish to give birth at home. Under the new policy, those midwife’s in private practice are not covered when they give care during home births. This means, that women wishing to give birth at home, may well have to accomplish this feat with no professional attending should something go wrong. This may well put these woman and their babies at risk. Leaving them little or no option other than giving birth in a hospital.Unassisted birth can traumatise a first time mother yet an increasing number of women are choosing home births as an option and they are on the rise and would probably be higher if more women had more options.

There are conflicting reports about whether home births pose greater risks to the mothers and infants with reports from different countries offering vastly different viewpoints. However, one thing is sure, providing mothers with medically assisted home birth options will decrease the risk of harm to both the mother and the baby over that of an unassisted birth and one sure way to do that is to provide professional indemnity insurance coverage for those skilled and private practicing midwives who attend home births. Something the new insurance measures that were put into effect on July 1 failed to do.

As things stand now a midwife who agrees to help a woman with her home delivery has no professional indemnity insurance protection should the unthinkable happen. This may make private practicing midwives reluctant to give care to those patients who may need their services the most. It also, puts those patients choosing to have at home birth at risk should something go wrong.Considering that the number of women who want to give birth at home is growing, and that the care of these mothers and newborn infants rests in the hands of privately practicing midwives that government supported professional indemnity insurance would recognise the benefits of insuring these midwives so that they could care for these mothers, allowing for a skilled professional to be on hand for the actual delivery and thus reducing the risks to both mother and child. However, government supported professional indemnity insurance for midwives has failed to provide them with such insurance coverage leaving both private practicing midwives and expectant mothers with fewer and more risky choices.

Source: Australian Department of Health & Aging

A JP Morgan report indicates a return of the hard market with fewer insurers out there and increased claims hiking premiums for Professional Indemnity Insurance with increases unseen since the 2001 market debacle.

Other news has reinforced the opinion that insurers will be forced to return to profitability after years of losses and falling premiums as they attempted to compete in a soft market with global competitors.  The effect of a hard market may be mitigated in some measure by competition from global insurers however profitability is a mandatory in the current economic climate even for International insurers and significant increases are a surety particularly in lines such as Professional Indemnity Insurance.

Industry analysts are quiet about the exact rate professionals can expect to see over the next few years but there is a reduction in capacity expected as well as premium rates and increases up to 30% have been speculated as possible for across all classes including Professional Indemnity Insurance.
The changes in the insurance field are said to be by some, a return to financial responsibility and profitability, however the impact on those required to carry Personal Indemnity Insurance may be further financial hardships and a struggle to retain or achieve profitability in already difficult times.

Time will tell if the market changes and increased premiums will benefit all, however the falling premiums for all insurance over the last several years have placed the Insurance industry and many insurers on shaky financial ground.

2009 saw an increase in claims against professional insurance companies that indicate an upward trend in those people wanting to recover losses that they believe were a result of those professional businesses with which they did business. More claims means more paper work, more money spent on paying legitimate claims and more money spent on defending companies from bogus claims resulting in higher premiums to the professional companies themselves.

On top of the higher rate of insurance claims, new regulations passed in January 2010 by the Australian Securities and Investment Commission calls for higher standards of professional indemnity insurance this may result in higher premiums for many professional businesses. This rise in professional insurance premiums will be noticed by those insured mainly in March and July when policies are renewed. When your business policy is renewed it will be reviewed to determine if it meets these new higher standards. For those whose policies do not meet the new standards commercial insurance, premium rates could rise by as much as triple from what companies are paying now.

This could be bad news for many companies who have thus far managed to weather the tough economic climate of the last two years.

The bad news doesn’t stop there. A new report issued in March by PriceWaterhouseCoopers (PWC) shows that the companies who underwrite insurance to businesses are being defrauded by their employees to the tune of over 1 million U.S. Dollars giving Australia the dubious distinction of having the highest internal fraud detection anywhere in the world. To complicate matters even more, Australian businesses themselves are uncovering fraud by 40% of their own employees to the tune of millions of dollars.

What this means is that the insurances underwriters themselves are being taken for several millions of dollars both by false claims and by their own employees. This again could eventually be bad news for those carrying professional indemnity insurance as well as all those insured across the board as these losses will more than likely be made up by increasing the premiums of the insured.

For those businesses required to hold professional indemnity insurance to protect them from client claims of loss they are probably wondering who is going to protect them from the insurance companies themselves. However you look at it, the news is not good on the professional indemnity front and those needing and required to hold these insurances policies may soon see their rates skyrocketing.

If you belong to a professional association, it is always a good idea to contact the association and check whether there is a minimum limit of Professional Indemnity Insurance you are required to maintain to comply with their compliance requirements.

They may also be able to provide guidance on matters such as this based on their expertise in your specific industry and their experience with other members.

In addition to guidance provided by a professional association, there are other factors to be taken into consideration when selecting an appropriate limit of Professional Indemnity Insurance. These include:

The size of your largest client or contract

While your earnings from a specific contract may appear minimal, the overall size of the contract itself can give a more accurate picture as to the full financial exposures in the event of a total loss.

The potential scope of your advice – how many people are relying on it?

This is particularly relevant to people providing any form of financial advice. While you may be providing advice in regards to one financial product, this financial product will have multiple clients. Multiple clients will mean multiple claims and needs to be taken into consideration when selecting an appropriate limit of Professional Indemnity Insurance.

Defence Costs

When considering what limit of Professional Indemnity Insurance will be adequate, it is important to take into account the costs associated with defending an action. Some policies include the Defence Costs within the limit of Professional Indemnity ; some provide Defence Costs in addition to the limit of Professional Indemnity insurance. You need to ensure your limit of Professional Indemnity Insurance is adequate to encompass both the claim and the costs in defending it.

The nature of a ‘Claims Made Basis’ policy

The very nature of a ‘Claims Made Basis’ policy means you need to consider  not only your current professional activities, but also all your past activities.

In addition to maintaining a limit equal to all past and current activities, factors such as inflation and an increase in interest rates need to be accounted for. What may have resulted in a financial loss of $500,000 several years ago, is likely to be substantially higher now.

With the growing popularity of the blogging on the internet, reputation is extremely important. If a business’ reputation gets tarnished as a result of a claim made against them from an unhappy client, the word can spread like wildfire over the internet and community.  This is where the value of professional indemnity insurance can be recognized.

If you were somehow involved in consulting or advising a client and they have had a financial loss it is possible that if the client is upset and wants to look at all possible options for compensation this could result in them filing a claim against you.  Most clients will be more than happy to agree to the terms of professional indemnity insurance, as this means that if anything happens that causes them a loss, your insurance will pay for it. Such an example may be that you area private consultant and the contractor made an error in numbers causing your client a financial loss and putting you in the hot seat.

A lot of practices, even the ones with clean claims records, should be cautious.  Increasing the amount of coverage if is appropriate, may be necessary from time to time depending on the size of a job contract or the level of risk involved.  Businesses or consultants whose insurance coverage is not sufficient may need to draw funds from their own pockets and that is never a good thing. With professional indemnity insurance you do not have this problem.

In life, mistakes happen just as frequently as they do in business.  Mistakes can be in sales, finance, marketing, or services rendered.  Many of these mistakes can often prove costly to a business if precautions aren’t taken. Claims can and do occur and can be a possible set back for new businesses just trying to get started, and also be a major inconvenience for those already well established. A large lawsuit, can ruin a business, cost tens of thousands of dollars, and potentially have the ability to ruin lives of those involved on the short end of the stick.

A major aspect that any potential policy holder needs to consider when deciding upon whether or not they should buy professional indemnity insurance is the potential financial loss that can occur as a result of legal fees whether or not you win your case.

However, there is a comes a risk with offering advice as a consultant. An angry client who has suffered a financial loss based on your advice may turn around and file an insurance claim against you. The result is that you could have to pay, these past clients who you attempted to help in good faith, a large sum of money for their damages. This may seem unfair, but the fact remains that you are at risk.One way to ensure that this never happens to you, is by purchasing something called Professional Indemnity Insurance, this is a very safe option to assure you are covered in the event that someone files suit against you. Professional Indemnity Insurance works by insuring you the cost of a claim made that is equal to your client’s monetary loss and will cover the cost of your legal fees.

This can really help to offer a consultant like yourself, the peace of mind for both the you and your client. It will make a client much more reassured and happier knowing that if any of your advice causes them a loss of finances that they will be reimbursed by your insurance company. It will also help you of course, in the way that you can breathe easier knowing your Professional Indemnity Insurance will take care of any disappointments of misjudgments on your part. Your insurance company will be responsible for paying your past client the amount they lost and cover your time and expenses that you may have had to put out initially.

This type of insurance is usually offered as a part of a business’s insurance policy. The cover will form the center of your insurance coverage and you will usually be able to add additional coverage if you think that you may need it in the future or at any time during your Professional Indemnity Insurance policy’s term. As an example, at some point you may want to add business insurance or public liability insurance for your own protection.

When you buy a Professional Indemnity insurance policy, it usually is a good idea to look around until you find the deal that suits your needs best. One way to do this is to compare quotes from different companies offering Professional Indemnity Insurance. This way you are able to get the full spectrum of what competitors charge but looking at a side by side comparison of them and their rates. This will save you time and money, and probably give you the best coverage in the long run because you would have had an opportunity to compare not only rates but also policy wording.