Failing to understand the difference between a commercial short-term insurance policy and a personal lines policy with business use for a vehicle, has landed a financial advisory firm in hot water.

The Ombudsman for Financial Services Providers, Naresh Tulsie, has ruled against Central Financial Advisors which trades as Coler Financial Services Providers in Bloemfontein, for “acting negligently” after an insurance claim by Mr Bongani Nxumalo was rejected following the theft of his courier vehicle.

The Ombud found that Coler had “flouted the very contract he had with Nxumalo and the requirements of the Financial Advisory and Intermediary Services Act’s General Code of Conduct”. The firm was ordered to pay almost R145 000 to Nxumalo to cover his loss of his vehicle.

Nxumalo, who was self employed as a courier, bought a Toyota Hilux vehicle with the intention of using it for courier work and had it fitted with a high volume or courier canopy.  He asked Coler Financial Services Providers to assist him with sourcing insurance for his vehicle.

Two years later, his vehicle was stolen, and his claim was rejected by the insurance company Renasa because it had been insured on a personal lines policy and the use of the vehicle had been captured as business use.

Nxumalo complained to the Ombud’s office that he specifically disclosed to his financial adviser that the vehicle would be used as a courier vehicle. Coler Financial Services, on the other hand, claims that it was not informed that he required a commercial insurance policy.

“It is evident that Coler Financial Services had no understanding or appreciate of the insurer’s product offerings, let alone the option that was appropriate to the complainant’s needs and circumstances.” Tulsie said in the ruling.

Coler Financial Services failed to comply with the provisions of the General Code of Conduct that requires advisers to obtain all relevant and available information from a prospective client to conduct an analysis and recommend a product that was appropriate to the client’s needs.

Had Coler Financial Services done the needs analysis, it would have been in a position to recommend a commercial lines policy to Nxumalo, considering the purpose for which the vehicle would be used. Instead, Coler Financial Services resorted to placing Nxumalo’s vehicle on a personal lines policy with the class of use specified as business use.

As a lay person, Nxumalo was simply required to answer a question of whether the vehicle would be used for private use or business use and Coler Financial Services failed to fully understand and appreciate his circumstances.

The Ombud added that Coler Financial Services also failed to maintain a record of advice which would indicate that a needs analysis was done and why a product was recommended.

Documents such as a needs analysis and a record of advice are key to determining whether a provider has not only complied with the Code but that it had discharged its duty of care towards the client, Tulsie remarked.

In its defence, Coler Financial Services claimed it had done a needs analysis but when completing the domestic proposal form, it had only been provided with two options of either private or business use. There was no official section to choose commercial use as an option, it stated.

But, Tulsie said in the ruling that “by proceeding with the proposal despite there being no option that satisfied Nxumalo’s needs, the adviser had acted negligently and the damage to him was not only foreseeable but inevitable”.

There was no doubt that the adviser’s negligence to, firstly, demonstrate that it had assessed the financial needs of the complainant and to, secondly, adequately advise him on the appropriate policy cover to meet his needs, were the reasons for the loss that Nxumalo suffered, Tulsie concluded.

The FAIS Ombud’s determinations or rulings have the effect of a civil judgment of a court.