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Business Insurance Fact-Finding

 

No issue gives the average Adviser greater grief than Business Insurance Fact-Finding.

However, if Advisers are to rise above the average, service Business Clients better and achieve the potential of the Business Succession market, then they must achieve a competency in Fact-Finding.

You cannot give competent Business Insurance advice, unless you have first completed a competent Fact-Finding process.

 

Interface with Business Succession Lawyer

The Fact-Finding issue is muddied in the context of Business Insurance, because in most cases the Adviser will need to work in conjunction with a Lawyer who will be responsible for preparing a Business Succession Agreement.

Both the Adviser and the Lawyer have a duty to know their Client and the Client's needs.

However, the fact that another professional needs to fact-find does not reduce the amount of Fact-Finding that each person has to do.

Both professionals have to satisfy their own duty of care, regardless of the involvement of the other professional.

What needs to be recognised is that the information that each professional needs to know is almost identical.

This creates the opportunity for both the Adviser and the Lawyer to use the same methodology or Fact-Finder.

Advisers should not assume that some facts are legal and not insurance-related.

Equally, Lawyers should not assume that some facts are purely insurance-related and not legally relevant to their duty of care.

 

IGS Business Insurance Questionnaire

IGS supplies Advisers with whom it works a Business Insurance Questionnaire.

This Questionnaire is subject to copyright and other intellectual property rights.

However, Advisers are entitled to use it on the terms of their Marketing or Documentation Licence.

 

IGS Questionnaire is a Fact-Finder

The fact that the Questionnaire is called a "Questionnaire" (not a Fact-Finder) does not mean it is not a Fact-Finder.

IGS created the original version in 1987, when the term "Fact-Finder" was not as common as it is now.

However, whatever it is called, it is intended to collect information about Clients and their Needs that both professionals need to comply with their duty of care.

IGS originally created the Questionnaire, because it frequently found that, when introduced to a Business after the Adviser had made a sale of the Insurance Products, IGS had to confront the fact that:

  • the Adviser had misunderstood the Business Structure; and

  • the Product Advice was wrong.

IGS considered that this embarrassment could be best avoided by using a common methodology and Fact-Finder.

 

Reliance on Content of Questionnaire

To the extent that IGS completes the Questionnaire (or a draft), the Adviser can rely on the contents (on the basis that the information has been supplied to both IGS and the Adviser by the Business).

If an Adviser completes the Questionnaire, it is intended to supply most information that the Adviser needs to comply with their duty of care with respect to Business Insurance (i.e., Buy/Sell, Debt Reduction and Key Person Cover).

Personal Fact-Finder

It does not purport to be a compliant Personal Needs Analysis or Fact-Finder.

Any Adviser who includes Personal Needs and Cover in their Advice must complete their normal Personal Needs Analysis or Fact-Finder in accordance with the requirements of their Licensee or Dealer Group.

Business Fact-Finder

Equally, if their Licensee or Dealer Group has created a compliant Business Insurance Fact-Finder, then the Adviser will need to use it.

However, Advisers should not assume that, because a fact is not required by their own Fact-Finder, it is strictly legal and not relevant to their own duty of care.

There is nothing in the IGS Questionnaire that is not relevant to the advice the Adviser must give.

Defending Professional Indemnity Claims

The IGS Questionnaire is a foundation for evidence that the Adviser raised issues, even if the Client declined to seek follow-up Advice or Cover.

For example, if the Business wishes to insure the Purchase Price, but does not wish to insure any Loan Accounts owing by the Business to the Lives Insured (or vice versa), the completed Questionnaire will be evidence that the issue was raised.

 

The "Less Paperwork" Alternative

Advocates of Self-Ownership often boast that their alternative involves "less paperwork".

The IGS Questionnaire is not trying to win a competition to ask Clients the most number of irrelevant questions.

It is simply trying to ask the most economical number of questions that are relevant to the Advisers' duty of care and the Needs of the Clients.

When you consider what "less" means, you have to ask:

  • what has been omitted?

  • what was the relevance of the question?

  • what are the implications of not asking the question?

  • what are the implications of not knowing or considering the answer?

Choosing to omit a line of inquiry makes the Adviser responsible for their lack of knowledge.

Ultimately, less paperwork means:

  • less enquiries;

  • less facts;

  • less scope for additional advice;

  • less scope for additional services;

  • less understanding of the Clients and their Needs;

  • less opportunity to consolidate a relationship with the Clients;

  • less value-add;

  • less protection from PI claims; and

  • less sleep (for those who care)!

Less paperwork is an excuse, not a defence.

 

Overview of the Questionnaire

Click here to see a summary of the questions asked by the Questionnaire with respect to each component of a Complete Succession Plan.

Completed Worksheets

Examples of completed Worksheets from the Questionnaire are set out under Heading 7 here.

 

Fact-Finding within a Marketing Framework

What is unique about the IGS Questionnaire is that it collects information within a clearly defined marketing framework.

A Complete Succession Plan addresses Asset (Blue), Liability (Red) and Personal (Green) issues.

The Questionnaire is structured in the same manner and colour-coded, so that it is clear at what part of the Strategy the Fact-Finding is aimed.

In other words, the fact-Finding is strategic, not just necessary for compliance purposes.

 

Interface with Adviser's Fact-Finders

In some cases, it might not be possible to avoid the need to complete both the Questionnaire and the Adviser's Fact-Finders.

IGS Draft

Where IGS is involved in a Meeting or Teleconference, it will normally complete as much of the IGS Questionnaire as is possible at the time.

This draft becomes a working document, which can be completed by the Adviser and/or the Business.

Incomplete Draft

It is not always possible to complete all of the details of the Business Structure and Liabilities of the Business in the Client Meeting or Teleconference.

Examples of information that might not be available are:

  • details of any Family Trusts or other Related Parties that own any of the Equity in the Business;

  • the exact number of shares or units that have to be sold (rather than the percentage);

  • details of the Borrower and Lender with respect to any debts that the Business wishes to insure.

IGS will identify any additional information not collected in the Meeting in the draft Questionnaire or Worksheets prepared by IGS.

IGS will also identify any information that the parties might not have been certain about.

Transfer of Information to Adviser's Fact-Finders

When completed, the content of the final draft can then be transferred from the Questionnaire to the Adviser's Fact-Finder(s) in a relatively pre-processed form.

Fact-Finding Fees

The standard Documentation Fees assume that the Business or Adviser will supply any additional information about the Business Structure and Liabilities of the Business in the completed Questionnaire.

Please click here to read more about any Fact-Finding Fees that might be applicable, if the Business or Adviser does not assist this process.

 

Interface with Complete Succession Agreement

The Business Insurance Trust Agreement that documents a Complete Succession Strategy effectively creates a List of Cheques that must be paid out of the total Insurance Proceeds at the time of a claim.

At the time of Fact-Finding, the IGS Questionnaire is effectively a "Check List" that determines:

  • the amount of each Cheque; and

  • the Payee or Recipient of each Cheque.

Thus, what starts off as a Check List ends up as a List of Cheques.

There is a total continuity and consistency between the Fact-Finding and Documentation processes.

 

Fact-Finding about the Business Structure

The IGS Questionnaire asks the following questions in order to understand the need for Buy/Sell Cover with respect to each Life Insured:

  • What separate parts of the Business Structure would need to be sold (whether the Life Insured or a Related Party owns each part)?

  • What is the amount of each part of the Business that would need to be sold?

  • Who is the Owner of each part of the Equity to whom the Sale Price would be paid?

  • What is the Pre-agreed Sale Price of each part of the Equity?

Only by following this sequence of four questions can the Adviser establish the amount of the Buy/Sell Cover in the case of each Life Insured.

 

Fact-Finding about the Debts and Liabilities of the Business

The IGS Questionnaire asks the following questions in order to understand the need for Debt Reduction Cover with respect to each Life Insured:

  • What external Debts and Loan Accounts are intended to be insured (e.g., because the Life Insured has personally guaranteed their repayment or is owed money by the Business)?

  • What is the name and address of each Creditor (or Lender)?

  • Who is the Debtor (or Borrower)?

  • What is the current amount of each Debt?

  • What dollar amount of each Debt will be repaid with the Insurance Proceeds for each insured event?

  • If the Debt reduces over time, should the repayment be restricted to a defined percentage of the Debt (e.g., 25%)?

  • If there is a surplus of Insurance Proceeds, who should receive the surplus (e.g., the Business or the Life Insured)?

Again, it is necessary to answer these questions, for the Adviser to determine the correct amount of Cover and ensure that it is paid to the appropriate Recipient.

 

Understanding the Ownership of the Business

Many Advisers assume that the Business Structure is strictly legal only and that they do not need to understand it or collect information about each Life Insured's Equity in the Business.

An understanding of the Client's Business Structure is pivotal to an understanding of their Buy/Sell Insurance Needs.

If you do not understand the Business Structure, you do not know what you are insuring.

In effect, you are insuring the Purchase Price of whatever Equity needs to be sold, if an Insured Event occurs with respect to the Life Insured.

This Equity might not necessarily be owned by the Life Insured in their own name.

It could be owned by a Related Party (e.g., a Family Company, Trust or Spouse).

This is relevant to the Adviser, not just because they have to determine what needs to be insured, they have to determine who the Sale price ought to be paid to.

In effect, it is the Adviser's role to ensure that the Purchase Price is paid to the appropriate Owner or Vendor of the Equity.

This affects the ownership of the Cover and the arrangements that apply after the Insurance Proceeds have been paid to the Policy Owner.

If they do not achieve this, then it is arguable that they have breached their duty of care to the actual Owner.

If the actual Owner does not receive the Sale Price, they might not be prepared to transfer their Equity in the Business to the Purchasers.

If the Owner fails to transfer the Equity to the Purchasers (because they have not been paid), then the Adviser has not satisfied its duty of care to the Purchasers.

There is no point in having the funding mechanism, if the funds are paid to the wrong party.

 

To Whom Does the Adviser Owe Their Duty of Care?

It should not be assumed that the Life Insured is the sole Client of the Adviser.

In the Business Succession context, the Adviser has a duty of care to:

  • the Life Insured;

  • the Vendors;

  • the Purchasers; and

  • the Business itself.

Example (Buy/Sell Cover)

If there are four Lives Insured involved in the Business, then in the case of the Buy/Sell Cover for each individual Life Insured, the Adviser owes a duty of care to the three Continuing Proprietors.

It is the three Continuing Proprietors who wish to insure the Purchase Price they would otherwise have to fund by way of loan or other resources.

Example (Debt Reduction Cover)

If Debt Reduction Cover is obtained by the Business, it is not only the Business that has an interest in the arrangements.

One of the reasons for the Cover might be the Life Insured's desire to be released from any Personal Guarantee.

Thus, the Adviser owes a duty of care to both:

  • the Business (the Debtor or Borrower); and

  • the Life Insured (the Guarantor).

 

Copyright: Ian Gray Solicitor

 

 

Adviser Tip

The Training Session is designed to help an Adviser market Business Insurance methodically and confidently.

 

See more Adviser Tips

 

 

 


Current Marketing Schedule

Current Marketing Schedule

Ian Gray travels to most capital cities regularly throughout the year and is available for Meetings.

Please click here to see his availability in Brisbane, Sydney, Melbourne, Adelaide and Perth.

Please contact us to arrange an appointment or teleconference.