Three lessons from a mortgage broker insurance claim

This article was produced in partnership with BizCover

Trust is everything when it comes to the finance industry. Clients rely on mortgage brokers to guide them through some of the most significant financial decisions of their lives. Oftentimes, this involves complex lending structures and multiple stakeholders, not to mention substantial sums of money.

But even when you act in good faith and believe you’re doing the right thing for your clients, misunderstandings and miscommunications can still lead to serious claims. That’s where professional indemnity (PI) insurance can help.

"Mortgage brokers operate in a high-stakes environment where even small oversights can have major financial consequences," said Sharon Kenny, head of marketing at BizCover. "Professional Indemnity insurance can act as a tool for managing risk and protecting your business."

Professional Indemnity insurance claim case study

Could this happen to you? This case involves a mortgage broker who, despite acting in good faith, found themselves at the centre of a client complaint lodged with the Australian Financial Complaints Authority (AFCA). The claim centred on a loan that had been taken out years earlier and a client who said she had no idea it even existed.

The background

In 2017, a broker obtained a loan of $200,000 on behalf of a client (Mr Smith). This was achieved by using the available equity from the client’s de facto partner’s (Ms Thomas) mortgage.

Then, in 2022, the broker received a complaint through AFCA out of the blue. This complaint was from Mr Smith’s now ex-de facto partner – who had had no idea that her mortgage had been used for the loan.

Now, years after the loan had been taken out, the couple’s relationship had broken down and Mr Smith had sold his business for $20,000, leaving his ex-partner with an outstanding debt of $180,000.

Unable to sustain the high repayments, Ms Thomas lodged a complaint against the broker through AFCA, alleging that an unsuitable loan had been arranged and that she had suffered financial loss as a result.

The problem emerges

“From the broker’s perspective, this was a highly complex and unexpected situation,” commented Kenny. “It’s the kind of scenario that could happen to almost anyone.”

The broker had dealt directly and exclusively with their client, Mr Smith. He had presented himself as authorised to act on behalf of both parties. There was no indication at the time that the arrangement was unauthorised by his partner, Ms Thomas.

Nevertheless, AFCA received a complaint from Ms Thomas alleging professional negligence and seeking monetary compensation for the resulting financial hardship.

The insurer steps in

Fortunately, the mortgage broker held a professional indemnity insurance policy.

Upon notification of this claim, the insurer appointed a solicitor from their legal panel and granted indemnity under the broker’s professional indemnity policy, in line with the policy’s terms and conditions. During the investigation, it became clear that because the broker was acting as a credit representative, their authorising entity should also be named in the complaint.

AFCA ultimately determined that responsibility in this case was shared between the broker and their authorising entity. After reviewing the evidence and findings, the insurer granted indemnity under the policy.

"Even experienced brokers can face unexpected claims years after a transaction," explained Kenny. "While professional indemnity insurance is mandatory for most mortgage brokers in Australia, it's important to make sure you have adequate insurance to cover an unexpected claim. It helps to protect your clients, as well as your business and your reputation.”

In total, the insurer incurred $75,000 in combined legal defence costs and damages related to the claim.

Key takeaways for mortgage brokers

• Even good faith isn’t always enough

You may have the best intentions and rely on what appears to be accurate or authorised information, but you can still face claims if things go wrong. Clients may hold you responsible for financial losses, even if the real issue lies with a third party.

• Always verify client consent

When dealing with multiple parties, it’s important to ensure that each person named on a loan or mortgage fully understands and authorises the transaction. Proper documentation and clear written consent can help prevent misunderstandings and protect you if a dispute arises later.

• Keep detailed records

Maintain records of all communications, approvals and identification checks. Detailed file notes can be invaluable in demonstrating that you acted responsibly and within your professional obligations.

Compare Professional Indemnity insurance quotes

"Insurance shouldn’t be complicated,” said Kenny. “At BizCover, we help mortgage brokers and other finance professionals quote and compare insurance policies from some of Australia’s leading insurance providers. Our online platform makes it fast, simple and easy to get covered in minutes.”

Quote and compare multiple insurance policies today and find out how much you could save on your insurance policies with BizCover.