As we celebrate Trustees Week, it seems to be a sensible time to look at how trustees can use insurance as a way to protect themselves against some of the risks they face when taking on these roles.

Trustees have unlimited liability in the event that they commit a “wrongful act” (eg breaching regulations, acting outside your authority, misuse of funds) whilst running the charity (regardless of the legal entity they have adopted as their charity model). This means that, should they commit a wrongful act and be sued, a trustee’s own personal assets can be put at risk. If a court awards damages to a claimant, then the named trustee has to find the money to pay the damage from somewhere – savings, cash, property, etc is all at risk.

Charity constitutions sometimes allow the organisation to indemnify trustees in the event claims are made against them. However, the charity may choose not to do so, and even if the charity did choose to do so, it may not have sufficient funds to cover the claim amount. Make sure you a clear what arrangements your constitution has in place.

This is where insurance comes in.  Trustees Indemnity covers the costs of any damages awarded, plus defence costs. This means that for a relatively small insurance premium, the costs of defending a claim against a trustee, and any damages awarded, can be covered (up to the limit insured).

Information about Trustees Indemnity, and other common insurances, can be found in our helpful buyers guide.

Trustees Indemnity operates differently to covers you may be more familiar with, such as Public Liability:

  • Basis of cover – Trustees Indemnity policies can provide a limit of indemnity either in the ‘aggregate’ or an ‘any one claim’ basis. An aggregate limit simply means that the limit of indemnity noted in the insurance schedule is the most that an insurer will cover in any given policy period (usually a year). If the policy is set up on an “Any One Claim” basis the limit of indemnity will apply to each and every claim, irrespective of how many claims are made in the policy period.
  • Claims Made – Trustees Indemnity policies are usually on a “claims made” basis. This means that cover is provided for claims brought against the charity during the policy period. By contrast, Public Liability policies are usually on a “claims occurring” basis where
    the insurer at the time the loss/incident occurred will deal with the claim, irrespective of when the claim is brought.
  • Prior & Pending Litigation Date – Trustees Indemnity policies usually preclude
    coverage for claims from litigation that was pending prior to the start of the policy

In order to set up a Trustees Indemnity policy we need fairly limited information. We need to know which entity or entities are to be covered, where they are located along with previous years’ income and total assets. We also need to know about any redundancies, employment disputes and previous claims.

It is useful to look at some claims examples to see the kinds of scenarios where Trustees indemnity would kick in:

Claim for misuse of Trust Funds
Following an investigation by the Charity Commission, it was declared that the trustees named had illegally gained payments from the trust by use of another trading company, of which they are directors.  The Charity Commission has stated that there exists a conflict of interests and that these salaries and dividends must be returned, and the trust be restructured. The claim itself is for reimbursement of legal fees incurred. However as the claim does not directly stem from a Wrongful Act, but rather from the error of the solicitors involved in the formation of the trust, the claim would not be upheld. However, solicitors’ fees and investigation costs were paid.
Claim for alleged Breach of Authority
A claim was made against a trustee by one of the charity’s employees. Before the charity ceased operating the trustee had indicated that employees would receive an enhanced redundancy payment, which was in breach of his authority. As a result, several employees had made financial decisions based on that statement, and hence ran up costs to cancel these arrangements.
Claim for legal fees to defend a Charity Commission investigation
The Charity Commission (CC) investigated a trust that was originally established during the 1960’s to research into artificial insemination. The CC investigated the trust’s activities on the grounds that they were no longer concerned with research and hence were not charitable in their nature. The trust successfully defended their charitable status, and the legal fees (over £2,000) were paid under the policy.
Claim for Dishonesty of a Trustee
A claim was made by a charity, which had suffered a loss of over £12,000. Due to poor internal controls, one of its trustees managed to fraudulently withdraw £11,000 in a single transaction, then a further £1500 at a later date. The claim was settled for 80% of the total amount plus fees, a total amount of over £9,500.
More claims examples can be found here.
So, a trustee position is a great responsibility and carries some risks, a trustees indemnity policy can give you the peace of mind that your assets are protected, even when mistakes happen.
As specialists in the Not for Profit sector, we would be keen to talk to any charity about Trustees Indemnity insurance, to provide quotations or to review existing arrangements. Please do get in touch to talk to us.