Trustee indemnity - essential insurance

Importantly, trusts are not legal entities that can be sued, or sue; it is the trustees who are personally liable for the actions they take.

In our view it is imperative that trustees take out Trustee Indemnity insurance. Often trustees are family members, godparents or friends of the family, rather than being
professional trustees. The number of times we hear âwe donât need to have Trustees Indemnity insurance as we won't ever fall out' is, quite simply, too many. The number of insurers prepared to offer the cover has shrunk dramatically in the last two years because of the high number of expensive claims, evidence if it was needed that the cover really is essential.

Unfortunately families do fall out and the fall outs can be messy, with the trustees often caught up in the middle. They can be sued for such things as unfair distributions, errors in accounting or mismanagement of assets. An example of the latter was a claim brought against trustees in respect of a large house that burnt down 20 years after it was put into a trust. When making the claim it became apparent that the house was underinsured to the tune of 50%. The shortfall in claims proceeds amounted to £2m and the beneficiaries successfully sued the trustees as they had failed to obtain a professional valuation and ensure that there was adequate insurance in place.

There will often be a professional trustee, a solicitor or accountant perhaps, who may have cover under their company's professional indemnity insurance for the work they do as a trustee, but many companies and insurers are tightening up on this and it is important they check that it is the case. However, whatever happens this cover will not extend to the lay trustees and they will not have protection unless they organise it themselves.

What does a Family Trust Indemnity policy typically protect against?

• It covers past, present and future claims against the trustees and also, importantly, it should cover the trust itself.
• Often when a claim is made against a trustee any resulting payment may be met from the trust's assets, potentially draining them, and for this reason it is important that there should be no insured vs insured exclusion in the policy.
• The policy should cover any wrongful act or breach of trust, defence costs and protection of the trustees' personal assets.
• Most importantly a potential claim needs to be reported to the insurer within the period of insurance in which it first manifests itself. If the renewal of a policy is 1st April and a claim was first intimated on the 1st March, delaying until after the renewal to report it will prejudice it and is why insurers require a proposal form and a no claims declaration before each renewal.

The executors and administrators of wills and estates have a very similar exposure to those of trustees and we urge all those who are responsible for other people's assets to check the insurance position before agreeing to take on the role. To find out more, please get in touch with Will Johnson in our Penrith office.