If a friend or family member has asked you to be their estate trustee, you likely have many questions. One of your concerns may be your insurance coverage. We often hear from our clients: “I have just been appointed trustee; Does my personal lines insurance policy cover me? »
This article will examine professional liability insurance and the protection it provides to the trustee.
Professional liability insurance versus personal liability insurance
Many of our clients already have personal liability insurance. This coverage is usually related to legal liability due to an accident involving personal property, such as a home or car. For example, if a guest slips and falls in your home, this policy will cover the expenses associated with the accident. Also, this policy will provide payment if you are involved in a car accident as a passenger in your vehicle or if another vehicle is injured.
However, when you agree to become a fiduciary, your roles and responsibilities are to manage assets on behalf of others, such as beneficiaries or charitable entities. This service is created by legal doctrines and a trust instrument that outlines the obligations in a statement of work. This distinction is beginning to shift to a professional service, which is covered by business insurance. More specifically, this type of insurance is called professional liability insurance. Trustee liability insurance is a subset of professional liability insurance designed to protect trustees.
As a trustee, you have the legal responsibility to manage and administer the assets of the trust in accordance with the trust deed for the benefit of the beneficiaries. Administration generally requires the trustee to manage the investment, distribution, reporting and administration of trust assets. Although this task may seem simple at first glance, it can be a huge undertaking.
Some of the work that needs to be done with care may include:
- Record expenses and income
- Distribution of funds to beneficiaries
- File taxes on any income earned by the trust
- Keep track of other transactions that occur
The confusion over whether a fiduciary’s insurance coverage falls under the definition of personal or business insurance stems from the fact that serving as a fiduciary for a close friend or family member is more like an extension of a personal relationship rather than a commercial contract. However, acting as a fiduciary requires specialized knowledge and skills. Since many educational organizations train trustees and certifications are available for independent trustees, this job clearly falls within the definition of a commercial enterprise for which professional liability insurance is available.
What does professional liability insurance cover?
Professional liability insurance aims to protect individuals against liability incurred due to an error or omission in the performance of their duties.
The roles of the trustee or trust service provider are defined by the trust instrument. It is imperative that service providers review the roles defined in the trust instrument and compare this list to the definition of professional services in the insurance policy. If the definition of professional services is not broad enough to cover your specific role and a claim is filed with the insurance company, you may not have the coverage you thought you had.
Many of our clients have indicated that they believe they have trustee coverage through their home insurance policy or through their law firm or accounting firm. They did not know this special type of insurance was available or they believed that the assets of the trust would indemnify them in the event of a claim.
While it is true that many trust instruments contain a provision for the indemnification of trustees, there are potential loopholes. Neither insurance companies nor trusts can indemnify a trustee for willful misconduct or gross negligence.
If there are allegations of willful misconduct or gross negligence, the judge will have to decide whether or not the assets of the trust can be used to pay for defense costs before trial. On the other hand, professional liability insurance should cover defense costs while defending the actions of the trustee until there is a final decision on the claim.
How to apply for professional liability insurance
As with all insurance coverage, the trustee must complete an application outlining their roles and responsibilities. In addition, the subscriber will want to understand the following information:
- Trust Type
- Trust domicile
- Amount and category of assets under administration
- Trustee’s experience
- Number of Trusts Administered
- Remuneration for acting as trustee or providing other services related to beneficiaries of wealth transfer vehicles
- Responsibilities delegated to other professionals (such as investment, legal or accounting responsibility)
It is important that you, as trustee, read and understand the policy and its provisions so that there are no surprises in the event of a claim. In addition to the terms and conditions already mentioned, here are some other factors to consider:
- Complaints made: Professional liability insurance is generally purchased based on when a claim is made relative to when the alleged wrongdoing occurred.
- Date of retroactivity: The wrongful act giving rise to a claim must have occurred after the retroactive date indicated in the policy.
- Pay on behalf of versus refunds: This amount will determine who chooses the defense attorney and who pays the initial legal fees.
- Definition of complaint: A claim is most often defined as a formal demand or action filed in court. This information is necessary to understand when the claim was reported to the underwriter.
When you accept the position of fiduciary, it is essential to understand your roles and responsibilities as well as the actions that can lead to personal liability. There are many helpful resources for learning more about the duties and responsibilities of trustees. Once you know how much your personal property is at risk, you can protect yourself with professional liability insurance.
Interestingly, 85% of our clients are first-time buyers of this type of insurance. When we offer our knowledge and expertise and discuss the personal liability of trustees, our clients are relieved to know they have an insurance partner to guide them through the attributes of the policy.