Trustee Indemnity – How much cover should we buy?
Trustee Indemnity Insurance provides some peace of mind for non-profit organisations because, to some degree, it protects members of the board if they are personally sued as a consequence of mismanagement. Board members might be concerned to discover that they are personally liable in such circumstances, particularly in a climate where charity regulation is increasing.
There are no qualifications required to become a trustee, as long as you are over the age of eighteen, pretty much anyone can take on this significant responsibility. However, many people do so without realising the personal exposures.
So how do trustees become personally liable?
Both the Charity Commission and UK courts can order a trustee to make payment for financial losses suffered if the trustee has not acted with suitable care in discharging their duties.
In reality, claims are few and far between and this is generally reflected in trustee indemnity insurance premiums. As long as a trustee has acted in good faith and can be shown to have acted reasonably, successful litigation is thankfully rare.
Board members do not have to be designated as such to benefit from trustee indemnity cover, it normally extends to any senior management of the charity too. It is also worth noting that cover is still of benefit to board members in organisations who are limited by guarantee because unless the damages sought cause the organisation to close, then there is an exposure following a ‘breach of trust or duty’ that the board should consider.
Of course, spending money on this protection needs to be considered carefully. The Charity Commission offer advice to boards making this decision, including consideration towards whether funds within the charity can be justifiably spent on such covers.
So how much trustee indemnity cover should be arranged?
Unfortunately, there is no easy and obvious calculation board members can make to determine the level of trustee indemnity that should buy. A group can only discuss risk, balance the likelihood and the impact of identified risks and purchase what is deemed to be appropriate insurance cover.
It is as important a decision as any other discussion that seeks to allocate the charities funds.
Typically, bands of Trustee Indemnity Insurance start from £100,000, we have organised cover for charities seeking £2m of cover and in some exceptional cases, higher indemnification limits can be arranged.
In making your own decision, it is important to consider the costs of both litigation settlement and the costs of defending a claim. Although the Insurance Act 2015 (coming into force later this year) might impact how some insurers treat cases of under-insurance, presently, not having enough cover will prevent an insurer from paying the limit of the cover provided. For this reason, some caution is advisable to ensure that there is enough indemnity arranged.
The following table was produced by CaSE Insurance, a charity insurance specialist which we have worked with on behalf of many of our clients. The analysis in the table shows the levels of indemnity purchased by charities at various levels of income. This might give you an idea of what other management boards are deciding to do but your own decision needs to be based on the exposures and circumstances in your own charity.
Why not download our guide on trustee indemnity.