Trustees manage trusts in accordance with the terms of a trust document on behalf of the beneficiaries. Trustees that are serving individually can be held personally liable for breach of fiduciary duties and related defense costs. Errors & Omissions (E&O) Insurance for trustees is a critical coverage for protecting the assets of trustees and trust service providers, and not all Trustee E&O Insurance policies are the same. In addition, trustees may provide services for the beneficiaries that go beyond the scope of the Trustee E&O policy, requiring an expanded scope of services or an additional E&O policy. Ensuring that you have comprehensive coverage at a reasonable cost requires expertise in both trust management and insurance. We can help.
Whether serving as an individual trustee or as an entity, trustees are fiduciaries and exposed to demands of the beneficiaries of the trusts. Beneficiaries are typically family members, often multi-generational, but beneficiaries may also include charitable entities. Trustees must balance the interests of all the beneficiaries, often over a long period of time, in accordance with the trust document.
Trustees will inevitably need to exercise discretion and subjectivity in decision making, which can subject a trustee to second-guessing by beneficiaries, and sometimes other stakeholders.
Trustees are responsible to the beneficiaries, but other stakeholders may also have an interest in a trust, including creditors, and are potential claimants. Even customers of a trust asset may initiate an action.
The specific duties of trustees can vary, including:
Trusts vary widely in type, size and structure, as well as in asset types held. Types of trusts include:
Why Do You Need Insurance?
Trustees need E&O Insurance protection from claims by beneficiaries and other parties. Many trustees are individuals and can be held personally liable for breach of fiduciary duties. An individual trustee’s personal assets are at risk. Even if no errors are made, defense costs can be expensive.
Family trusts may be the most widely used trusts, and in many cases are revocable. Family trusts can become complex as they seek to balance a variety of objectives, including allocating and protecting assets, maintaining control of assets, and minimizing taxes. In addition, the familial nature of trusts can heighten emotions and even stoke rivalries between beneficiaries, leading to claims against the trustees.
Beneficiaries are the primary source of E&O claims against trustees. In a family trust, balancing the rights between beneficiaries of different generations can be particularly tricky, and decisions that may benefit one generation may be to the detriment of other generations and can trigger claims. Likewise, a charitable organization beneficiary may have different interests and objectives than other beneficiaries and can be a source of claims.
The assets held in trust will impact the trustee’s duties and exposures. While most trusts hold traditional assets like public stocks and bonds in a diversified portfolio, some trusts hold illiquid, hard-to-value assets, such as private company equity or real estate. Illiquid assets can be particularly challenging for trustees. Illiquid assets can be hard to liquidate, can vary in value, and can require significant management time. Trustee decisions on illiquid assets that make up a large part of a trust’s assets can have a significant impact on a trust’s long-term value and distributions to beneficiaries.
Many trusts have a provision allowing for the trust’s indemnification of trustees, but not all, and there may be situations where a trust will not indemnify a trustee. Indemnification in a trust agreement does not eliminate the need for insurance. Indemnification of the trustee exposes trust assets to the cost of litigation, and beneficiaries may attempt to bar the use of trust assets to indemnify a trustee of that trust. Defense costs can be significant for trustee claims.
Professionals are often trustees, such as accountants, attorneys, and investment professionals. Some attorney E&O policies will cover their duties as trustees, but others do not. And most other E&O policies, like a consultant's E&O, will not cover a professional’s duties as a trustee.
What Coverages Are Recommended?
Depending on the type and size of the trust, and the assets held in the trust, a trustee may need:
The primary insurance coverage to protect a trustee is E&O Insurance, specifically Trustee E&O. Trustee E&O is a form of E&O typically including modified terms that contemplate the duties of a trustee. Trustee E&O serves to ensure the availability of alternative funding to defend action and damages.
Cyber - Trusts hold assets, typically financial assets, and make financial transactions. Cyber Insurance can offer protection from certain types of cyber-related losses.
D&O - Trusts may have owned entities and non-profit affiliates, and these entities should have D&O Insurance, sometimes naming the trust as well.
Trustee E&O Insurance should not be confused with Fiduciary Liability Insurance – it is not the same coverage. Fiduciary Liability Insurance provides coverage for the management of employee benefits and pension plans.
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Are There Claim Types I Should Be Aware Of?
Due to the broad scope of responsibilities, trustees find themselves subject to a wide range of exposures including failure to diversify, accounting errors, asset mismanagement, unfair or improper distributions, conflict of interest, and failure to follow terms of the trust agreement. In addition, multi-generation beneficiaries add an additional complexity, and exposure, in determining asset management and distributions.
Allegations, even if ultimately defensible, are increasing in frequency and often end up in litigation.
Examples of allegations against trustees include:
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Note: Insurance policies are not all the same. Some policies are more comprehensive than others, and some policies provide broader coverage in specific areas. In addition, each insured may have different exposures and coverage needs. We encourage you to read your policy and consult with a Specialty Insurance expert such as eSpecialty Insurance.