Trustees not fulfilling their responsibilities could find themselves facing a negligence claim, says Richard Packman, managing director of Heritage Insurance. But what steps can be taken to avoid such a situation?
Many trustees do not fully accept their obligations and, as a result, expose themselves to risks which could evolve into multi-million pound professional indemnity insurance claims being made against them.
One such obligation is the full and complete protection of the trust's assets which, in the case of tangible assets such as properties, works of art and yachts, means the trustees physically arranging the insurance cover. If a trustee does not then they expose themselves to claims should an insurance loss occur and the policy cover prove to be inadequate. This could mean, at best, insurers making a reduced claim settlement offer, or at worst, refusing the claim completely. In both situations, the trustees may face claims from settlors or beneficiaries under their own professional indemnity insurance policy for negligence, as the trust value has been depleted.
Once a trust is established, the settlor ceases to have any insurable interest in the asset and no longer has the ability to insure. The responsibility to insure the asset rests with the trustees.
Trustees often feel themselves to be in a difficult position and do not wish to "bite the hand that feeds them" by imposing strict terms of operation on the trust. They will often continue to use the services of the legacy broker, that is the agent previously used for the insurance placement by the settlor prior to the trust being formed. But they do need to take control of the situation at an early stage and insist that full control, including the insurance placement, is undertaken by the trust company.
Responsibility to insure
This responsibility includes not solely checking they are actually insured, but that they are correctly insured. This could include the correct assessment of risk and exposure, the extent of cover, the security of the insurer or the competitiveness of the premium. Should the trustees be seen to be failing in arranging the correct insurance coverage, as they will often leave the settlor or beneficiaries to continue to organise and renew the policy, then they face potential professional indemnity insurance claims should a loss occur.
A typical example will be where a high net worth individual wishes to take advantage of the benefits of trust structures and will transfer the ownership of, say, the family house into an offshore trust structure. Previously he will have used a locally based insurance broker to organise the insurance placement for his home, but when the trust is established he refuses to accept that the house, or other trust asset, is no longer "his property" and will continue to arrange the insurance cover - merely redirecting the renewal form to his trust company for premium payment. Often in such circumstances, the trust company will simply raise a cheque payment and file the papers for 12 months. They will often not check the adequacy of the sums insured, suitability of the insurance cover, imposition of restrictive underwriting terms or warranties imposed.
In many cases, the trustees may not even have the policy anniversary date in their own diary system and will rely on the broker to remind them of the forthcoming policy renewal. What if the renewal papers get lost in the post system, or arrive post-renewal date only to find the property has been already destroyed?
UK television bombards us with adverts promising to provide the cheapest insurance cover, but is the cheapest price the best option? Should this be the only buying criteria for insurance protection of trust assets? Who has checked the excess level? The full extent of the policy cover provided? The quote terms and conditions, and finally, the advice provided by the broker?
In the event of under-insurance, insurers are within their rights to impose the average policy condition and reduce the claim settlement in line with the level of under-valuation. How often will a trustee check this insurance value, that their trust assets are adequately insured? At inception of the cover? At renewal? Perhaps never.
Trustees, by their experience and qualifications are, by definition, trust experts. They are not, however, experts in insurance placement and so may not necessarily identify restrictive policy conditions. A previously experienced example was a London-based home with high value contents and artwork where insurers had applied an Alarm Warranty, insisting the intruder alarm be activated whenever the house was left unoccupied or the family retired at night. Such a policy condition, placed in the small print on the policy schedule, had not been identified by the trust administrator, and so such a requirement had not been passed on to the beneficiaries with life-long usage of the family home. Should a break-in have occurred and the alarm not have been in force, the insurers would have been within their rights to repudiate the claim completely. The outcome of which would surely have been a large professional indemnity insurance claim by the family against their trustees.
Once the trustees have accepted the responsibility to place the insurance cover, then comes the added burden of full disclosure of material facts to insurers.
A case experienced some years ago highlighted the importance of the trustees' need to have full understanding the assets they "own" and administer. In this example, the trustees presented an office block risk to insurers, advising that it was "purely an office block". Owing to the large sum insured, insurers sent their own surveyor to assess the risk who discovered a nightclub located in the basement. The trustees were not aware of this and had therefore not disclosed this fact to underwriters, but in the event of a claim, insurers would have been within their rights to turn down the claim on the grounds of non-disclosure of material facts.
A further burden to trustees is arranging the correct level of insurance cover for the asset. For example, if a property is at risk, should terrorism cover be purchased? Are the premises in central London, or a more rural location? Does the policy include subsidence cover? Have insurers restricted the policy cover, for example, by excluding flood cover, as the property sits within a notorious flood plain?
It has been estimated that trustees will only organise the insurance cover for 20-25% of the tangible assets held in trust and for which they are responsible. In the majority of cases, they will leave the settlor, beneficiaries or often, for commercial properties, a managing agent, to place the insurance cover with no checks being made on the suitability of the policy cover. In up to 75% of cases therefore the average trustee is exposing him or herself, their colleagues and their companies to large PI insurance claims for failing to "control" all insurance risks for which they have a responsibility.
In all such cases a trustee's position is an exposed one and care needs to be taken to protect their position and their reputation. It is crucial therefore that professional insurance advice is taken n
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