Understanding Trustee Liability and Indemnity

As we celebrate Trustees Week, it seems a sensible time to look at how trustees can use insurance to protect themselves against some of the risks they face when taking on these roles.

Understanding Trustee Liability

Trustees have unlimited liability in the event that they commit a “wrongful act” — such as breaching regulations, acting outside their authority, or misusing funds — while running the charity (regardless of the legal entity they have adopted).

This means that, should they commit a wrongful act and be sued, a trustee’s personal assets — savings, cash, property, etc. — can be at risk.
If a court awards damages to a claimant, then the named trustee must find the money to pay the damages themselves.

Indemnity in the Charity Constitution

Charity constitutions sometimes allow the organisation to indemnify trustees if claims are made against them.
However:

• The charity may choose not to do so.

• Even if it does, it may not have sufficient funds to cover the claim amount.

Make sure you are clear on what arrangements your constitution has in place.

How Trustees Indemnity Insurance Helps

This is where insurance comes in.
Trustees Indemnity covers the costs of any damages awarded, plus defence costs.

For a relatively small premium, this cover ensures that the costs of defending a claim and any damages awarded can be met (up to the insured limit).

You can find more information about Trustees Indemnity and other common insurances in our helpful Buyers Guide.

How Trustees Indemnity Differs from Public Liability

1. Basis of Cover
Trustees Indemnity policies can provide a limit of indemnity either on an aggregate or an any one claim basis.

• Aggregate: the limit shown in the policy schedule is the total an insurer will cover during a given period (usually a year).

• Any One Claim: the limit applies to each and every claim, regardless of how many occur within the policy year.

2. Claims Made Basis
Trustees Indemnity policies are usually written on a claims made basis — meaning cover applies to claims brought during the policy period.
By contrast, Public Liability policies are typically claims occurring — the insurer at the time the incident occurred handles the claim, no matter when it’s brought.

3. Prior & Pending Litigation Date
Trustees Indemnity policies usually exclude coverage for claims arising from litigation that was pending before the policy began.

Setting Up a Trustees Indemnity Policy

To set up a Trustees Indemnity policy, we need fairly limited information:

• Which entity or entities are to be covered

• Their location

• Previous years’ income and total assets

• Details of any redundancies, employment disputes, or previous claims

Real-Life Claims Examples

Claim for Misuse of Trust Funds
Following a Charity Commission investigation, trustees were found to have gained payments from the trust through another trading company they directed.
The Commission required salaries and dividends to be returned. Although the claim itself wasn’t upheld (as it stemmed from solicitor error), legal and investigation fees were paid.

Claim for Alleged Breach of Authority
A trustee promised enhanced redundancy payments without proper authority. When the charity ceased operating, employees sued, having made financial decisions based on that promise.

Claim for Legal Fees to Defend a Charity Commission Investigation
A trust faced investigation over whether its activities were still charitable. It successfully defended its status, and the £2,000 in legal fees were covered by the policy.

Claim for Dishonesty of a Trustee
A charity lost over £12,000 after a trustee fraudulently withdrew funds. The claim was settled for over £9,500, including fees.

More examples can be found in the WCVA claims summary.

Final Thoughts

A trustee position carries great responsibility and some risk.
A Trustees Indemnity policy offers peace of mind that your personal assets are protected, even if mistakes happen.

As specialists in the Not for Profit sector, we’d be keen to talk to any charity about Trustees Indemnity insurance — to provide quotations or review existing arrangements.

Get in touch with us to start the conversation.