Trustee insurance – what is covered? - 29 April 2024

Trustees’ roles and responsibilities are often misunderstood, and so are the risks associated with trusteeship. With the recent changes in trust law in South Africa, it has become more important than ever for trustees to work together and manage their risks as a collective, as one trustee’s non-cooperation may expose their co-trustees. Currently, although no insurance products exist for family trustees, professional/independent trustees may access insurance for trust services they provide. As trustees are regarded as joint owners, and joint controllers of trust assets, in most instances they will be regarded as “one”. Therefore, professional/independent trustees should ensure they have proper (relevant) insurance in place to reduce the risk for all trustees. In many instances, lay-person trustees rely on their independent trustees for guidance and entrust them with trust assets on behalf of the trust. Families more often than not are unaware that they may be exposed when they sue their independent trustee as a result of their wrongdoing, but the independent trustee is a “person of straw” and there is no insurance in place.

The family’s accountant, attorney, or financial advisor is the independent/professional trustee

In many instances, the families’ trusted professionals have been asked to serve as trustees with them in their trusts. As these professionals often do not provide trust services as a specialist service (and only act as trustees when asked to), they are sometimes unaware that their normal professional indemnity (PI) insurances as accountants, attorneys, or financial advisors do not cover their services as trustees and are sometimes specifically excluded. Often professionals are surprised to discover that they do not have cover for trust services as they do not frequently consult their insurance schedules and are not familiar with insurance terms. That may leave them and the families exposed. Professionals should ensure they are appropriately covered and the families should ask for proof that their independent/professional trustees have relevant and sufficient cover. No one should just assume all is in order. Independent/professional trustees should also ensure they price correctly for their services to compensate them for the risks undertaken, as well as to cover additional insurance costs.

The professional should seek advice from a specialist in the field of professional indemnity, and analyse the existing PI cover they may have in place for their normal profession. Any risks not covered by their existing PI should be insured through a specialist PI product. Professionals should, however, be mindful to ‘double insure’ for the same risk under more than one policy, as cover may then be specifically excluded.

Professional indemnity (PI)

PI cover protects the independent/professional trustee against any damages that may be claimed from them by clients or third parties, as a result of any actual or alleged negligent act, error, or omission, which arises in the performance of trust administration as a trustee. Depending on the insurer, it may include automatic extensions for interest-bearing deposit advice (claims arising out of the independent/professional trustee’s failure to invest trust funds not immediately required for payment of any creditors or beneficiaries of a trust, on interest-bearing deposit with a bank) and loss of documents.

The following are mostly not included in PI cover and the trustees should agree on whether it should be acquired by the independent/professional trustee as an extension from the insurer, depending on the role the independent/professional trustee will play in the trust:

• • Investment advice - advice on the suitability of any investments such as fixed-term investments, savings, income protection plans, and any other means of returns on investments, and/or advice rendered by the independent/professional trustee regarding how the trustees should invest the trust funds to receive a return on those funds.
  • Tax advice - where the independent/professional trustee purports to advise on any taxable transactions, donations, disposals, and tax relief.

The trustees should take care in instances where the independent/professional trustee has relied upon the investment or tax advice of a third party that is not insured in terms of the policy, as that may be specifically excluded from the cover provided. The trustees should therefore ensure that they know exactly who will be providing the advice, document that in a trustee resolution, and insist that the agreed procedures are followed.

The wording of the policy should be studied well by the trustees, as the insurance policy may have specific exclusions. These risks should then be identified and managed by the board of trustees, such as a breach of contract, loss of money, money laundering, the depreciation or total loss (or failure to appreciate) in value of any investments, or as a result of any actual or alleged representation, recommendation, suggestion, guarantee or warranty provided by or on behalf of the independent/professional trustee as to the performance of any such investments, or the loss of interest on trust funds which ought to have been placed on interest-bearing deposit.

Misappropriation (theft or stealing) of trust funds

Trustees have to ensure that trust assets are protected against theft. Approval and access provided to one or more trustees should be well considered before entering into a trustee resolution. In many instances, trust funds are entrusted to the independent/professional trustee, who may even be the financial advisor. The family should request proof from the independent/professional trustee that they have insurance in place for risks relating to the theft of trust funds, and that the trust’s specific assets are covered. Typical cover protects the professional/independent trustee (the Insured) from theft/misappropriation of funds belonging to a trust by any principal, partner, or employee of the Insured (excluding independent contractors) provided that the funds were held in a trust account in the name of the trust or the trust assets were entrusted to an employee of the Insured on behalf of the trust (not to any agent or independent contractor of the Insured). The insurer will typically indemnify the Insured for its legal liability to pay claims (including their costs, fees, and expenses) for the reimbursement and/or replacement of trust assets where the claim arises out of theft, unauthorised borrowing or misappropriation of such trust funds (normally includes assets such as paper currency, coins bullion, precious metals of any kind and in any tangible form and articles made therefrom, gems (including uncut gemstones), precious and semi-precious stones, stamps, certificates of stock, bonds, coupons, but excluding fixed property) by the independent/professional trustee’s employees. The independent/professional trustee should put certain measures in place which may be a requirement for the cover to pay out (check policy wording) and which may be good practice that family trustees can insist on, such as the provision of training, a formal written policy concerning the dealing with trust funds, obtaining written references from previous employers for all employees dealing with trust funds, performing criminal and credit checks on all employees before they are hired, enforcing an employee leave policy which requires its employees to take a minimum number of consecutive days’ leave in a calendar year, implementing a segregation of duties policy about dealing with trust funds, etc.

Unfortunately, if the trustees collude, the trust cannot be made whole through a claim, as the policy wording mostly excludes such claims. 

Conclusion

The board of trustees should understand the risks they face in the trust and obtain advice to mitigate same. The independent trustee should ensure they are adequately covered for the risks they face. The appointment of independent trustees should be carefully considered, as often PI cover excludes claims as a result of dishonest, criminal, or malicious acts or omissions committed by or on behalf of the independent/professional trustee, or when the independent/professional trustee (or their employees) had been previously accused or convicted of theft or fraud. The family may then have to pursue the trustee personally for any damages.