Does a Personal Umbrella Policy Cover a Trustee?

If you have been asked to serve as a trustee, you no doubt have questions about the duties and responsibilities of the role. You also should be clear on your trustee insurance coverage.

Unfortunately, some confusion exists regarding the definition of coverage terms—especially involving personal umbrella policies—that could put you at risk. The goal of this article is to clear up that confusion.

Is a Trustee Liability Insurance Policy Necessary?

A client recently asked me if the premium for a separate trustee liability insurance policy was warranted, given a broker told them they could purchase a $1,200 extension under their excess umbrella policy.

My first step in answering this question was to request a copy of the proposed endorsement.

The proposed endorsement's title of "Non-Profit D&O and Trustee Liability Endorsement" is a bit misleading with respect to my client's question. It's an example of how terminology can become confusing. In this case, the reference to "trustee" concerns the trustees of a non-profit entity.

Although some people use the terms "directors" and "trustees" interchangeably in the context of a charitable organization, they are not the same. Generally, the term "director" is used in relation to a non-profit corporation, and "trustee" is used in the context of a charitable trust. Therefore, the intent of this particular endorsement is to cover insureds serving a non-profit organization.

However, a trustee of a trust is an entirely different role. A trustee is responsible for administering assets of a trust based on instructions drafted in the trust instrument. Since these roles include investment, reporting, administration, and distribution of trust assets, they more closely resemble professional services rather than the management services of an entity. Therefore, this endorsement does not extend coverage to a trustee of a trust.

My client realized the language was vague but thought there was still potential coverage. As a result, I decided to look more deeply into insurance contact. This step involved further exploration of confusing terminology.

What Is a Qualifying Organization?

The next often misunderstood term my client and I discussed was "qualifying organization." In this particular endorsement, the definition of a qualifying organization is "any not-for-profit organization qualifying for tax-exempt status under Section 501(c)(3), (4) or (7) of the Internal Revenue Code of the United States, or any subsidiary thereof, including the following organizations:

• Religious, educational, charitable, scientific, or literary organization
• Civic league, social welfare organization, or local association of employees
• Social or recreation club

Another critical part of the language we discovered is that the endorsement only covers the time the individual holds the position. This language means that no coverage exists for acts prior to becoming trustee, and no coverage exists once the individual resigns.

The insuring agreement also states that coverage only applies if the director and trustee loss is not indemnified by the qualifying organization, or the qualifying organization does not indemnify the director or trustee due to financial insolvency.

This clause makes the coverage analogous to what for-profit insurance policies call "Side A" coverage, which is only available if there is no indemnification by the non-profit entity. Therefore, trustee coverage would only apply if it was determined there was no available indemnification from the entity.

More importantly, there is an exclusion for acts arising out of an insured person performing or failing to perform professional services or for professional services for which any insured person is legally responsible. As we have pointed out, most services performed by a trustee will fall within this exclusion.

The Need for "Required Underlying Insurance"

Here's another potential problem we discovered with this endorsement. Personal umbrella policies provide extra insurance beyond the existing limits and coverages of other policies.

Umbrella insurance can cover property damage, injuries, lawsuits, and personal liability situations. In this case, under the insured duties section, the endorsement stated "required underlying insurance" must be maintained by the qualifying organization in full effect for the minimum required underlying limit amounts shown on the declarations page, which in all events shall not be less than $1 million in the aggregate.

This clause effectively creates a $1 million deductible if, in the remote case, the umbrella underwriter's claim division offers coverage. Therefore, the personal umbrella policy does not protect the trustees of a trust.

What a Trustee Liability Policy Should Cover

When purchasing a trustee liability insurance policy, you need to ensure there are certain specific provisions in the policy, including (but not limited) to the following coverage:

• Prior acts. If you have been serving as a trustee before purchasing a policy, make sure your previous actions are covered.
• All roles. Most policies only cover the trustee role, and you may be serving in additional roles such as trust protector or family advisor.
• Legal expenses. Make sure that defense costs are advanced until a final adjudication of a claim determining an intentionally dishonest act or that there was gross negligence, neither of which are insurable by law.
• Professional services. All professional services you provide should be covered, including oversight of the professionals you hire.

Trustees are growing in terms of their numbers, responsibilities, and legal complexities. You need a specialist with the expertise and ability to bring you broad coverage to protect you when you serve in this crucial role. Reach out to your Woodruff Sawyer representative for more information.