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Insurance for a Private Trust Company: 4 Common Policies
Judith Pearson
May 24, 2023
If I own or manage a private trust company (PTC), what insurance do I need? This is a great question and, as in many situations, the answer is that it depends. It depends on whether a public trust company is involved, whether the trust company is regulated or unregulated (also called supervised), and the state where the trust company was organized.
This article will focus on private regulated and unregulated trust companies. Rather than diving into state-specific regulations, we’ll give a broad overview, including the background of regulations, typical insurance policies, and what each policy insures.
Insurance Recommendations for a Private Trust Company
A private trust company is a corporate entity established to act as a trustee for a family trust. PTC regulation ensures that the establishment and operation of PTCs are conducted in a manner that protects the interests of beneficiaries, promotes transparency, and maintains the integrity of the trust industry.
As part of these regulatory requirements, certain insurance policies are either recommended or required. The following is a list of four policies frequently recommended for private trust companies, including what they offer and their advantages and disadvantages.
1. Fidelity Bond
A fidelity bond is a commercial crime policy designed for the specific risks associated with a financial institution. Also called a financial institution bond, a fidelity bond insures banks and other financial institutions against employee dishonesty, robbery, burglary, forgery, and other crime exposures.
Financial Institution Bond Standard Form 24 is the one most often used for trust companies, and it is accepted by most banking commissions.
| Pros |
|---|
| Regulators are familiar and comfortable with the policy form. |
| The fidelity bond has separate insuring clauses for employee theft, depositors' forgery or alteration, theft, disappearance or destruction of money and securities, robbery and safe burglary, computer crime (theft, funds transfer fraud, etc.), and counterfeit currency/money orders. |
| The most important fidelity bond coverage in 2023 is cybercrime, which needs to be added by endorsement. |
| Cons |
|---|
| Many of the insuring clauses don’t apply to trust companies. |
| The underwriting is based on employee count, which many PTCs don’t have because the services are provided by others. |
2. Fiduciary Bond
A fiduciary bond, usually purchased for an individual fiduciary, protects the estate from dishonest acts such as theft, fraud, embezzlement, and misrepresentation.
| Pros |
|---|
| This policy protects against many of the hazards listed in PTC regulation. |
| Cons |
|---|
| The insureds may be required to provide personal indemnification to the surety company. |
| Each trust is bonded separately. |
| The use of this bond can be an onerous way to fulfill a private trust company’s regulatory obligation. |
3. Directors and Officers (D&O) Liability Insurance
D&O insurance provides financial protection to directors and officers of companies against claims made against them while performing their duties.
The primary purpose of D&O insurance is to safeguard directors and officers from personal financial loss in the event they are sued for alleged wrongful acts committed in their capacity as company executives. It provides coverage for legal defense costs, settlements, and judgments that may arise from claims related to breaches of fiduciary duty.
| Pros |
|---|
| It safeguards directors and officers from personal financial loss in the event they are sued. |
| It provides coverage for legal defense costs, settlements, and judgments that may arise from claims related to breaches of fiduciary duty. |
| Cons |
|---|
| Each policy must be structured based on the specific structure of the PTC. |
| The scope of D&O insurance alone may not be adequate since most potential claims emanate from providing trust services. |
4. Trustee Liability Insurance
Commonly known as errors and omissions (E&O) insurance, trustee liability insurance is mostly applicable to claims regarding negligence while providing trust administration.
| Pros |
|---|
| It protects PTC management and employees with defense and potential damages if they are sued for breach of fiduciary duty. |
| Some states require that PTCs purchase this insurance to receive their certificate of operation. |
| Cons |
|---|
| Since there are no insurance policies written to specifically address PTCs, negotiating appropriate terms can be challenging. |
| PTCs come in many forms and sizes, so it takes some time to identify the exposures and design the right policy for a specific family’s needs. |
Regulatory Requirements Vary by State
State requirements for private trust insurance can vary widely, and, in many cases, the placement of the insurance policy that is compliant with the state-specific law can take some time and thoughtful design.
As you and your team form a PTC, pay close attention not only to the state requirements but also the needs of the people you are appointing to serve in these roles. You are asking close friends, family members, and professionals to make complex decisions. At the same time, you are placing them in a position of exposing their personal balance sheets.
Therefore, it is important to understand how an individual is exposed—regardless of regulatory requirements. Here’s when working with an insurance professional who understands the regulatory requirements for each state and the structure of the PTC can be invaluable. At Woodruff Sawyer, we can work with your team to design and implement the insurance program that best meets your individual situation.
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