Boards Buy D&O Insurance—Shouldn't Trustees Also be Protected?

Trustees are exposed to some of the same risks as directors and officers. Learn more about that risk.

Directors and officers (D&O) liability insurance is designed to protect management from personal liability for a claim resulting from an alleged breach of fiduciary duty while managing the operations of a company. The insurance also protects the company’s balance sheet by transferring the risk of indemnifying boards for these claims.

Without D&O insurance, the company would be reimbursing the directors and officers from its balance sheet. The reimbursement obligation comes from the corporate by-laws. It is payable to the directors and officers of a company, or to the organization itself, as indemnification (reimbursement) for losses or advancement of defense costs in the event the insured suffers such a loss.

Companies purchase D&O insurance to attract excellent board members. Quality companies recognize that to attract the best board members and to expect active participation in board decisions, they need to be able to protect them to the broadest extent of the law. Without D&O insurance, a board member's personal assets may be at risk. Companies also purchase D&O insurance for protection against unknowable emerging risks and potential regulatory exposures.

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Trustees Are Also at Risk

Trustees are exposed to some of the same risks as directors and officers. For example, a trustee can be personally liable due to an alleged breach of fiduciary duty for following the trust guideline and making management decisions. This risk is heightened if the trust holds alternative asset classes and privately owned businesses.

A trustee may even be brought into a lawsuit based on their capacity as a director, depending on their role as trustee. From a regulatory perspective, many new trusts have been created based on evolving trust laws that have not been tested.

An example of an evolving risk for trustees is the Corporate Transparency Act (CTA). FinCen released its final ruling about reporting financial ownership of domestic and foreign ownership of LLCs with 23 listed exemptions.

A Brief History of D&O Insurance

While D&O insurance has been available since the 1930s, it wasn’t until 1967 that the state of Delaware passed an indemnification law authorizing companies to purchase D&O insurance.

By the end of the 1970s, 70% of public companies purchased D&O coverage. The corporate litigation, merger mania, and financial instability of the 1980s caused the D&O insurance marketplace to become volatile, and public and private companies started taking note.

By the 1990s, with the implementation of new regulations such as the Private Securities Litigation Reform Act (PSLRA) and Sarbanes Oxley (SOX), litigation expenses increased. And by 2013, 90% of private companies purchased D&O insurance.

Private companies have standard indemnification agreements and will often incorporate the broadest indemnification provisions allowed by law. Trustees are in a very different situation, with trustee indemnification provisions being inconsistent. And trusts are regulated by state law.

Beginning in 2004, the National Conference of Commissioners on Uniform State laws began the process of codifying a uniform statute ultimately called the Uniform Trust Code (UTC). By 2020, 34 states had adopted some form of the UTC.

The All-Important Indemnification Agreement

The UTC has some exculpatory features, but it does not appear to have required indemnification provisions. Trustees must look to the state where the trust was created and/or is administered for the exculpatory agreements and potential indemnification provisions. While we have not done a complete state-by-state analysis here, it appears that for a trustee to have guaranteed indemnification, there must be an indemnification provision in the trust instrument.

Therefore, the trust instrument is the first place to look. It has only been recently that trust instruments have incorporated an indemnification agreement.

It is critical for a trustee to review the language of the agreement in terms of scope and duration. The most common exemption of indemnification is intentional misconduct or gross negligence. While these standards may be difficult to prove, the allegations may prevent the advancement of defense costs. Additionally, if a trust is terminated, there may not be assets available for indemnification, similar to when a corporation declares bankruptcy.

Furthermore, while there can be agreements between the trustee and grantor as well as beneficiaries to use trust assets to purchase a policy and indemnification, those details should also be in the trust instrument for the purchase to be guaranteed. Even then, the beneficiaries may petition the court to disallow indemnification until final adjunction of a claim.

The Evolving Trustee Liability Insurance Landscape

The current liability insurance landscape is like the D&O insurance landscape of the 1960s, when directors and officers didn't understand their personal risk or indemnification, and insurance available for protection was inconsistent. With the evolution of trust structure and laws, we expect to see trustee protection evolving into where the D&O insurance industry is today. For example, most directed trust statutes are already attempting to limit some of the liability of trustees.

Until the 1970s and 1980s, it was mostly lawyers and doctors who purchased professional liability insurance. At that time, few exclusions in the Commercial General Liability (CGL) policies existed for other professionals. However, insurers started to notice claims from non-traditional professionals and started excluding professional liability from the CGL policy. Hence, Miscellaneous Professional Liability (MPL) was born.

Until recently, if a trustee wished to purchase trustee liability insurance, they would use the MPL form in conjunction with a trustee liability endorsement. However, with enormous wealth transferring intergenerationally, trust laws changing, and litigation increasing, now is the time to break out trustee liability insurance from MPL and provide a comprehensive policy designed specifically for trustees.

There is a need for expertise in this area to track changing roles and responsibilities and focus on pricing algorithms that are relevant to this field. There is no available data about the percentage of trustees that purchase this coverage independently. Some trustees who work for law firms and accounting firms may have coverage, but as the revenue increases and claims arise, the Lawyers Professional Liability and Accounts Liability underwriters may decide it is best to separate this distinct profession and require separate policies. This is what the CGL underwriters of the 1970s and Management Liability underwriters of the 1990s and 2000s did for employment practices, cyber liability, reps and warranties, etc.

For that reason, Nomadx—in conjunction with Balance Partners—created a specific insurance policy and underwriting guidelines for independent and professional trustees. To learn more about this policy, visit