Frequently Asked Questions About Trustee Liability Insurance

If you’re not sure if you need trustee liability insurance or are unsure about how it works, these answers to frequently asked questions are here to help. 

I am trustee, why do I need insurance?  

Trustees can be held personally liable for their actions, decisions, and even omissions while managing a trust. Trustee liability insurance protects your personal assets if you encounter claims of negligence, breach of duty, or errors in judgment. In the event of a lawsuit, legal defense costs can be substantial. Trustee liability insurance typically covers legal fees, settlements, and judgments, ensuring you are not financially burdened by these expenses.

The trust indemnifies me, aren’t I protected?  

While trust indemnification provides some protection against legal action, it may not be comprehensive enough to cover all potential risks and liabilities associated with your role as a trustee. The trust’s indemnification provisions may have limits on the amount or types of claims covered, such as gross negligence and intentional misconduct. Even if you believe you are performing your trustee duties consistent with fiduciary standards, that doesn’t prevent allegations that disallow indemnification until the dispute is settled. Moreover, inadequate liquidity in trust assets can create a potential conflict of interest.

What does trustee liability insurance cover?  

Trustee liability insurance provides coverage for a variety of risks and liabilities that trustees may face while managing a trust. Examples of claims the insurance typically covers include:

• Costs associated with defending against lawsuits, including attorney fees, court costs, and other legal expenses. 
• Settlements and court judgments if the trustee is found liable for damages. 

• Claims alleging that the trustee has failed to act in the best interest of the beneficiaries, including accusations of negligence or improper management of trust assets. 

• Administrative mistakes, such as errors in record keeping or failure to comply with regulatory requirements. 

It's important to review specific policy details, as coverage can vary between insurers. Policies may have exclusions and conditions, so understanding the terms and limits is crucial to ensuring adequate protection.

I am a co-trustee with an institution. Doesn’t the trust company protect me?  

Being a co-trustee with an institution can offer some level of protection, but it doesn't necessarily provide complete coverage for your personal liability. It is important to understand that trustees are jointly responsible and severally liable for the management of the trust. If something goes wrong, both trustees can be held accountable. Additionally, a trust company's insurance or indemnification policies may primarily cover its own interests and employees, potentially leaving individual co-trustees exposed to personal liability and in need of competent counsel.

Is trustee liability insurance expensive?  

The cost of trustee liability insurance usually starts at a few thousand dollars but can vary based on several factors, such as:

• The type and complexity of the trust  

• The value and type of assets in the trust 

• Trustee experience  

• The number of generations and beneficiaries involved 

• The roles and responsibilities of the trustee(s) 

• Any past claims or litigation history 

• Structure of the insurance policy, such as the limit of liability and deductible.

Who pays for the insurance?  

Most states will allow trust assets to be used to purchase the insurance, especially if the trust document has a provision to purchase insurance. If the trust document does not allow for this, it’s a good best practice to secure approval by the beneficiaries and/or the grantor. If not, the trustee will often include the insurance costs as part of the trustee fee.

Is it difficult to get trustee liability insurance?  

Obtaining trustee liability insurance is generally a straightforward process, especially if you are well prepared and work with knowledgeable professionals. It’s important to provide a complete submission, which will include an application and information about the trust(s) to be covered as well as the value of the assets under administration and asset allocations. Be transparent and provide the broker and underwriter with accurate and complete information to avoid issues during underwriting or the claims process.

Why is it difficult to insure family member trustees?  

The role of trustee is a significant job, and the family member may not appreciate or have the know-how to handle the enormity of the role. To avoid mistakes and potential conflicts of interest, remove family dynamics from the situation and leave the role of trustee to experienced individuals. Rather than managing assets, a more appropriate role for family members is to preserve the family’s history and legacy. When establishing a trust, an estate attorney can aid in documenting the right roles for the right people.

Proceed with Peace of Mind 

As a trustee, you want to be able to make decisions in the best interest of the trust without undue worry about personal financial loss. Trustee liability insurance coverage allows you to focus on your fiduciary duties with confidence and proceed with peace of mind.