Expert view: Don't assume you will never be sued - consider trustee indemnity insurance

The provisions in the Charities Act 2006 that make it easier for charities to purchase trustee indemnity insurance from their own funds will have come as a surprise to some managers.

But such insurance is an important consideration for voluntary sector organisations of all sizes.

In the past, some charities have found it difficult - if not impossible - to recruit new trustees, especially from the business sector, without this insurance protection for both the individuals and the organisations involved.

If there is no insurance, trustees risk permanent damage to their personal reputations and credit histories. Their personal assets, their houses, savings and pension funds could be in jeopardy, whether they have acted deliberately, negligently or even made an innocent mistake.

Trustee indemnity insurance is designed to pay for legal defence costs in the event of actions being brought, and, so far as possible, to place charities and trustees in the same position after losses as they enjoyed previously. Insurance companies understand legal processes and have experienced claims teams to fight charities' corners.

Trustee indemnity insurance will not cover a trustee's dishonest, fraudulent or reckless breach of duty, but a trustee can still be found personally liable even when they've just been a little careless - and protection isprovided for that scenario.

Despite this risk, research undertaken in 2005 by charity insurer Royal & SunAlliance identified that only 47per cent of small charities bought trustee indemnity insurance.

So why do charities decide against taking out insurance? Some third sector groups may feel that the cover is not worth the premium charge. This response is no doubt because charities watch their pennies.

Many still believe that people will not take legal action against charities or their trustees. Indeed, the Royal & SunAlliance survey found that 48 per cent of smaller charities did not believe that their organisations would be sued.

But charities should act now to protect existing trustees and work towards attracting new ones. It could be a wise precaution.

If nothing else, it would provide important peace of mind.

Key points

- Trustees' assets may be at risk if their charities do not have trustee indemnity insurance.

- Such insurance covers defence costs in the event of actions being bought.

- Only 47 per cent of small charities buy it.

- 48 per cent believe they would never be sued.

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