To indemnify trustees - or not to indemnify?

It can be worth taking out insurance to protect your trustees against personal liability, but you should first assess what the risks for them and the charity actually are. David Ainsworth reports

Board of trustees
Board of trustees

No matter what the size of the charity, trustees can be held personally liable if anything goes wrong. Taking out trustee indemnity insurance can therefore provide a degree of reassurance to board members who might otherwise fear the potential risks involved.

Phil Duffy, charity insurance consultant at Ecclesiastical, says that one of the main benefits of trustee indemnity is protection against litigation. The insurance will cover legal fees, which even in the case of unfounded claims can run to thousands of pounds. "It's different from other types of insurance in that it protects the trustee, rather than the charity itself," he says.

Policies will generally cover trustees for damages in civil court cases, although they will not protect them against fines in criminal cases. They can also protect trustees from debts incurred if the charity closes down and is unable to pay its bills.

Many specialist charity insurers have started to bundle it with their other policies, which is leading to more charities taking it out. But there are still charities that do not use it. "There's inevitably a cost attached," Duffy says. "Charities have limited funds, and some decide they can't afford it."

The costs, though, aren't necessarily prohibitive. "It's not an expensive form of cover," he says. "You may be able to get it for as little as £100, depending on the size of the charity."

Simon West, managing partner at the insurance brokers Master Policy, believes that more charities are starting to take up trustee indemnity policies because they fear the potential cost of legal action. "It used to be a broker and insurer-led market, but charities are increasingly asking us for this cover," he says.

Take-up has also been driven by a change in the Charity Commission's stance on trustee indemnity insurance, says West. Historically, he says, the commission disapproved of charities taking out this type of insurance, but the commission's most recent guidance, CC49, now makes it clear that charitable funds may be used to protect individual trustees against liability.

But there is still some scepticism among charity finance directors about the benefits of the cover. Ian Bucknell, operations director at Asthma UK, believes that the best way for trustees to protect themselves is to make sure the charity is incorporated. Incorporated charities are registered as companies with Companies House as well as the Charity Commission. If a charity is incorporated, the organisation, rather than individual trustees, is liable for debts and other costs.

Bucknell says that any organisation large enough to have even a single employee should incorporate. "It's a good idea for all sorts of reasons, not just limited liability," he says. "It gives clarity to the ownership of assets and to contractual relationships."

David Membrey, deputy chief executive of the Charity Finance Directors' Group, says the range of situations where trustee indemnity insurance will help you is relatively narrow. "If you've broken the law, it won't help," he says. "If you're incorporated, and you've taken proper care in your decisions, you're usually already protected."

Rather than take an off-the-shelf cover, he says, it is a good idea to explain to a broker the actual risks the charity faces and check that trustees are protected against those. "The risks a trustee faces vary considerably," he says. "Check your trustees are protected against everything they need to be and nothing they aren't.

"For example, if you're a campaigning charity, your trustees might be asked their opinion on contentious issues, so make sure you're properly protected against libel."

Membrey says the CFDG itself does not have trustee indemnity insurance, but it does have several different forms of cover that protect trustees as well as staff.

In practice, he says, many charities buy trustee indemnity insurance because it is the simplest option. "It's usually set at a rate that's just under the radar," he says. "It might be easier to take it and be on the safe side than to calculate whether you need it."

But Membrey recommends to CFDG members that they carry out proper risk analyses, rather than simply taking the cover automatically, without understanding what they need.

"There haven't been very many cases where trustee indemnity insurance has actually paid out," he says. "It's best to see whether you really need it first."

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