Reputable and committed trustees are vitally important to charities of all shapes and sizes. However, it is important to recognise that trustees bear considerable responsibility both for their actions and the actions of the organisations that they represent.
Making an error on a seemingly minor decision can put them at risk of claims for compensation, legal action or official investigations being directed towards them personally.
These claims can be financially crippling to defend, which is why trustee indemnity insurance is so important. It covers the legal costs and expenses of defending against disqualification as a trustee, investigations or extradition proceedings. The most important thing to remember is that without trustee indemnity insurance in place, an individual trustee might have to pay the costs to defend a claim out of their own personal wealth.
There’s a misconception that trustees belonging to an incorporated charity are fully protected by the charity’s legal entity should a claim arise. However, trustees can still be held liable for legal costs if they are found to have acted dishonestly, negligently or recklessly, or if they have caused financial loss.
For example, a few years ago a large sports club ran into financial difficulties and approached the trustees of the club’s charitable trust for help. This existed to raise money to help young fans take part in the sport; yet, given the seriousness of the sports club’s situation, the trustees felt they had no choice but to help it avoid financial ruin and handed over a large quantity of money to the club. Unfortunately, because funding the parent club was not the purpose of the charity in question, an investigation by the Charity Commission inevitably followed, which focused on the erroneous actions of individual trustees rather than on the charity itself.
In a case such as this, without trustee indemnity insurance the significant costs associated with the investigation would have to be met by the trustees themselves.
Your charity’s activities might seem so straightforward that financial irregularities or breaches of the law are highly unlikely to arise, but, as the examples above show, it is possible for trustees to make bad decisions even when their intentions are good.
To see more specialist articles on managing risk, please visit the Markel Expert Hub