How should charities protect themselves against potentially ruinous litigation? Nathalie Thomas reports.
When the Diabetes Foundation found itself on the receiving end of court proceedings launched by a former trustee (Third Sector, 21 June), the charity faced the difficult decision of how to deal with the possibility of thousands of pounds of legal costs.
The foundation applied to the Charity Commission to change its governing documents to allow it to take out indemnity insurance - a move that its chairwoman Judith Rich said represented "real value for money" in the long term, despite the need to shell out several hundreds of pounds on premiums each year. The cover proved invaluable when the charity found itself facing more than £15,000 of costs because the claimant was unable to pay.
According to a report by Royal & SunAlliance, however, the precautions taken by the Diabetes Foundation are a rarity in the sector, particularly among smaller organisations. The insurer says one in five small charities operates without any insurance and nearly half don't believe they could be affected by anything like what happened to the Diabetes Foundation.
There is continuing debate in society about whether the UK is developing a US-style compensation culture or whether this is a notion that exists purely in people's minds. But, as the Diabetes Foundation found out, it is becoming increasingly easy for individuals to launch court proceedings.
Even if threatened proceedings have no legal basis, there is little charities can do to prevent employees, trustees, volunteers or even members of the public from starting legal action against them.
Gary Johnson, development consultant at R&SA, doesn't think litigation against charities is increasing. But for those who find themselves in a legal battle, the costs are rocketing, and this is something he thinks all charities should protect themselves against. "The level of claims has remained static, but the amounts expended are increasing and are expected to rise exponentially," he adds.
Johnson argues that, whatever the pros and cons of different indemnity insurance policies, one of their main benefits is that they do provide cover for legal costs. And as Rich and the trustees at the Diabetes Foundation found out, the premiums, which start at about £250 a year, are a "drop in the ocean" compared with the costs they are able to recover.
But for some charities it's not as simple as phoning up a friendly insurance broker. After the Charities and Trustee Investment (Scotland) Act came into force last year, trustees of Scottish charities have been unable to take out trustee indemnity insurance - even if they had wanted to.
"With the Act, there was no specific change regarding trustee indemnity insurance," explains Euan Drysdale of the Scottish insurance firm Keegan & Pennykid. "But there is now a limit that says no more than 50 per cent of trustees can receive remuneration."
Because trustee indemnity insurance is considered a benefit in kind and affects all trustees on boards, Scottish trustees are, by law, disallowed from insuring themselves.
According to Drysdale, this change has had severe consequences. Many Scottish charities are signing contracts with their local health wards to deliver service contracts that require them to take out several types of insurance - including, in some cases, trustee indemnity insurance. As a result, service charities find themselves in a Catch-22 situation - do they defy their contracts or charity law? "Where are charities that sign up to these contracts going to be?" asks Drysdale. "They're stuck between a rock and a hard place."
Jane Ryder, chief executive of the OSCR, the Scottish charity regulator, has promised to pursue the issue with the Scottish Executive. She has also said that, until the matter is looked into, the OSCR will neither intervene nor penalise charities that have taken out indemnity insurance for their trustees.
South of the border, the Charity Commission is just as unwilling to intervene when it comes to how charities should protect themselves against large legal fees. "The commission shouldn't and can't interfere in the administration of charities, so it's not appropriate for us to issue absolute and blanket advice," says David Locke, its head of charity services.
One person willing to step out of line and offer charities worried about litigation a kind word is Tesse Akpeki, a consultant for Bates, Wells & Braithwaite's governance project OnBoard. "Keep everything in perspective," she advises. "It's easy to see one-off difficult cases like this and generalise."
Akpeki thinks insurance is one of a range of ways in which charities can protect themselves, but stresses that good management, governance and leadership should always take priority. "Having all those measures in place should protect charities," she says.