In April 2021, a member of the Milton Hershey School Board sued a Pennsylvania school, questioning how the school and its endowment fund was spending money.1 The lawsuit followed a series of financial controversies with the school.
Trustees, like the Milton Hershey School, are responsible for administering and handling the assets in a trust. Because of the nature of this work, trustees face liability risks, which can lead to costly lawsuits. That’s where trustee errors and omissions insurance can help.
Also known as trustee E&O insurance, this coverage can help trustees defend themselves in a lawsuit and cover other legal costs, like judgments or settlements.
Common Types of Trusts That Trustees Administer
Trustees can set up and administer various types of trusts, including:
- Beneficiary trust: An individual or group of people that a trust is created for. The person creating the trust chooses the beneficiaries and a trustee. This person has a fiduciary duty to manage the assets in the best interest of the beneficiaries.
- Charitable trust: A trust that isn’t tax exempt with interests devoted to one or more charitable purposes. The Internal Revenue Service treats these trusts as a private foundation, unless it meets the requirements for an exclusion that classifies it as a public charity.
- Education trust: A trust that specifies that the funds must be used for education. The trust document names the trustee, beneficiaries and how the trust money must get used.
- Special needs trust: A legal arrangement that allows a physically or mentally disabled or chronically ill person to get income without reducing eligibility for disability benefits.
- Liquidating trust: A legal entity that becomes the successor of a liquidating fund. Assets and liabilities get transferred into the new trust. The former owners of the liquidating fund become beneficiaries of the liquidating trust. These trusts are governed by a trust agreement between the former fund and trustees.
- Bankruptcy trust: Managed by a bankruptcy trustee. The United States Trustee, an office of the Department of Justice, appoints the bankruptcy trustee to represent a debtor’s estate during bankruptcy proceedings. The trustee evaluates and makes recommendations about the debtor.
What Is a Trust Document for Beneficiary or Charitable Trusts?
A trust document is also known as a trust agreement. It’s typically drafted by an attorney that the grantor, or trust creator, hires. The trust document is an important legal document that:
- Establishes a trust
- Lists who the grantor, trustee and beneficiaries are
- Explains how the trust works and how beneficiaries will get paid
- Includes information about the assets
- Defines the powers of the trustee
- May provide legal protection to the trustee
- Establishing the name and purpose of the trust
A trust document may sometimes be needed for liquidating or bankruptcy trusts. The court usually drafts the trust document for these. It will include the name of the company in bankruptcy or getting liquidated, as well as similar information as a trust document for a beneficiary or charitable trust.
Common Trustee E&O Exposures
Trustees face a variety of liability risks because they’re handling a trust and assets. Trustees can get sued for negligence, mistakes in their handling of the trust or misrepresentation. Some common trustee errors and omissions exposures include:
- Negligent selection of outside professionals where the person the trustee hired to help them administer the trust made a mistake. Outside professionals includes attorneys, investment advisors and accountants.
- Negligence for not hiring professionals to assist in the administration of a trust.
- Negligence for not following terms in the trust document or court document.
- Mismanagement of trust assets or unwise investment decisions.
- Co-mingling of trust money.
- Lawsuits from beneficiaries who believe they didn’t get their fair or expected share of trust assets.
- Conflict of interest when a trustee is also a beneficiary or acting in another professional capacity for the trust.
What Is the Difference Between Trustee E&O Insurance and Fiduciary Liability?
Trustee E&O insurance and fiduciary liability are two different types of insurance coverage. This may be confusing because trustees are considered a fiduciary.
Fiduciary liability coverage helps protect fiduciaries from damages due to their administration and management of employee benefit and pension plans.
Trustee E&O insurance helps protect a trustee from lawsuits related to the professional handling and management of individual trusts. Without this coverage, a trustee would have to pay out of pocket for legal costs if they get sued, which can be financially devastating.
How Do You Get Trustee E&O Insurance?
You can get trustee E&O insurance through an insurance carrier. When you get coverage, underwriters from an insurance company will ask you for information about the trust. It’s a good idea to provide the trust document, since it’ll have most of this information, like:
- Who are the trustees?
- What are the assets in the trust?
- What is the total value of the assets in the trust?
- Who are the beneficiaries?
- Are trustees also beneficiaries of the trust?
- Did the trustee hire any outside professionals to help administer the trust?
- Is the trustee an accountant or attorney and providing those services to the trust?
Be aware that most insurance companies require a Trustee Supplemental Application for each trust. This gives insurance companies more details about the trust and how it’s managed.
Trustee E&O insurance costs vary. That’s because insurers will typically use the total value of the assets that the trustee manages to determine insurance cost. Since trusts have different asset values, the cost for trustee E&O insurance will differ.
How The Hartford Can Help
We make it our business to know the risks and challenges trustees face. That’s why our professional liability coverage is the right choice for a wide range of professional businesses.
It starts with our experienced underwriters who have specialized knowledge in a particular industry. Their expertise brings a better understanding of what professional liability exposures trustees face, allowing us to develop solutions for their unique needs. Our underwriters also have significant authority, handling new and emerging risks as they come. This means you can expect quick turnarounds, helping you can feel confident in the coverage you’re securing for your client, earning their trust while giving you the ability to build long-term partnerships with them.
If you are a trustee and interested in learning more about trustee E&O insurance, please contact your insurance agent or you can find an agent near you. If you're an agent, please contact your professional liability underwriter.
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