This month we focus on trustee liability insurance issues.
A trustee’s liability may arise from various sources. However, the principal ones with respect to insurance are:
- breach of fiduciary duty, including breach of the terms of the trust deed
- the Superannuation Industry (Supervision) Act (SIS) or the Corporations Act 2001, and
- fraud, dishonesty or wrongdoing of the trustee’s officers, employees or agents.
Depending on the nature of the wrongdoing, the trustee’s liability could be civil or criminal. Most trustee liability is civil but some actions of the trustee have criminal consequences under SIS and the Corporations Act. Legislation in each jurisdiction in Australia permits a court to excuse a trustee who has committed a breach of trust if that trustee has acted honestly and reasonably and ought fairly to be excused.
A director of a trustee company may be personally liable if he or she is ‘involved in’ a contravention under SIS or the Corporations Act or, for matters falling outside SIS, if the trustee company has committed a breach of trust and the director knowingly or recklessly assists in or procures the breach of trust.
Despite personal liability arising, a trustee (and its directors) may have one or more of the following sources of indemnity available:
- At common law, a trustee generally has a right to be indemnified out of the assets of the fund for costs and expenses properly incurred in the operation of the trust and permitted under the trust deed. This generally includes the right to recover from the fund the amount of damages that the trustee has become liable to pay in the course of administering the trust, provided the trustee has not been dishonest or reckless.
- A trustee may have a right to indemnification under the superannuation fund’s trust deed. However, SIS and the Corporations Act place limits on the extent of indemnification. Naturally, any provision in a deed that purports to excuse dishonesty or bad faith would be ineffective on policy grounds as well as under SIS and the Corporations Act.
For some types of liability, the trustee may seek insurance. There are several types of insurance that may be of use to a trustee, depending on the trustee’s circumstances and that of its directors. Despite the common law indemnity from the assets of the fund that is available to a trustee, the trustee may wish to seek protection from liability where an indemnity from the fund:
- is not available for whatever reason, or
- is insufficient to cover the legal liability of the trustee arising out of its administration of the fund, or
- would result in members bearing the expense.
A trustee indemnity policy usually provides protection in two instances:
- for the trustee where the trustee (or a director) is subject to an action alleging that the trustee has committed a ‘wrongful act’ (ie the insurance operates if the trustee’s indemnity out of the fund cannot be enforced for the benefit of the trustee), and
- for the superannuation fund for losses arising as a result of a wrongful act being committed by the trustee (or director) (ie to the extent that the fund must indemnify the trustee, it is reimbursed by insurance). This prevents members bearing the cost of some (if not all) of the indemnity to the trustee and its directors.
When reviewing your insurance policy, we suggest you consider how your policy addresses the following issues:
Who is insured? It is important to keep in mind that not all indemnity policies insure the same persons and that, depending on the familiarity of the insurer with superannuation funds, clauses vary substantially. At a minimum, the trustee company and all present and former directors should be covered.
What is insured? Care should be taken to ensure that the policy is clear, meets industry standards and is broad enough in its application to cover all items of concern to the trustee.
What is excluded from cover? An indemnity policy will typically exclude certain matters from cover, such as those activities prohibited by SIS as well as other dishonest and fraudulent acts of the insured and events which occurred before the policy commenced. Others exclude cover for regulatory investigation and actions.
What are the duties of the insured? For example, policies tend to exclude claims or events of which the insured is aware, but which the insured did not disclose before the policy commenced or was renewed.
How much indemnity insurance? In the Australian insurance market it may be impossible to obtain insurance covering a loss of the entire amount of the fund. However, insurance for the entire amount of a fund may not be necessary and to purchase excessive cover may amount to a breach of fiduciary duty.
It is the trustee’s responsibility to consider the relevant risks and to purchase appropriate cover. In assessing risk, the trustee should consider factors such as the level of experience and professionalism of the trustee, the quality of its advisers and the size of the membership. It is also necessary to consider the limits of any other indemnity.
In ‘Superannuation Guidance Note SGN 140.1 Adequacy of Resources’, the Australian Prudential Regulation Authority (APRA) indicates that a trustee must maintain an ‘adequate level of insurance against liabilities incurred as a result of a breach of its professional duty as trustee of an entity, and adequate levels of business insurance in respect of its business or undertaking as trustee of an entity.’ A policy will generally place limits on both the maximum coverage for each claim and the maximum coverage in the aggregate. A trustee should consider these limits when seeking to match a policy to the perceived risk.
Who bears the cost of the insurance? Usually, the cost of trustee insurance is passed on to members of the fund, ie it is an expense taken into account when setting the fund’s earning rate, unit prices or administration fees. Accordingly, the trustee should be even more cautious in obtaining cover in excess of what a risk assessment shows is required.
There is a disparity among insurance policies and care needs to be taken by a trustee in ensuring that the appropriate cover is being provided and the extent to which the policy represents value for money. A trustee should avoid making the amount of premium the sole criterion for selecting the insurer. Regular review of current insurance arrangements should be incorporated into every trustee’s risk management strategy.
More information
For information regarding possible implications for your business, contact a member of the Financial Services team.