Trustee liability insurance coverage is a little-known specialty coverage for trustees and for some trust service providers. This segment offers a great opportunity for retail agents because the coverage is not widely available and many potential insureds do not buy coverage. Attorneys specializing in estates and trust law may be good sources of prospects for trustee liability insurance.

Trusts & Trustees

Trusts come in many shapes and sizes, presenting their trustees and service providers with a variety of duties. The range of duties leads to a broad and complex range of exposures for trustees. On top of this, the law defining a trustee's liability for various situations and actions is expanding.

Family trusts can be the most complex and long lasting trust arrangements. Family trusts are typically set up by an individual to provide financial and other benefits to a set of beneficiaries lasting long after the individual has passed away. The primary objectives of this type of trust are usually some combination of the following:

  • Allocate assets among a group of beneficiaries
  • Maintain control over the assets
  • Minimize taxes
  • Protect special family assets, such as a family company

In addition to variations in size and objective, trusts also own a wide range of asset types. In some trusts the assets are traditional financial assets such as stocks and bonds, but many trusts are dominated by illiquid assets such as real estate or ownership in private companies. The level of cash flow from these assets has significant implications for the management structure of the trust, the distributions to beneficiaries and ultimately on the liability of the trustees.

Trustee investment and distribution decisions are governed by a combination of the terms of the trust document and trust law. In many cases the trust document gives the trustee wide latitude in making decisions, but can be subject to interpretation and second guessing by beneficiaries.

Trustees, service providers and family offices can provide a wide range of services to a trust and trust beneficiaries. Some examples include:

  • Investment management
  • Investment strategy & planning
  • Asset allocation and divestiture
  • Advisor selection and review
  • Administration - reporting, record keeping, estate planning
  • Tax - preparation and filing, planning, compliance
  • Legal
  • Property management
  • Charitable giving
  • Insurance management

The wide range of services creates a wide range of exposures for trustees in a number of different capacities. In addition to providing professional services to the trust, trustees may also act as directors and employers through trust ownership.


Trustees can be held legally accountable for the decisions they make and the services they provide, with personal assets at stake. Claims against trustees can allege:

  • Mismanagement
  • Violation of trust, exceeding authority
  • Conflict of interest
  • Self dealing
  • Breach of fiduciary duty
  • Misrepresentation
  • Negligent supervision and selection
  • Professional negligence
  • Challenges to trust terms

Often these allegations are based on trustee actions that should be defensible but are still litigated (Claim Examples)

One area of contention is often investment performance. Trustees have a duty to invest as a prudent person, including a duty to reasonably select an investment advisor. In addition, trustees have an obligation to direct the advisor in accordance with trust guidelines, and to reasonably review the advisor's performance. The trustee may also have to make investment decisions on assets in the trust not under control of an investment advisor, such as real estate and ownership of private companies. While poor performance of an investment advisor selected by the trustees may be a potential source of litigation by beneficiaries, a more typical dispute would arise over whether the investment direction given to an advisor by a trustee follows the intent of the trust.

Another common situation in larger trusts is the ownership of all or the majority of an operating company. The trustees may serve as Directors of the operating company, and the operating company may have D&O coverage, but the trustee Directors will not be covered by the D&O policy for their acts as trustees of the trust. While this seems obvious, it is rare that the trustees have considered this and have a trustee liability policy in place. In addition, a trustee serving as a Director needs also to be aware of the potential for conflicts of interest created between the two roles.

The trustee has a fiduciary obligation to the beneficiaries of the trust and to the trust itself which may give rise to liability. In certain situations, such as gross negligence, the trustee may be legally barred from indemnification by the trust, despite indemnification provisions. Whether liability could apply vicariously to the trustee in a situation of gross negligence of a trust service provider, such as an investment advisor, is an open question.

Claims against trustees are often triggered by differences of opinions between the trustees and one or more beneficiaries. One common area of contention is the size of distributions. The trust may be set up to benefit a number of different family generations, and the trustee may be required to balance current distributions with the maintenance of assets for future generations. And while the trust document may provide the trustee with broad latitude in making the decision(s), and indemnification provisions should a beneficiary object, a claim of negligence will often result in the right of a court review and serious litigation. A claim against a trustee for failure to properly discharge his or her duties is typically a question of fact to be determined by the Court. These types of claims are very expensive to defend regardless of merit.

Because of the family nature of the trusts, claims are sometimes fueled by family rivalries and may have little merit. In these situations, cost of litigation is high and settlement is prudent despite the lack of merit. And these claims can hinge on the merits of judgment calls by the trustee, which is the best situation for a plaintiffs attorney. Lots of discovery and other legal activity!

A source of unexpected claim activity is non-profit beneficiaries. Many family trusts have non-profit organizations as beneficiaries in addition to family members, and these beneficiaries have rights similar to the other beneficiaries. While litigation from this source is rare, this is a growing area of dispute.

Often attorneys are trustees because of their relationship to the settlor of the trust. Most attorney's professional liability policies do not cover attorneys in their roles as trustees, and those that do are limited in scope. For example, the failure by an attorney trustee to adequately supervise an investment advisor ("investment agent") in the investment of a trust's assets, leading to loss of value, would not typically be covered in an attorney's professional liability policy. Likewise, other trust service providers' professional liability policies do not typically cover the professional's role as a trustee.

A trustee liability insurance policy will protect the trustee, and the trustee's personal assets, from actions arising from his or her duties as a trustee. And protection from the cost of litigation is just as important, if not more so, than protection for the payment of damages. A trustee without insurance has two sources of funds to pay for the litigation: trust assets, through indemnification provisions in the trust document, and his or her personal assets.

Many trust documents provide for indemnification of the trustee by using trust assets, but this may not be the best course. The lack of insurance to protect the trust from the cost of indemnifying trustees for claims exposes the trust assets to the cost of litigation. One attorney has suggested that the use of trust assets to provide for the defense of a claim against the trustee could then lead to a negligence claim against the trustee for failing to purchase insurance. Insurance provides an alternative source of funds for the defense of any action and damages.

Trustee liability claims do occur and the frequency is increasing. Most importantly, they often occur without merit, but due to the complexity and emotion are very expensive to defend. (Claim Examples).

Trustee Professional Liability Insurance

Trustee professional liability insurance is an obscure line of coverage. It is not well understood, even by some underwriters, and is only available from a few specialty insurers. Coverage and pricing varies greatly depending upon the type of trust and the structure of the trustee services.

Coverage varies widely depending on the insurer and the trust structure. The coverage is a form of professional liability insurance, and is always provided on a claims-made basis. Limits and deductibles vary with the size and type of trust, and include defense costs. Standard limits for most small to medium sized organizations start at $1.0 million. The simplest form for coverage protects only the trustee for his or her duties as trustee of a specific trust or series of trusts. For larger and more complex situations, broader customized coverage can be obtained.

Underwriting trustee liability insurance requires significant information on the size and complexity of the trust(s), the experience of the trustees and the beneficiary composition. Other factors include the trust agreement itself and the nature of the trust's assets. Many trust agreements have provisions allowing for the trust to pay for appropriate insurance coverages, including trustee liability.

While trustee liability policies vary significantly, most contain typical professional liability exclusions such as dishonesty, wrongful profit and discrimination. Two areas that might require customization are securities coverage and D&O coverage for operating companies owned by the trust. While these are typically excluded from trustee liability forms, customization can sometimes add these coverages back in if necessary.

The application process for trustees liability can get complex since trusts vary considerably. In addition to an application, underwriters will want to review the trust agreement, trust assets, the background on the trustees and beneficiary composition. Most of this will not be provided in an application, but will be provided to the underwriter in attachments. Also, confidentiality agreements with underwriters are sometimes used to protect trust information.

Trusts may need other insurance, such as:
  • D&O coverage for operating subsidiaries or non-profit affiliates
  • Fiduciary liability insurance
  • Data Breach/Cyber Risk
  • Employment Practices Liability insurance
  • Investment Advisors professional liability insurance

Tennant Risk Services has worked with a range of trustees and trust structures, including the following situations:

  • A very old family trust providing for the maintenance of family assets including significant farming assets
  • A new generation skipping family trust to maintain an ownership in a family company and build assets for the beneficiaries
  • A family office that provides ongoing services to a series of family trusts, including investment management, tax and estate planning services

Tennant Risk Services provides coverage for a range of trustees, trusts and family offices. Since virtually all trustee situations are unique, give us a call to discuss you client's specific situation and insurance needs. In addition to trustee liability insurance, we can also provide other coverages for your trust client. Please let us know your client's needs and we will provide you with information and assistance with your particular situation or account, and professional liability coverage solutions.

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Tennant Risk Services
124 LaSalle Road
West Hartford, CT 06107
Phone: (860) 519-1301
Fax: (860) 216-5845

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