OG100 A1 TRUSTEE INDEMNITY INSURANCE

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OPERATIONAL GUIDANCE

TRUSTEE INDEMNITY INSURANCE

OG 100 A1 – 27 February 2007

Purpose:	This guidance explains the effect of the general statutory power to purchase trustee indemnity insurance using charity funds, and what action may be needed on our part where there is an express prohibition against such insurance.
Note:	OGs 100 C1, C2, C6, F1, and G1 are withdrawn.

Contents

1. Introduction
2. What if there is an express prohibition?
3. Registration: Approving governing documents
4. English and Welsh charities operating in Scotland
Glossary of Terms used in this Guidance

Index to further related information


The Law	Refer to a lawyer	Refer to an accountant

1. Introduction
1.1 What is trustee indemnity insurance? 1.2 What powers do trustees have to buy TII? 1.3 Summary of the law 1.4 What is meant by "duty of care" in this context?

	1.1 What is trustee indemnity insurance?
	Trustee indemnity insurance (TII) covers trustees against having to personally pay legal claims made against them (by their charity or by a third party) for a breach of trust, or a breach of duty or negligence, committed by them in their capacity as trustees. Provided that trustees have authority, they are entitled to be insured against claims that may arise from their legitimate actions as trustees, and will be covered against liability as long as they have acted honestly and reasonably. In most cases, this authority will be provided by the statutory power brought in by the 2006 Act.
	Provided the cost is reasonable, the insurance premiums can be paid for out of charity funds. But, because TII paid for in this way is regarded as a form of personal benefit to the trustee(s) concerned, it must have proper authorisation before the charity can purchase it. This can be in the form of a specific power in the charity’s governing document, a scheme or order from us, an order of the Courts, or now most commonly, an authority conferred by legislation or regulations.
	This principle applies even where a trustee purchases TII out of his or her own pocket, and wishes to claim a refund from the charity as a legitimate expense - the money can’t be refunded unless there is a specific authority in place.
	Ensuring there is proper authority is important. Without it, any policy is unlikely to be effective, with the result that insurance companies may not pay out on an otherwise valid claim. The charity would have wasted its money, and the trustees would technically be in "breach of trust", and could be held liable to repay the cost to the charity.
	The main difference between TII and other types of insurance taken out for the benefit of a charity is that TII directly protects an individual trustee rather than the charity itself. But in practice, TII is often provided under a single policy in combination with other types of cover. This could include:
	Professional liability insurance: covering errors or omissions resulting in a civil liability for the charity, where the charity provides counselling, advice, or an information service;
	Fidelity or "theft by employee" inurance: covering fraud or loss through criminal acts by officers or employees;
	Trustee Reimbursement insurance: covering residual liability for a claim which ought to have been met out of the charity's assets, but for which trustees may be held liable because those assets are insufficient to meet the claim.
	These and other examples of insurance, which may or may not indemnify against personal liability, are discussed in more detail in our booklet CC49 Charities and Insurance. The important point is that, if the insurance policy as a whole provides any indemnity to trustees for their personal liability, it will amount to a benefit which needs authority.
	1.2 What powers do trustees have to buy TII?
	The 2006 Act provides trustees with a legal authority, so long as the trustees are able to meet the conditions of its use (see next section); and provided also that there is nothing in the charity’s governing document that specifically forbids it.
	It is likely to be extremely rare for a governing document specifically to prevent the purchase of TII, so in practice this means it is very unlikely we will need to make orders or schemes authorising the purchase of TII. In other words, most, if not all charities, will be able to rely on the power in the 2006 Act to purchase TII.
	If there is what is termed an "express prohibition" against TII, a short scheme will be needed to overturn it - if we agree this is in the interests of the charity (see section 2 below). The governing document may give an express power to purchase TII. If this is narrower than the statutory power, the trustees can rely on the statutory power; if it is wider than the statutory power, the trustees can rely on the power in the governing document. They should, however, be able to demonstrate why they consider it is in the best interests of the charity to provide this wider insurance for their benefit.
	The main TII powers and restrictions are summarised immediately below.
	1.3 Summary of the law
	Section 39 of the 2006 Act inserts a new provision, s.73F, into the 1993 Act allowing trustees to pay for TII out of the funds of their charity, provided they are satisfied the arrangement is in the best interests of the charity. ("Best interests" means giving a clear advantage to the charity.)
	Trustees can therefore arrange insurance cover for:
	any personal liability for breach of trust or duty in their capacity as trustees or holding trustees;
	any negligence, default, breach of duty or breach of trust committed by them while acting as directors or officers of a charitable company, or of any company carrying out activities on behalf of the charity.
	(Note: The latter will cover any liability for "wrongful trading" where the business is carried out by a charitable company, or by a company on behalf of a charity.)
	This general statutory power is subject to the following exclusions:
	liability in respect of fines imposed in criminal proceedings, or penalties arising from regulatory action; (for example, penalities imposed by the Financial Services Agency or Companies House);
	liability arising from defending criminal proceedings in which the trustee is convicted of fraud, dishonesty, or wilful or reckless misconduct; and
	liability arising out of conduct which the trustee knew, or should have known, was not in the interests of the charity.
	It is made clear the term "conviction" means one that is final, taking into account the termination of any appeal process.
	The Secretary of State has the power to amend the exclusions by order.
	Trustees are also subject to the "duty of care" in section 1(1) of the Trustee Act 2000 when making a decision to buy TII.
	Note: The statutory power cannot be used where the charity’s trusts contain an express prohibition against TII (subsection 8(a) of s.73F refers). See section 2 below for action where there is an express prohibition, and for the effect of the law where there is a general or qualified prohibition.
	1.4 What is meant by "duty of care" in this context?
	In broad terms, trustees must exercise all reasonable care and skill when making and carrying out a decision, allowing for any special knowledge or experience an individual trustee might have, particularly when acting in the course of a business or profession.
	They must exercise the power responsibly in the interests of their charity, and take professional advice as appropriate when selecting the right insurance policy for the charity.
	We recommend that, before considering the purchase, trustees check whether they have in place policies and procedures that help reduce any potential risk. See Charities and Risk Management on our website under "Meeting our requirements".
	In this context, the duty of care in the 2000 Act does apply to directors of charitable companies, who are not normally subject to that provision.

2. What if there is an express prohibition?
2.1 What is meant by "express prohibition"? 2.2 Action where there is an express prohibition 2.3 Action if we need to give authority

	2.1 What is meant by "express prohibition"
	By "express prohibition" in this context we mean a provision in a governing document that specifically refers to TII, and explicitly forbids its purchase out of charity funds.
	It is clear that, under subsection 8(b) of s.73F, the statutory power overrides a general prohibition against trustees receiving any personal benefit, and also any "qualified prohibition", where the use of a power is expressed to be conditional upon our prior written consent.
	This covers, for example, our model "trustees [or directors] not to be personally interested" clause. We do not need to make a scheme in such cases - the charity can rely on the statutory power.
	2.2 Action where there is an express prohibition
	It is likely to be very rare to find an express prohibition against TII. If a charity does approach us where there is an express prohibition in its governing document, we will need to consider carefully the circumstances in which it was introduced, and whether it should reasonably be overturned.
	We accept that TII is widely regarded as a useful adjunct of trusteeship, and that there may be circumstances where potential trustees may be deterred from volunteering if it is not available. However, there may be circumstances where it is not in the interests of the charity to overturn a prohibition.
	For example, the charity founder might have also included a trustee remuneration provision, with the stated intention that TII should be paid for out of that remuneration, and not from any separate provision. Or the founder may strenuously object to charity funds being spent on what he/she considers to be unnecessary insurance. The test from our point of view will be whether the charity is finding it difficult to recruit trustees because it cannot offer TII cover.
	Our scheme will effectively limit the extent of TII to be purchased to that allowed by the statutory provision. If we have evidence the charity wishes to purchase wider cover, we will need to consider carefully the grounds on which we could authorise this as being expedient in the interests of the charity, and/or the risks of making a standard scheme, rather than one which specifically sets out the statutory restrictions.
	Legal advice should be sought if there is doubt as to whether any wider provision should be authorised.
	But generally, unless there is a compelling reason for not doing so, we will delete or set aside the prohibition. For non-company charities, we will normally make a short altering scheme in accordance with our normal drafting practice (see chapter A4 of the Drafting Guide (Altering previous documents)).
	In the case of a charitable company, we will assist the directors to remove the prohibition by approving an amendment to the memorandum of association under s.64(2) of the 1993 Act (see OG 47).
	2.3 Action if we need to give authority
	Where a prohibition has been overturned by a scheme, we will not normally need to authorise the purchase of TII, since the statutory power will be fully available to the trustees.
	However, if it is possible to justify authorising a general power, then in the case of a charitable company, the directors (as trustees of the charity) will need both:
	an appropriately worded power to provide the insurance (which may include the power "to do all such other lawful things as are incidental or conductive to the attainment of its objects"); and
	where (as will usually be the case), there is a provision in the charity's memorandum precluding any trustee from receiving a personal benefit from the charity, an addition to the range of exceptions to this clause.
	See OG100 C5, for model provisions.
	Provided the charitable company is willing to accept the limitations and conditions reflecting the legal extent of cover that may be provided, consent may be granted in the usual way – see OG 47.
	In the case of non-company charities, we will make a scheme using the model in OG100 C3.

3. Registration: Approving governing documents
	Given the existence of the statutory power, there is technically no need for a governing document to include a formal power to purchase TII, although of course there is no bar to this. Charities intending to operate in Scotland may wish to include a formal power, in the absence of any current general power in Scottish law to purchase TII - see next section.
	If there is a TII provision, we are are only concerned that the scope of the power is within that allowed by law, and is expressed to be subject to the conditions and exclusions set down in s.73F.
	There is no objection to a provision that may further restrict the use of the power, or to one that is couched in terms that allow the trustees to purchase cover "to the fullest extent permitted by law".
	But any TII provision that appears to extend the scope of personal cover beyond that allowed by s.73F should be queried, and, if appropriate, referred for legal advice.
	The same principles apply when approving new standard governing documents for national charities that include a TII provision. (We are not concerned with whether a previous "standard" contained any form of prohibition against TII.)

4. English and Welsh charities operating in Scotland
	Scottish charity law currently contains no general statutory power allowing trustees to purchase TII, which the Office of the Scottish Charity Regulator (OSCR) regards as a form of trustee remuneration.
	Scottish charity trustees are entitled to receive remuneration if their charity had an express power of remuneration on or before 15 November 2004.
	And a charity without an express power may make use of the statutory remuneration power set out in the Charities and Trustee Investment (Scotland) Act 2005.
	But, since one of the criteria for using this power (as set out in s.67 of that Act) is that only a minority of trustees can benefit, the power to purchase TII is ruled out - because TII will normally cover the whole trustee body.
	However, pending a legislative resolution of this issue, guidance issued by OSCR states that it will not turn down a new organisation for charitable status just because of the presence of a TII power in its governing document. This includes applications from "cross-border" charities which may based in England and Wales, but also required to register with OSCR because they operate in Scotland.
	Further information can be found on the OSCR website.

Glossary of Terms used in this Guidance
	The 1993 Act
	The 2006 Act
	Breach of trust
	Charitable company
	Court
	Express prohibition
	Governing document
	Order
	Scheme
	Trustees

Index to further related information