Charities, Associations and PI insurance

Trustees/Directors
These are the individuals responsible for the management and administration of a charity or association. They are usually identified under the charity’s governing document (rules) for controlling the management of the charity. For instance, in the case of an unincorporated association, the executive or management committee are its charity trustees, and in the case of a charitable company it is the directors who are the charity trustees.

A vast range of commercial work is undertaken by charities and associations including research and development, property management, sports organisations such as football clubs and golf clubs, welfare services, care in the community, design consultants, training and many other activities.

Duties and responsibilities
These are summarised in the publication CC3 produced by the Charity Commission of England and Wales. The document sets out the rules concerning the application, protection and investment of the charity’s property, supervision of the charity’s employees and preparation of the charity’s accounts. Trustees’ duties are also usually set out in the rules or ‘deed’ governing the trust. The Charity Commission will not allow any indemnity to be provided by the charity where trustees knew or recklessly disregarded the fact that they were committing a breach of trust or duty.

Trustees may find themselves in a position of having to prove that they made an ‘honest’ mistake. Failure to demonstrate that they acted honestly may result in a personal liability and in the absence of adequate cover their personal assets would be on the line. Even trustees who acted honestly and reasonably will often require expensive legal advice and representation before ultimately being relieved of personal liability or being indemnified from charity funds.

How do insurers rate a risk and what do they look for?

Insurers will want you to complete a proposal form but can generally obtain an indicate of terms on the basis of the latest accounts. Business activity and financial status are major underwriting criteria, whilst the number of trustees/directors is a relatively unimportant factor.

Clearly the activity of the charity or association will have a bearing on the risk. The trustees of a gardening club will be less exposed than those of a medical research charity.

The size of donations and funds managed is an important factor. A small charity supporting local community projects such as fund raising for the construction of a new village hall will have far less exposure than a large charity with a multi-million pound income.

What is the financial status of the charity/association? Most organisations are not run for profit but insurers do look at the accounts in order to establish that the organisation is properly financially managed.

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Examples of claims

• Inappropriate advertising
  The Charity Commissioners received complaints concerning a charity’s advertising campaign. The trustees were required to meet costs personally when it was ruled the advertisements did not fall within the organisation’s charitable purpose.
• Embezzlement
  A charity administrator with responsibility for banking donations embezzled thousands of pounds of charity funds over several years. Insurers provided a full indemnity to the charity for the missing funds.
• Indecent assault.
  The chaplain of a denominational children’s home was found guilty of indecent assault over a period of years. Former residents of the home claimed damages. Insurers funded the defence of the home and its trustees, and costs exceeded £10,000.

The selection of trustees

Trustees must be selected for what they can contribute to the charity. They should not be appointed for their status or position in the community alone; this is the function of patrons. Trustees need to be able (and willing) to give time to the efficient administration of the charity or association and the fulfilment of its trusts. It is recommended that they are selected on the basis of their relevant experience and skills and must be prepared to take an active part in the running of the charity.

What powers do trustees have when investing funds?
The trustees are under a duty to decide what form of investment will be most appropriate for the needs of their charity and obtain skilled advice for this purpose. Those people involved in supporting and managing a charity expect the majority of its funds to be applied in pursuit of its charitable purpose and for an association they expect such funds to be utilised in accordance with the stated aims of its constitution.

Risks for charities and associations can be minimised by considering these options:

• Recruitment of trustees with business or professional acumen
• Trustee induction and training
• Clear internal procedures
• Clear management structures and controls
• Clear internal financial controls
• Charity and association guidelines

The Charity Commission for England and Wales has established guidelines for charities, associations and their trustees when purchasing insurance. The guidelines are summarised in publication CC49 available from the Commission. The Charity Commissioners do not object to and can authorise payments from charity funds to purchase appropriate trustee indemnity insurance.

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Main bodies with PI rules

At present there are no established professional bodies that represent charities but they are bound by the rules and regulations (publication CC3) of the Charity Commission.

Where can liability arise

• Liabilities to third parties
• Trustees liability
• There are many other aspects of a trustees’ duties that may involve exposure to liability to third parties:
• Breach of tortious liability at common law
• Breach of contract
• Trustees who provide advice or services in the course of their work for the charity may incur personal liability for negligent errors or omissions.
  These duties can give rise to unlimited personal liability for the trustees involved.

Directors' liability
Where a charity or an association is incorporated, the specific responsibilities and potential liabilities of directors must be considered as a separate issue from their duties as trustees. These arise from:

• Breach of duty of care arising at common law
• Statute law Ð a whole raft of legislation relating to corporate law, Companies Act 1985, Insolvency Act 1986, Health and Safety at Work Act 1974 and the Environmental Protection Act 1990.,

When the charity/association is a victim of fraud, Charity and association governors, directors, council members, officers, trustees, employees and volunteers are often entrusted with cash (including donations) or given the means to authorise financial transactions in the name of the charity or to access its accounts. The charity or association can become the victim of fraud or other dishonest and malicious acts.

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Policy wordings

Cover can be tailored to provide insurance for either the ‘professional’ exposures of the charity or, a special charities policy can be provided. Policies are generally underwritten with the limit of indemnity on an aggregate basis including costs and expenses incurred in the investigation, defence or settlement of all claims made against the charity or association. The excess will usually apply to each and every claim including all costs and expenses incurred in the investigation, defence or settlement of any claim.

The usual cover

A special charities wording is designed to indemnify both the charity/association and the trustee/director. So, the policy will indemnify a charity/association where the trustee or director has incurred personal liability but has acted honestly and therefore may be entitled to indemnity from the charity’s or association’s finances.

In circumstances where the trustee/director cannot expect indemnity from the charity/association, the policy will cover the individual trustee/director. Wrangles over who pays what and when can therefore be avoided.

Cover is available for any charity or association, whether incorporated or not. It extends protection to include all employees, where appropriate, and makes provision to cater for external ‘not for profit’ and shadow directorship appointments. PI indemnifies the charity, association, its managers, employees and appointees against damages, own and third party costs and expenses which arise from a ‘wrongful act’ committed in the conduct of the charity’s or association’s ‘professional services’.

Cover is usually provided under four separate insuring clauses:

• Executive liability
  Provides indemnity for the personal liabilities incurred from a ‘wrongful act’ whilst acting in the capacity of manager of the charity/association. Includes cover for damages, own and third party costs and expenses and costs incurred by the insured attending official investigations. The definition of ‘manager’ usually includes, governors, directors, council members, officers, trustees, shadow directors and employees. Where appropriate cover will extend to their spouses, estates, heirs, legal representatives or assigns. Where the charity/association has an obligation to indemnify, the cover will incorporate the charity or association.
• Professional indemnity
  Provides indemnity to the charity/association, its managers, employees for damages, own and third part costs and expenses arising from a ‘wrongful act’ committed in the conduct of the charity’s or association’s professional services.
• Fidelity
  Indemnifies the charity or association against losses caused by dishonest, fraudulent, criminal or malicious acts of managers or employees for personal gain.
• Documents
  Indemnifies the costs and expenses of replacing or restoring documents destroyed, damaged, lost or mislaid in or about the conduct of the charity’s/association’s ‘professional services’.

Associated links

• Charity Commission
  UK government department helps charities use their resources effectively. Includes a register of charities in England and Wales.