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The Rough Notes Company Inc.



February 27
08:49 2018

Risk Managers’ Forum

Agents can play a key role in protecting their clients’ trusts

Estate planning trusts are creating new risk finance challenges for both personal and commercial lines clients. Simply put, a trust—a tool used in estate planning—creates a fiduciary relationship concerning specific property. Trusts typically are formed when someone (the trustor or settlor) transfers legal title to property to another (the trustee), with direction for the latter to hold and distribute these assets for the benefit of others (the beneficiaries).

The insurance producer who can perform continuing risk analyses for a client and provide periodic detailed information will be of immense value, particularly if he or she is involved in the trust decisions the client is making.

When insuring a trust, it’s important to remember that the trust instrument and the memorandum of trust specifically detail the obligations and responsibilities of the trustee to the beneficiaries. This includes any requirements to provide insurance for the assets of the trust and professional liability for the trustee.

If your client is a trustee, you must acquire a complete understanding of the entity’s or individual’s loss exposures and fiduciary responsibilities.

Trustees and their liability

The trustee has responsibility for the legal title to and the management of the trust’s property, and owes a duty of utmost good faith and loyalty to the beneficiaries. A trustee is prohibited from self-dealing in any manner. For example, they cannot purchase or sell trust assets, borrow from or lend money to the trust, and so on. The trustee also cannot obtain any personal benefit from a third party. Therefore, a corporate or bank trustee should not purchase its own shares or deposit trust funds into an account at its institution. Individual trustees are expected to segregate trust assets from their own assets and earmark or otherwise identify trust property.

A trustee is precluded from obtaining “any personal benefit” other than the agreed-upon statutory fees related to his or her position. Trustees who are insurance agents, stockbrokers, or real estate agents are precluded by state statutes from receiving their usual commissions for services involving trust property. And while trustees are not absolutely prohibited from entering into transactions with the beneficiaries of the trust that they are administering, all pertinent facts concerning such transactions must be disclosed to the other beneficiaries. With this background in mind, let us now examine exposures and remedies for protecting trustees.

Here are common examples of claims made against trustees:

  • Investment decisions. Even good investments are subject to criticism.
  • Accounting objections. Winning can be expensive.
  • Negligent delegation. Trustees get blamed for falling markets.
  • Only two things are certain in life, and one of them is trustee exposure. Failure to gain the most favorable tax treatment for the trust and the beneficiaries is a frequent source of claims against trustees.
  • Dead men tell no tales. Liability at the expense of a deceased trustee’s family.
  • Co-trustee liability. You are your brother’s keeper.
  • They’re not always charitable to trustees.
  • Liquidating trusts. These present their own special hazards.

Typical trustees professional liability coverage form language is tailored to the specific needs of trustees and the exposures therein, including discretionary investment authority and coverage for negligent delegation and negligent tax preparation. Coverage is provided for the appointment of defense counsel that specializes in trustee litigation. Spousal and domestic partner coverage endorsements or extensions of coverage generally are available.

Coverage is provided for insured trustees that are also trust beneficiaries when a suit is brought against another insured trustee (insured-versus-insured suits). Coverage also is provided for punitive damages up to the full limit of liability where insurable by law. Final adjudication language for fraud claims is provided.

In addition, coverage can be extended to employees of the trustee (paralegal, clerical). Some policies push for mediation and will give up to a 50% retention credit for claims settled in formal mediation. Some coverage forms provide personal injury coverage that must be coordinated with Commercial General Liability Coverage Form Coverage B.

Some insurance companies will provide coverage through a miscellaneous professional liability (MPL) coverage form (several endorsements may be required). MPL insuring agreements cover “wrongful acts” resulting from “insured services” for specifically described professional services. The trustee will still need coverages for crime, property and business income, business auto, commercial general liability, professional liability, and excess liability.

Home owner considerations

The growing popularity of trusts means that insurance agents should anticipate the day when the use of trusts will spread throughout their homeowners, personal auto, growers and ranchers, and umbrella books of business. Some insurers simply add the trust as an additional insured under the homeowners policy, with no changes to the named insured (trustors, grantors, settlors). This can create problems for the trust because the additional insured is provided no coverage for personal property, loss of use, or medical payments. If the trust owns jewelry or if there is a rental exposure (tenants or roomers), coverage gaps can result. A better approach is to list all parties as co-named insureds on both the underlying and umbrella policies.

For example, the declarations could list the named insured as (use the memorandum of trust to get the exact name of the trust): “John and Mary Doe and Alan White, as Trustees of the John and Mary Doe Revocable Trust Dated May 3, 2015.” Improper naming can result in unintended exposures for the insurer. For example, if a family trust is listed as a named insured, personal property losses to trust property in other states may not have been anticipated and underwritten by the underwriter. Also, any business-related exposures of the trust are a concern for insurers.

Some insurers do not like this approach because of concerns that they may pick up other liability exposures of the trust unrelated to the home. Therefore, it is important to appropriately limit the loss exposures surrounding the trust to the residence premises. To address this concern, an insurer-developed manuscript endorsement could specify that, if the trustee does not regularly reside on the residence premises, the personal liability and medical payments insurance apply only to bodily injury and property damage that arise from the maintenance, ownership, or use of the residence premises. This endorsement should also specify that no coverage is provided under the trust’s homeowners policy for any resident of the trustee’s household.

No consensus exists on this complex issue. Also complicating matters is the fact that no “standard” trust agreement exists. An underwriter would find it difficult to analyze every trust agreement to fully understand exactly who has what insurable interests and liability exposures. ISO introduced the HO 06 15 Trust Endorsement in the 2011 HO program to replace the Residence Held in Trust (HO 05 43) endorsement. This endorsement allows the policy to be issued in the name of the trustor, grantor, or settlor of the trust instead of in the name of the trust.

Auto, umbrella, and commercial issues

The personal auto policy also can be affected by a trust arrangement. For example, the ISO PP 13 03 01 05 Trust Endorsement, introduced in conjunction with the 2005 PAP program, is needed for situations where the title to an automobile is held solely in the name of the trust.

The personal umbrella policy also must be modified. The named insured definition in the ISO personal umbrella policy can be similar to what is found in many underlying policies.

Commercial property insurance can insure trust property when it is leased to the first named insured by adding additional insured endorsements to the commercial property policy: It is hereby agreed and understood that The Harold Smith and Virginia Smith Irrevocable Trust dated July 1, 2015, is added as an additional insured as their interests may appear with respect to the property at 17245 Harvest Road, Spokane, WA. The phrase “as their interests may appear” occasionally has been interpreted by the courts as limiting not just loss recovery but also immunity from subrogation. The phrase “with respect only to” could certainly be interpreted in the same way.

Immunity from subrogation is a big concern for commercial property trust additional insureds, because the trust principal must be protected. The Business Income–Landlord as Additional Insured (Rental Value) endorsement, CP 15 03, allows an insured tenant who is required to obtain coverage for loss of rental income for the benefit of the landlord to fulfill this requirement. It adds the individual or entity identified in the endorsement schedule as an insured for loss of “rental value.”

The commercial general liability policy can be issued in the name of a trust to provide coverage for the commercial enterprises being operated by the trust. Carefully check the “Who Is Insured” section of the policy. Coverage will apply for premises liability, operations liability, products liability, completed operations liability, insured contract, vicarious or contingent liability, operation of mobile equipment, personal injury, and advertising injury. Defense will be outside limits. All coverage exclusions will apply. All attached endorsements also will apply to coverage. CG 20 23—Additional Insured—Executors, Administrators, Trustees or Beneficiaries should be added to the commercial general liability policy for trusts.

Commercial crime coverage can be purchased by the trust to address specific loss exposures, and the named insured can be the trust. The trustee must have employee dishonesty coverage (sometimes called employee theft coverage). This is probably the single most important kind of crime coverage. Please note that directors and trustees of the insured’s business are not considered employees except while they are performing duties within the scope of an employee’s usual duties as the trustee. Distribution of funds from the trust is an important loss exposure that requires employee theft coverage.

Business automobiles used in the operation of a business enterprise can be owned by a trust. The named insured can be the trust if all the vehicles are owned by the trust. If certain autos are owned by the trust but the primary first named insured is different than the trust, an endorsement will be needed to make the auto a covered auto and the trust an insured.

Commercial umbrella or excess liability coverage forms must be modified to include the trust for liability loss exposures. If the trust is the enterprise, then it can be the named insured. Make sure that the underlying policies have the trust as the first named insured to ensure that coverage is concurrent. If the trust is an additional insured, the definition of insured should be reviewed to determine whether additional insured is included. If not, the additional insured endorsement should be added. The ISO umbrella automatically includes trusts and additional insureds.

Agent value

Some organizations rely on periodic audits from risk management consultants to ensure that the job is being performed appropriately; some use the consultant on a continuing retainer basis. The general practice for most organizations without in-house staff is to rely on the agent or broker.

Agents and brokers therefore should be thoroughly conversant with the techniques of risk identification and measurement. Although their compensation is generally from the sale of insurance, they often will be called on to act as risk managers. The insurance producer who can perform continuing risk analyses for a client and provide periodic detailed information will be of immense value, particularly if he or she is involved in the trust decisions the client is making.

The author

Paul Burkett is president and chief executive officer of Snoaspen Insurance Group, Inc., which specializes in risk management consulting, insurance teaching, and expert witness services for agents errors and omission carriers. He is a national faculty member of The National Alliance and has served on the board of governors of the Society of Certified Insurance Counselors.

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