Beginning in 2004, the National Conference of Commissioners on Uniform State laws began the process of codifying a uniform statute ultimately called the Uniform Trust Code (UTC). By 2020, 34 states had adopted some form of the UTC.
The All-Important Indemnification Agreement
The UTC has some exculpatory features, but it does not appear to have required indemnification provisions. Trustees must look to the state where the trust was created and/or is administered for the exculpatory agreements and potential indemnification provisions. While we have not done a complete state-by-state analysis here, it appears that for a trustee to have guaranteed indemnification, there must be an indemnification provision in the trust instrument.
Therefore, the trust instrument is the first place to look. It has only been recently that trust instruments have incorporated an indemnification agreement.
It is critical for a trustee to review the language of the agreement in terms of scope and duration. The most common exemption of indemnification is intentional misconduct or gross negligence. While these standards may be difficult to prove, the allegations may prevent the advancement of defense costs. Additionally, if a trust is terminated, there may not be assets available for indemnification, similar to when a corporation declares bankruptcy.
Furthermore, while there can be agreements between the trustee and grantor as well as beneficiaries to use trust assets to purchase a policy and indemnification, those details should also be in the trust instrument for the purchase to be guaranteed. Even then, the beneficiaries may petition the court to disallow indemnification until final adjunction of a claim.
The Evolving Trustee Liability Insurance Landscape
The current liability insurance landscape is like the D&O insurance landscape of the 1960s, when directors and officers didn’t understand their personal risk or indemnification, and insurance available for protection was inconsistent. With the evolution of trust structure and laws, we expect to see trustee protection evolving into where the D&O insurance industry is today. For example, most directed trust statutes are already attempting to limit some of the liability of trustees.
Until the 1970s and 1980s, it was mostly lawyers and doctors who purchased professional liability insurance. At that time, few exclusions in the Commercial General Liability (CGL) policies existed for other professionals. However, insurers started to notice claims from non-traditional professionals and started excluding professional liability from the CGL policy. Hence, Miscellaneous Professional Liability (MPL) was born.
Until recently, if a trustee wished to purchase trustee liability insurance, they would use the MPL form in conjunction with a trustee liability endorsement. However, with enormous wealth transferring intergenerationally, trust laws changing, and litigation increasing, now is the time to break out trustee liability insurance from MPL and provide a comprehensive policy designed specifically for trustees.
There is a need for expertise in this area to track changing roles and responsibilities and focus on pricing algorithms that are relevant to this field. There is no available data about the percentage of trustees that purchase this coverage independently. Some trustees who work for law firms and accounting firms may have coverage, but as the revenue increases and claims arise, the Lawyers Professional Liability and Accounts Liability underwriters may decide it is best to separate this distinct profession and require separate policies. This is what the CGL underwriters of the 1970s and Management Liability underwriters of the 1990s and 2000s did for employment practices, cyber liability, reps and warranties, etc.
For that reason, Nomadx—in conjunction with Balance Partners—created a specific insurance policy and underwriting guidelines for independent and professional trustees. To learn more about this policy, visit trustnomadx.com.