Recourse at law or in equity of trust beneficiary who is dissatisfied with trustee’s proposed settlement with insurance company of property-damage claim

Charles E. Rounds, Jr.
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Assume entrusted property that has been duly insured by the trustee suffers damage through no fault of the trustee. A current beneficiary, though, is unhappy with the trustee’s proposed nonjudicial accommodation with the insurance company. The beneficiary requests that trustee assign its contractual rights against the insurance company to the beneficiary personally so that the beneficiary may take it upon himself to bring suit against the insurance company, with any recovery to be remitted to the trust estate. The trustee declines to execute such an assignment. What recourse, if any, should the beneficiary have at law and/or in equity?

If it would be imprudent/unreasonable for the trustee to further pursue the insurance company, then the trustee should have no duty to assign the contractual rights to the beneficiary. See §6.2.1.3 of Loring and Rounds: A Trustee’s Handbook, which is reproduced in its entirety in Appendix A below.

On the other hand, if it would be imprudent/unreasonable for the trustee to enter into the proposed settlement with the insurance company in the first place then the beneficiary would have recourse in equity directly against the trustee personally. Id. But what if the trustee were, say, judgement-proof? The beneficiary, qua beneficiary, then would have a right under equitable principles to bring an action at law on the contract directly against the insurance company on behalf of the trust (and at trust expense, if successful), provided the trustee had unreasonably declined to do so. See §5.4.1.8 of Handbook, which is reproduced in relevant parts in Appendix B below. In other words, the trustee’s unreasonable forbearance could effect what amounts to an involuntary equitable assignment of the contractual rights to the beneficiary, an assignment that the insurance company should be in no position to defeat.

As to the trustee in the face of its reasonable forbearance assigning anyway the contractual rights to the beneficiary, what harm could that possibly do? There are several reasons why the trustee should think twice before doing something like that. The first is doctrinal: The beneficiary becomes a fiduciary agent of the trustee, which brings with it a duty on the part of the trustee to monitor/oversee the agent’s activities. The second is practical: Who is to bear the burden of the trustee’s attendant legal fees, monitoring costs, and other such expenses? The trustee personally? The trust estate? The beneficiary? At the very minimum, the trustee is likely to be made a nominal party in the beneficiary-agent’s litigation against the insurance company. No way the trust estate the remaindermen will say.

Practice tip: Is the beneficiary entitled to principal distributions in the discretion of trustee? If so, a discretionary principal distribution of contractual rights possessed by the trustee as against the insurance company might be worth considering, assuming to do so would be within the trustee’s discretionary authority. That way the trustee and the beneficiary can go about their separate ways with respect to the matter no longer constrained by the fiduciary principle.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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