Trustees and other officers of Scottish Charities may, by now, be very familiar with the term SCIO (Scottish Charitable Incorporated Organisation) and indeed also with the advice that the limited liability provided by this structure, like that of a charitable company limited by guarantee, is very valuable to trustees.
But if the SCIO and charitable company offer protection for trustees, what is there left to worry about and why might Trustee Indemnity Insurance be required?
The quick answer is that limited liability does not mean, no liability. It remains possible (despite a charity being a SCIO or charitable company and therefore the trustees enjoying limited liability) for individual trustees to find themselves personally liable for criminal offences and actions for damages.
We take a look below at some of the situations where a trustee's personal liability can arise, despite a limited liability structure and when this liability can be met by insurance.
In general, trustees remain liable where their individual actions have brought about a loss or an incident, or where it was possible for something to happen because the trustee was negligent.
Trustee indemnity insurance can provide cover for this personal liability. It can provide a useful financial protection for trustees who find themselves personally liable for financial losses or being investigated sued or prosecuted for wrongdoing.
However, the Charities and Trustee Investment (Scotland) Act 2005 s68A(2) prohibits trustee indemnity insurance from providing cover for fines and penalties and although indemnity can be provided for trustees' legal expenses. This cannot be provided to trustees who are found guilty of a criminal offence. In addition trustee indemnity insurance cannot provide cover where a trustee has acted deliberately, in bad faith or recklessly.
Accordingly it is important to understand that liabilities remain for trustees, even where the charity is a SCIO or charitable company and has Trustee Indemnity Insurance in place.
Breach of trust
Where a trustee does something which is a breach of trust; in simple terms, something which contravenes the terms of the trust or the duties of a trustee.
Breaches are only likely to be enforced if a trustee has acted dishonestly or recklessly.
Insurance can cover the cost of a breach of trust but only where a trustee acted in good faith.
Breach of directors'/trustees' duties
Where for example the charities funds are invested imprudently or where trustees allow a conflict of interest to arise.
Trustee indemnity Insurance is unlikely to cover losses suffered by the charity itself. However, cover for third party losses can be obtained.
Wrongful or fraudulent trading
Where a trustee allows a charity to continue to trade/operate despite knowing that the charity is no longer viable, thus incurring debts and other obligations which the trustee knows, or ought to know, the charity is unlikely to meet.
Fraudulent trading will arise where the charity carries out business activities with the intention of defrauding creditors.
Insurance can cover the cost of wrongful trading but only where a trustee acted in good faith. Insurance cannot cover fraudulent trading.
Health & Safety breaches
A trustee can be personally liable where an offence is committed with the consent and connivance of the trustee or is attributable to the trustee's neglect. A trustee can be prosecuted and receive a criminal conviction for such a breach.
An employers' or public liability insurance policy cannot cover the cost of any fine imposed but can provide cover for the damages payable to the injured person and the legal fees incurred by the charity. A trustee indemnity policy can cover a trustee's legal costs but will not do so if the trustee is found guilty of an offence.
A trustee will be liable for any criminal offence committed in its role as trustee. This could include offences in terms of the Data Protection Act 2018 (with the consent and connivance of or because of the neglect of the trustee) and The Money Laundering and Terrorist Financing (Amendment) Regulations 2019.
Trustee indemnity insurance can provide cover for the legal costs of a trustee but only where they are not found guilty of a criminal offence.
Serving as a trustee while disqualified / permitting a trustee to act while disqualified
It is a criminal offence to act as a trustee while disqualified. Trustees who permit another trustee to act while disqualified may also be guilty of an offence.
Trustee indemnity insurance can cover the legal expenses of investigation and prosecution. However, there will be no cover for the expenses incurred by a trustee who is found guilty of an offence. The expenses of trustees who are investigated or prosecuted for allowing a disqualified trustee to act will be covered by trustee indemnity insurance but only where the trustees have taken reasonable care and have acted in good faith.
A trustee will be directly liable for a defamatory publication.
Trustee indemnity policies can provide cover, but it is not always automatic. Cover is unlikely to be granted where one trustee makes a clam against another.
Discrimination against a staff member in relation to one of the protected characteristics
If a trustee is found by a tribunal to have discriminated an individual in relation to a characteristic defined as protected by the Equality Act 2010; age; disability; gender reassignment; marriage and civil partnership; pregnancy and maternity; race; religion or belief; sex, the trustee can be liable to pay compensation to the victim, as well as, or instead of the charity.
Trustee indemnity insurance can provide cover for the legal expenses and the damages awarded to the victim. Insurance will not cover any fines imposed.
Spending funding without funder's consent
A trustee could be liable for losses if they authorise the expenditure of funds from a grant and the expenditure is not compliant with the terms and conditions attached to the grant.
Trustee indemnity insurance can provide cover however, in most circumstances, cover will not be provided if the trustee has deliberately acted in contravention of the terms and conditions of the funding.
Arguably, the best form of insurance is ensuring that you abide by law and good governance, taking legal advice when required.