Great expectations

With 2005 officially the Year of the Volunteer, the Charity Commission recently launched its Get On Board campaign, designed to encourage people to become trustees. This followed a survey that found charities have difficulty finding people with the right skills and experience.

Trustees are responsible under a charity's governing document for the control of management and administration, and a breach of trust occurs when they act outside the terms of this document. A trustee found in breach can be held personally responsible for liabilities incurred by, or on behalf of, the charity or for making good any loss to it.

The Charity Commission has urged trustee boards to conduct a skills audit on new trustees to ensure they are equipped to be competent. Skilled trustees make better insurance risks but, as Gerald Buck, liability account manager for Ecclesiastical Insurance, comments: "Recruiting trustees of the right calibre can be a difficult task. Many potential trustees are busy working people and assuming this role can be a time and energy-consuming commitment. Candidates may be dissuaded by the prospect of being held personally legally liable for their actions and those of their co-trustees."

Commission stance

This is where trustee indemnity insurance comes in but a hurdle for insurers has been the traditional stance of the Charity Commission. This has meant that if no provision is made for the insurance in the charity's constitution, the Commission needs to be approached for permission to use the fund to purchase it. This is because cover against a trustee's potential liability is perceived as a benefit - and trustees are not supposed to benefit from their trusteeship. Mr Buck points out that while there is nothing to stop individual trustees purchasing cover from their own pocket, "there can be complications and being asked to do so may not aid the recruitment process".

This may explain why the Charity Commission has become more flexible, and moved towards a 'self-certification' system. "There has been a problem during the past 13 years, and I have been on a working party that expressed concern to the Charity Commission," explains Lee Barber, underwriting manager for UK trustee insurance at Royal and Sun Alliance, which sponsored the Best Practice award at last month's 2005 UK Charity Awards. "After self-certification came in two years ago, we saw a rise in sales of 10%."

These awards celebrated the achievements of individuals and organisations in all areas of charity management. Good governance is important to insurers, as it reduces exposure and the Charity of the Year accolade, which went to social inclusion charity P3, was sponsored by Ansvar Insurance.

One element of good governance is assessing liabilities, including the need for insurance. The Charities Bill currently making its way through parliament will give trustees a general power to buy trustee indemnity insurance at their charity's expense. This will be on the proviso that the trustees "are satisfied it is in the charity's - as distinct from their own - interests to do so", explains a spokesman for the Home Office, which is steering the Bill through parliament.

Statutory self-certification

It is not entirely clear whether the provisions amount to a further loosening up of the current position, or whether it is simply putting self-certification into statutory form. According to Mr Barber, the Bill proposes a statutory permission for trustees to use the fund to buy insurance for the personal element of the cover. "It has never properly registered with people that the insurance cover is 10% personal benefit - which the Commission refers to as trustee indemnity - and 90% indemnity of the fund," he remarks.

As to whether the Bill will lead to increased sales, Julian Brown, professional indemnity underwriter for Markel International, says a more flexible regime "will inevitably lead to more demand for trustee insurance, as the administrative burden is removed. It also means individuals with relevant qualifications will be more willing to become trustees, with the comfort of knowing they are insured".

Claims under trustee indemnity polices are infrequent, although Mr Brown insists they do happen, such as claims by consumers who have been given legal advice about mortgages by a charity. "The policy also has a fidelity angle, and reimburses the fund if someone runs off with the money," he says.

Another relevant point, observes Mr Barber, is that charities are becoming more commercial by generating more of their income from fees. The government also uses charities to do more work, both of which increase risk.

On the other hand, a spokeswoman for the Charity Commission implies that indemnity insurance would be less important once the Commission has the power to relieve trustees from personal liability.

"At present, only the courts can do it but one of the Bill's proposals is to give us the power to grant relief, although we do still expect trustees to take appropriate advice," explains James Evans, solicitor with the charities team at Foot Anstey. "If trustees acted honestly and reasonably, and should fairly be excused for a breach of trust, the Charity Commission will be able to relieve them from liability - but not if they were wilfully negligent or reckless."

In terms of cover take-up, it is difficult to get a true picture. Simon Hickman, marketing director of Access Underwriting, comments: "Some trustees delayed buying it until it was made easier by the Charity Commission." He estimates take-up to be around 25%, but adds: "Trustees do not think they are at risk and there is a feeling that if the charity is a company limited by guarantee, then there is less risk."

Ann Phillips, a charities partner at law firm Stone King, notes some limitations, however: "It only affects contractual liabilities and does not protect against the consequences of a breach of trust."

This is echoed by Mr Evans: "A lot of unincorporated charities have turned themselves into companies limited by guarantee but people need to know what liabilities they are saving themselves from. Trustees still have to make sure they act within the governing document, and can still be personally liable if they allow the charity to enter into something they should not have done. It is only reducing the risk, not extinguishing it."

Obligations on trustees are also becoming more onerous. The new Statement of Recommended Practice, Accounting and Reporting by Charities, published this year, introduces 'impact reporting' whereby trustees must describe the impact of what they have done, and how they are spending the charity's money. As Mr Evans notes: "There are greater expectations from trustees year on year."