Should trustee's insure?

Peter Mann, Partner, Clayton Utz Wednesday, 27 February 2007

The very short answer is of course "yes"

Liability of trustees: under the Trust Deed

Trustees can be sued for:

an attempted, actual or alleged act, error or omission; a misstatement; an attempted, actual or alleged dishonest or fraudulent act; failing to exercise their powers in the best interests of all present and future beneficiaries of a trust;

 Trustees can be sued for (cont.):

investing trust funds in investments that are speculative or hazardous; failing to act impartially towards beneficiaries and between different classes of beneficiaries; and failing to take advice.

Liability of trustees: Common law

Trustees can be sued for (cont.):

a breach of trust, which is not an 'Excusable Breach of Trust' under section 85 of the Trustee Act 1925 (NSW). A breach of trust will be excusable where it appears to the Court that the trustee has acted honestly and reasonably and ought fairly be excused for the breach; an attempted, actual or alleged libel, slander or defamation either by words written or spoken;

 Trustees can be sued for (cont.):

a loss, including mislaying, damage or destruction of documents or records; a breach or alleged breach of contract in the course of executing a trust; and failing to have regard to matters listed in 14C of the Trustee Act when exercising a power of investment.

Liability of trustees: equitable duty

Where there is a breach, the trustee has an equitable duty to restore the trust to the position in which it would have been had the breach not been committed.

Permanent Trustee
Permanent Trustee Australia ("PA") was the trustee of two property trusts (Aust-Wide trusts). In 1988, PA, as trustee, subscribed approx. $65 million for units towards 1 O'Connell Street. PA subsequently subscribed a further $65 million for the same property and later paid a further $20 million towards the project. $370 million lent by a syndicate for the construction. 1994: project sold for $328 million.

Liability of director of a corporate trustee: Statute

Section 197 Corporations Act 2001 (Cth): a director may be personally liable when:

the corporation has breached the trust; the corporation has acted outside the scope of its powers as trustee (i.e. ulta vires); or a term of the trust denies, or limits, the corporation's right to be indemnified against the liability out of the trust assets.

 Section 197 was amended to its current form in 2005 due to confusion created by Hanel v O'Neill [2003] SASC 409. It was feared that the Hanel decision potentially led to the expansion of directors' personal liability, where the trust has no assets to meet the corporate trustee's liability. The amendment seeks to clarify the law and ensure no liability is incurred, regardless of whether there are sufficient trust assets to discharge the liability, where the corporate trustee's corporation has the right to be fully indemnified in relation to the liability.

Fincorp
ASIC sends letter to Fincorp's three main corporate trustees (Perpetual Trustees Australia, Sandhurst Trustees and Trust Company of Australia) to use their legal power to protect investors or face being sued. Fincorp placed into voluntary administration in March 2007 potentially owed $150 million (mostly debenture notes held by Sandhurst). ASIC: debenture holders, amongst other parties, had the "protection of the trustee" and the trustee "has a duty to exercise reasonable diligence to see that investments are sufficient to repay capital and interest owed to those debenture holders".

Insurance: Recent History

Industry generally HIH Soft and hard markets

Insurance cover available to trustees

Insurance to cover trustees

Professional Indemnity Insurance Trustee Liability Insurance Directors' and Officers' (D&O) Insurance

Use of brokers

Professional Indemnity Insurance

Cover for liability arising from the performance or carrying on of professional activities, e.g.

financial loss arising from a legal liability to a third party breach of professional duty misleading and deceptive conduct

Exclusion of superannuation trustees

Compensation and insurance requirements for AFSL holders

New requirements introduced by regulation 7.6.02AAA of the Corporations Regulations 2001 on 28 June 2007 and section 912B of the Corporations Act They make professional indemnity insurance the main way licensees are to meet their compensation arrangement obligations The obligations under section 912B and regulation 7.6.02AAA will commence on 1 January 2008 for new licensees and 1 July 2008 for existing licensees

Trustee Liability Insurance

Combines elements of Professional Indemnity Insurance and D&O Insurance Written on a "claims made and notified" basis Provides two limbs of cover:

Trustee Liability Cover Trust Reimbursement Cover

Trustee Liability Insurance cont'd

Common exclusions:

known claims and circumstances dishonest or criminal intent/improper gain

D&O Insurance
Exposure of directors to both direct and derivative liability for both criminal and civil offences Exclusion of trustees

D&O Insurance cont'd

What to consider when considering a D&O policy:

Section 199B of the Corporations Act Attendance at investigations Advancement of defence costs Fines and penalties Severability Insured v Insured/Consensual Claim Deeming clause

Importance of run-off cover for D&O policies

Relevant in respect of mergers and acquisitions Changes to company boards Run-off cover for outgoing directors for at least 7 years Automatic run-off cover under D&O policies

Limitation periods
States and Territories take different approaches to the application of breaches of trust by trustees Focusing on NSW, the limitation legislation applies to all breaches of trust Relevant sections of the Limitation Act

Sections 11, 47, 48, 50 and 55

Limitation period of 12 years

Section 54 of the Insurance Contracts Act

An insurer may not refuse to pay claims in certain circumstances Two limbs to the section Notification of claims and circumstances Amendment to the Insurance Contracts Act

Insurance Contracts Amendment Bill 2007 Fate of the Insurance Contracts Amendment Bill 2007 currently uncertain

Life policies
Life polices are protected from any debts and charges pursuant to section 204 of the Life Insurance Act 1995 (Cth). The provision secures the rights and interests of a person under a life policy effected on the person's life or the life of the person's spouse, and ensures that the assets are not available for payment of the person's debts. Section 205 provides that money which becomes payable to a person's estate under a policy effect on the person's life, is not available for payment of the person's debts, unless the person had entered into a contract that provided expressly for the money to be so applied. These provisions are subject to the Bankruptcy Act 1966 (Cth).

Life Insurance Act Sections 204 and 205

Section 204: Protection of interest of insured (1) The rights and interests of a person under: (a) a life policy effected on his or her life; or (b) a life policy effected on the life of the persons spouse; are not liable to be applied or made available by any judgment, order or process of a court in discharge of a debt owed by the person. (2) Section 204(1) applies regardless of when the policy was issued and in the case of a life policy effected on a persons life, whether or not the policy is owned by the person. (3) Section 204 has effect subject to the Bankruptcy Act 1966.

 Section 205: Protection of policy money on persons death (1) If, on the death of a person, money becomes payable to the persons estate under a policy effected on the persons life, the money is not liable to be applied or made available: (i) under any judgment, order or process of a court; or (ii) in any other manner whatsoever; in payment of the persons debts; unless the money is expressly provided for in contract for the money to be so applied, or where the person had charged the money with the payment of the debt, or the person gave an express direction, in his or her will or other testamentary document signed by the person, that the money be so applied.

Section 205 continued... An express direction is not constituted by (i) a mere direction that debts be paid; (ii) a charge of debts on the whole or a part of the persons estate; (iii) the creation of a trust for the payment of debts. (2) Section 205 has effect regardless of when a policy was issued. (3) Section 205 has effect subject to the Bankruptcy Act 1966.