Insuring a Business Trust Structure under Management Liability Insurance

Introduction

Insuring business structures that use a trust requires an understanding of how trusts operate and their nuances. This article explores the issues associated with business trust structures and Management Liability (ML) insurance.

Management Liability Insurance – an overview.

Berkley Insurance Australia’s (BIA) ML insurance can help protect the assets of directors and officers, as well as the company itself (including in its capacity as trustee), from the financial consequences of claims for wrongful acts such as mismanagement, breach of fiduciary duty or misrepresentation.

ML insurance typically includes Directors & Officers (D&O), Employment Practices Liability (EPL), Statutory Liability, Tax Audit and Crime covers. These covers assist the company and its directors and officers in managing the financial risks arising from liability to pay compensation for claims relating to alleged mismanagement, employee theft, or employment disputes.

Business Trusts

Businesses utilise trust structures for a range of purposes that may relate to protection of assets, liability management and income distribution flexibility.

In a trust arrangement, there are some fundamental concepts that apply as follows:

• The trust is a legal arrangement created and governed by a trust deed.
• The trust deed appoints a trustee to own and manage assets and distribute income for the benefit of the beneficiaries named or described in the trust deed.
• The trustee has legal ownership of the property that is the subject of the trust (in the case of a business trust this would include the physical assets required to run the business, licenses and permits required to operate the business, opening and operating business bank accounts).
• The trustee can only deal with the assets in accordance with the terms of the trust deed and consistent with the duties of the trustee to the beneficiaries. The trustee must always act in good faith in relation to the beneficiaries, meet statutory and regulatory obligations relevant to the trust business (e.g. income tax, GST, PAYG and employment requirements) and keep accurate records.
• The trustee may be either individual(s) or corporate (that is, a company registered under the Corporations Act).
• The trust itself is not a separate legal entity, it is the trustee of the trust that is the legal entity and the entity that can sue or be sued in relation to trust activities.

Underwriting considerations

If you are considering ML insurance for a client that utilises a business trust structure, it is important to pause and understand the type of structure being utilised by your client.

For a business trust structure to be considered for ML insurance by BIA, the following guidelines apply:

• The trustee must be the insured.
• The trustee of the trust must be a corporate trustee with a valid nine digit Australian Company Number (ACN).
• The trustee company’s sole/dominant purpose must be limited to its role as the trustee of the business trust that is the subject of the insurance application (this requirement is designed to reflect alignment between the directors and officers of the trustee company, the operation of the trust and the named beneficiaries such as in a family run business).
• The activities/services undertaken by the business trust must be within BIA’s risk appetite.

If a risk is acceptable, consistent with the guidelines stated above, policies will only be issued with the following naming conventions:

Examples of acceptable naming conventions for trustee insureds
XYZ Pty Limited ACN  123 456 789 As Trustee For Fletcher Trading Trust t/as Cools Cats Consulting
XYZ Pty Limited ACN  123 456 789 As Trustee For Fletcher Trading Trust

Examples of unsuitable naming conventions for trustee insureds
Robert Hope Unit Trust
Smith & Sons Family Trust t/as Smith & Sons Electricians

Need further assistance

If you require additional clarification regarding ML applications for business trusts, please contact your local BIA underwriter who will be happy to assist you.

Important Notice

Berkley Insurance Company (limited company incorporated in Delaware, USA) ABN 53 126 559 706 t/as Berkley Insurance Australia is an APRA authorised general insurer. Information provided is general only, intended for brokers and has been prepared without taking into account any person’s particular objectives, financial situation or needs. It is not intended to be comprehensive or constitute legal advice. You should always obtain legal or other professional advice appropriate to your own circumstances before acting or relying on any of the information. Insurance cover is subject to terms, conditions, limits, and exclusions. When making a decision to buy or continue to hold a product, you should review the relevant policy wording.