Persons or institutions having the legal responsibility for managing the property or business of another following the owner's death have special insurance needs. Persons in such positions are usually held personally liable for damages sustained by third parties during the course of the administration of such holdings to the same extent as if the property were their own. Such responsibility can formally come about in three ways. A person can be: (1) designated executor of an estate in a decedent's will; (2) appointed by court order to the post of administrator of an estate; or (3) be chosen to act as an estate's trustee. Informally, a person assumes a fiduciary role simply by stepping in to manage the property or business of a deceased, with or without being officially named. For instance, the general manager of a construction firm may take over the operation of the company until the official legal representative is put in control. That person has the same obligation to third parties for injuries or damages as persons whose roles have been formalized.

A person, partnership, or other organization acting in any of these capacities is a fiduciary, defined in Black's Law Dictionary as "a person [or entity] holding the character of a trustee...in respect to the trust and confidence involved in it and the scrupulous good faith and candor which it requires..."

According to the Restatement of the Law on Trusts (Third), the trustee has a duty to invest and manage trust funds as a prudent investor would, exercising reasonable care, skill, and caution. Other duties include diversifying investments, conforming to fiduciary duties of loyalty and impartiality, prudently selecting supervising agents, and incurring only reasonable costs.

A fiduciary is not liable for losses or depreciation in the value of the trust or for failure to make a profit not resulting from a breach of trust. The Uniform Probate Code, though, states that a fiduciary is liable for damages resulting from a breach of fiduciary duty if the exercise of fiduciary power is improper.

If the fiduciary is found liable for damages due to personal fault, such damages must come from personal funds and not out of the estate. It does not matter whether damages arise from acts or omissions that are negligent or intentional (the latter being uninsurable under the "against public policy" rationale). If the fiduciary is found not liable, but has incurred expenses in defense, he can look to the estate for indemnity. However, this takes time and expense that can be avoided by seeing that insurance protection is in effect or procured at the time of undertaking a fiduciary role.

Fiduciary Coverage

From the public liability coverage standpoint, the standard CGL form, CG 00 01, declares that a trust can be a named insured, and that the trustees are also insureds with respect to their duties as trustees. Moreover, a fiduciary involved in a one-shot type of arrangement is automatically covered upon death of a named insured through the "assignment" clause in general liability forms. The assignment clause might apply, for example, in the case of death of a relative or close associate, or to a fiduciary such as a bank or law firm.

The commercial general liability (CGL) policy provides that the following people are insureds: "Any person or organization having proper temporary custody of your property if you die, but only: (1) with respect to liability arising out of the maintenance or use of that property; and (2) until your legal representative has been appointed." Also included as insureds are: "Your legal representatives if you die, but only with respect to duties as such. That representative will have all your rights and duties under this coverage part.

The fiduciary also has no guarantee that the insurance he "inherits" is satisfactory. The fiduciary or insurance advisor should determine whether proper coverage and sufficient limits are provided to protect the interests of the fiduciary. Thus, for a business risk, premises and operations insurance is important, but so are other insurable exposures, such as construction operations that might have to continue, or products and completed operations exposures that will continue. Another insurable exposure that should be considered is libel, slander, or invasion of privacy. Of course, in a case where the fiduciary finds the original coverages to be insufficient for his needs (for example, the deceased owned a construction company, but had opted for no completed operations coverage), additional coverage may be added to the deceased's policy.

If there is no general liability coverage in force at the time of appointment to a fiduciary role, a policy can be purchased, usually at the expense of the estate. The premium will, of course, depend upon the coverage and limits desired, but the exposures insured against are in no way different from those that would have been in existence had the insured not died.

Professional Fiduciary Interests

A fiduciary who occupies a position of trust regularly or as a matter of commerce-such as a bank, trust company, or law firm-generally carries its own insurance. So, as opposed to the nonprofessional fiduciary discussed in the preceding paragraphs, it does not necessarily depend upon the estate's insurance for protection. When an entity that operates in a professional fiduciary capacity has its own general liability policy, protection for liability arising out of fiduciary activities can be arranged-without additional charge-by use of the Fiduciaries-Fiduciary Interest endorsement CG 24 11 12 04. Endorsement CG 22 38 07 98 is added if a bank or other financial institution wishes to exclude coverage under its CGL form relating to property for which it is acting as a fiduciary.

The fiduciary interest endorsement (CG 24 11) extends coverage to liability arising out of the ownership, maintenance, or use (including all related operations) of property in any trust, guardianship, or estate for which the named insured is acting in a fiduciary or representative capacity. The insurance applies to bodily injury, property damage, personal and advertising injury, and medical payments.

Three classes of additional interests are added to the who is an insured clause of the CGL form as insureds by attachment of the endorsement: (a) any co-fiduciary or co-representative of the named insured with respect to acts or omissions as such (for example, a situation in which both a bank and a law firm are named as representatives regarding various aspects of an estate); (b) any person or organization legally responsible with respect to the named insured's acts or omissions in a fiduciary capacity (such as an outside counsel retained to handle fiduciary matters for a bank); and (c) any beneficiary, devisee, legatee, ward, heir, or distributee of the trust, guardianship, or estate, and any co-owner or life tenant of the property, with respect to acts or omissions as such.

However, those entities or persons added as insureds by the endorsement are not given the full extent of coverage that applies to the named insured. There is no coverage for the three categories of insureds added by CG 24 11: (1) if the insured is an executive officer or employee who causes bodily injuries to another executive officer or other employee of the same employer (fellow-employee exclusion); or, (2) for liability related to property or operations that the named insured has designated by written notice to the insurer as not requiring insurance. This notice must be given within 30 days of the named insured's knowledge of the start of a fiduciary relationship to the property or operations.

Also excluded is injury or damage arising out of an offense occurring prior to the time the named insured first had the right or duty to act in a fiduciary capacity in regard to the trust, guardianship, or estate.

The endorsement amends certain provisions to reflect the fiduciary relationship. The definition of "your product" and the alienated premises and property damage to work performed exclusions are revised to assure that coverage applies not only to the insured's premises and operations, but also to those the insured assumes in a fiduciary capacity. Further, policy conditions are amended so that the insurer's right of subrogation does not apply to the insured's right of exoneration or reimbursement from the property.

The endorsement is specific in stating that property held in trust by the named insured as fiduciary shall be considered property owned by the named insured. Trust property equates with "owned" property, and the insured cannot obtain liability insurance for damage to owned property. However, the insured fiduciary cannot avoid responsibility for the property in its care; it is imperative that adequate property insurance be arranged and maintained.

By the same token, the fiduciary's commercial general liability insurance will offer no protection to the insured for mismanagement of the trust property. The endorsement covers only bodily injury, property damage liability, and personal and advertising injury, none of which can be expanded to cover an exposure such as diminution in value because of mishandling or mismanagement. This is an "errors and omissions" type of exposure that can usually be handled through specialty markets.

Banks or other financial institutions that regularly act as fiduciaries will usually have endorsement CG 24 05 12 04, Financial Institutions-Fiduciary Interest Only, attached to their CGL form. The endorsement is used for premium computation. It requires that the named insured report in writing to the insurer every 60 days information about properties in which the insured has "acquired, relinquished or terminated a fiduciary or representative interest (including the date of such action)." The insured must also notify the insurer immediately when it assumes, as a fiduciary, active management or control of a commercial enterprise. The insured's failure to notify the insurer does not invalidate insurance coverage.

Banks acting regularly in a fiduciary capacity also have an endorsement attached to their Business Auto Policy (BAP)-Fiduciary Liability of Banks, CA 99 13 07 97. The endorsement makes three changes to the auto policy. First, it adds a liability exclusion stating that the insurance does not apply to the fiduciary's liability arising from bodily injury or property damage that occurred before the fiduciary had the duty or right to act as a fiduciary. The second provision of this endorsement adds employees as insureds with respect to "any covered auto not owned by you, by such employee or by members of his or her household but only while the covered auto is used in your business." The policy conditions are also changed so that the insurer's right of subrogation does not apply to the insured's right of exoneration or reimbursement from the property cared for in a fiduciary capacity.

Court Decisions

The traditional rule of law is that an estate is not liable for a tort committed by an executor, administrator, or trustee (82 ALR3d 892). The purpose of the traditional rule is to protect estate or trust beneficiaries against improvident fiduciaries by imposing personal liability on the fiduciary. This traditional rule has undergone much revision, particularly in cases where the fiduciary is obligated to carry on a business enterprise or if the estate in some way benefited from the tort. The modern rule is that a business enterprise generally bears the burden of losses caused by its operations. Some states have modified the traditional rule to allow direct actions by injured third parties against trust assets when the trustee is sued in his representative capacity, as long as the tort is incidental to the operation of the business.

Fiduciaries are often entitled to protection by the trust or estate against personal liability, or to reimbursement out of trust funds, as long as the fiduciary is without personal fault or personal negligence (82 ALR3d 892). However, the fiduciary may still be personally liable under certain circumstances, such as when the doctrine of respondeat superior is applied due to an injury caused by an agent or employee of the enterprise. The doctrine of respondeat superior, "let the master answer," means that the master is liable in certain cases for the wrongful acts of his servant; that is, the employer is responsible for his or her employee's acts.

A case illustrating both the application of the doctrine of respondeat superior against a trustee and the trustee's right to indemnification from the trust is Cook v. Holland, 575 S.W.2d 468 (Ky. Ct. App. 1978). The case involved a two-car collision. The passengers in one car sued the driver of the other car who was employed as farm manager for the estate of the deceased farm owner. The manager had worked as farm manager before the owner's death and continued his employment under the administration of the estate's executor and trustee. The Kentucky appeals court followed the traditional rule insofar as it imposed personal liability on the executor under the doctrine of respondeat superior and did not limit his liability to the amount of indemnification he might receive from the estate. The court reasoned that the executor could protect himself by buying liability insurance with premiums paid for with estate funds. However, the court also allowed indemnification from estate funds and assets because the liability was vicarious and the trustee had not violated any fiduciary duty.

Another case involving personal liability of the executor of an estate is Evans v. Johnson, 347 N.W.2d 198 (Mich. App. 1984). The executor took over operation of a bar when the bar's owner died. A bar patron was injured in a slip and fall case in which she alleged improper maintenance of a step near the women's bathroom. Contrary to the rule of law expressed by the trial court, the Michigan appellate court determined that an executor can be held personally liable when in control and possession of estate premises if he fails to exercise reasonable care to avoid injury to others. The case was sent back to the jury to determine whether the executor had been operating the bar long enough to have become aware of the problem with the step so that the question of his liability could be resolved.

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