ESTATE LITIGATION AND INSURANCE COVERAGE
/ESTATE LITIGATION AND INSURANCE COVERAGE
By David A. Gauntlett*
While probate and civil litigation address legal issues in separate spheres, those distinct lawsuits often address interwoven factual disputes. Where procuring Professional Liability Trustee insurance is, more times than not, a viable solution, proactive acquisition of insurance coverage trustees placed in a fiduciary duty role. This, access to insurance coverage is more broadly available than many policyholders recognize. Professional fiduciaries’ ability to secure Professional Liability Trustee coverage is more diffuse.[1]
Where a trustee is a family member, with no fiduciary experience, estate disputes can spiral into lawsuits as litigation expense is often high. This blog will explore insurance coverage benefits available to trustees where a fiduciary is not acceptable to the beneficiaries of the estate. The cost of the Professional Liability Trustee policy is, itself, a proper expense or the estate and thus would be equally born by all beneficiaries.
INSURANCE POLICIES AVAILABLE TO TRUSTEES
A typical Trustee Professional Liability policy fiduciary encompasses the following policy provisions[2]:
I. What is covered
We will pay up to the coverage part limit for damages and claims expenses in excess of the retention for covered claims against you alleging a negligent act, error, or omission in your trustee services performed on or after the retroactive date, including but not limited to:
1. Breach of fiduciary duty or duty of loyalty, whether imposed by the trust instrument, statute, or other applicable law;
2. Breach of any duty related to trust assets, whether imposed by the trust instrument, statute, or other applicable law;
3. Breach of discretionary investment authority in violation of the trust instrument;
4. A petition for removal or suspension of the trustee, whether asserted with or without a demand for an accounting;
5. Negligent delegation; or
6. Personal and advertising injury[3],
Provided the claim is first made against you during the policy period and is reported to us in accordance with Section V.[4]
Commonly, this Trustee Professional Liability policy, also, includes exclusions for costs and damages: “(a) Fines, penalties, taxes, or sanctions against you; (b) Overhead costs, general business expenses, salaries, or wages incurred by you; …”[5] It also limits coverage for misappropriation/mishandling of funds.[6]
POTENTIALLY COVERED DISPUTES ARISING IN ESTATE LITIGATION
Estate Litigation Can Triggers Coverage
Probate court claims can encompass covered “wrongful acts” under a Trustee Professional Liability policy, but the more typical forum is a companion civil action. Civil actions may also assert tortious interference with contracts between a claimant of an estate and a financial institution. Fact allegations therein may trigger breach of fiduciary duties under a Trustee’s Professional Liability, even though the matter is not pending in probate court. Potentially covered claims include gross negligence, breach of fiduciary duty, as well as concurrent failure to preserve trust assets by acting against the interests in the estate.
For example, in, Kurvink v. Kurvink[7], a California Appeals court analyzed claims of alleged breach of fiduciary duty as resulting from gross negligence where Mr. Kuvink “fail[ed] to follow the insurance trust’s instructions…to retain counsel as to how to complete the transaction properly…and fail[ed] to take actions in mitigating the damages created.”[8] Mr. Kuvink hired accountants to prepare the estate taxes but did not employ counsel, as “he considered his trust duties to be completed after he paid the taxes.”[9] Mr. Kuvink was held to have breached his fiduciary duty and thereby held responsible for paying all costs as well as any surcharges resulting from his negligent administration of the trust.
Trustee Professional Liability policies could fill the coverage gap providing coverage for Mr. Kuvink’s breach of duty due to his negligence in acting as a trustee. As the California Supreme court, in Moeller v. Superior Court[10], explained:
“[i]n a trust relationship… the benefits belong to the beneficiaries and the burdens to the trustee. The office of trustee is thus by nature an onerous one, and the proper discharge of its duties necessitates great circumspection. Liability to beneficiaries for mismanagement of trust assets is merely one of the burdens…trustees take on.”[11]
No Coverage For “Disgorgement” Or “Fines And Sanctions”
Where exclusions in Trustee Professional Liability policies limit coverage to “damages” defined narrowly to not include “fines, penalties, and sanctions”. Any claim for “disgorgement of fees” arising in connection with an alleged breach of fiduciary duty poses, under applicable California law, a potential for reimbursement under a Trustee Professional Liability policy will not be subject to indemnity. The same is true for exclusions based on intentional conduct that fall within the scope of the specified exclusion where scienter is adjudicated against the policyholder that supports the application of the exclusion.[12]
Exclusions and Limitations To Trustee Liability Coverage
Insurers often seek to add overreaching exclusion which cannot properly limit the exercise of professional judgment which a trustee has a fiduciary duty to exercise.[13] In Ill. State Bar Ass’n Mut. Ins. Co. v. Frank M. Greenfield & Assocs. P.C.[14], an Illinois Court of Appeals determined that the “voluntary payment clause” in the IBM policy does not bar coverage to Greenfield in seeking compensatory damages after omission of a provision in a client’s will which allegedly damage the underlying plaintiffs upon the client’s death. The court reasoned that:
“absent instruction from the rules of professional conduct or the Attorney Registration and Disciplinary Commission, it is the attorney's responsibility to comply with the ethical rules as he understands them. Accordingly, we find that a provision such as the one at issue here is against public policy, since it may operate to limit an attorney's disclosure to his clients.”[15]
Other exclusions may be problematic where they curtail the policyholder’s ability to provide advice or act in accordance with the ethical duties.
INDEPENDENT COUNSEL RIGHT MAY ARISE FROM ESTATE LITIGATION
An exclusion that potentially eliminates coverage may entitle a policyholder to independent counsel at its insurer’s expense. A right to independent counsel may arise based “on the reality of the wrongs alleged.”[16] Scienter-based conflicts in estate litigation may also may also entitle trustee policyholders to independent counsel. Risks of uncovered liability must be carefully explained to beneficiaries of the estate who may be entitled to access policy benefits to make them whole. Representatives, such as legal counsel for the trustee, may have independent Errors and Omissions insurance coverage which could be implicated in estate litigation. All policies must be evaluated to determine what insurance assets are available to meet litigation expense and indemnity exposure.[17]
CONCLUSION
Securing Professional Liability Trustee insurance can enhance protection for fiduciaries where they act as trustees because they must function as fiduciaries. Review of an insure reservation of rights letter may highlight uncovered exposure and therefore died of an appropriate trial strategy to protect the economic interest of beneficiaries and lead to early resolution of disputes.
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* David A. Gauntlett is a principal of Gauntlett & Associates. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com. Gauntlett law, also, orchestrates acquisition of insurance policies for Cyber/Media, D&O/E&O, and CGL insurance coverage.
[1] VELA Insurance Services/Gemini Insurance, Professional Liability Insurance, Form No. VP 00 06 1 17, modified by Endorsement, Form No. VP 07 07 07 17; Travelers, Miscellaneous Liability Policy, Form No. LIA-3001 Ed. 01-09; CHUBB Westchester, Miscellaneous Professional Liability Policy, Form No. WC8938Q2018
[2] Hiscox Pro, Trustee’s Professional Liability Policy, Form No. WCLMPL P0005 CW (11/4)
[3] Hiscox Pro, under this coverage, includes: “4. slander, libel, defamation, or disparagement… 5. oral or written publication of material…that violates a person’s right of privacy.”
[4] Id. at 1; The Errors and Omissions coverage possessed by lawyers is limited to the rendering of legal services but does not include acting as a trustee; see, Construction Application of Business Pursuits Exclusion, 35ALR375
[5] Id. at 2-3
[6] Id. at 3, (“17. Based upon or arising out of the actual or alleged theft, misappropriation, commingling, or conversion of any funds, monies, assets, or property, including any client’s funds, monies, assets, or property, or the inability or failure to pay, collect, or safeguard funds.”)
[7] Kurvink v. Kurvink, 2021 Cal. App. Unpub. LEXIS 6571 (Sept. 10, 2012)
[8] Id. at *27
[9] Id. at *11
[10] 16 Cal. 4th 1124 (Cal. 1997)
[11] Id. at 1134
[12] See, Dominion Insurance, Fiduciary Professional Liability Insurance. Form No. FPL21105754M (Another scienter based exclusion may arise for “any Claim arising out of any criminal, dishonest, fraudulent or malicious act, error, or omission of any Assured, committed with actual, criminal, dishonest, fraudulent, or malicious purpose or intent.”)
[13] See, David A. Gauntlett, Illusory Coverage – A Continuing Thorn in the Side of Policyholders, www.gauntletlaw.com (Sept. 2021) discussing Crum & Forster Specialty Ins. Co. v DVO, Inc., 939 F. 3d 852, 857 (7th Cir. (Wis.) 2019) (Endorsement that excluded any loss “based upon or arsing out of” a breach of contract is extremely broad, rendering the professional liability coverage illusory.)
[14] 980 N.E. 2d 1120 (Ill. App. 2012)
[15] Id. at 1129
[16] Ronald E. Mallen & Jeffrey Smith, Legal Malpractice § 2921 at 335. (5th Ed.)
[17] See, David A. Gauntlett, Insurance Coverage for Intellectual Property Assets, Chapter 7, §7.02 Reservation of Rights and Policyholders Right to Independent Counsel. Wolters Kulwer (N.Y.), 2nd Edition (2021)