Executor's Insurance

  • April 10, 2014
  • Jordan M. Atin

At a seminar last week, a group of lay people were asked if anyone had acted as an executor before. About ¾ of the group proudly raised their hands. The next question- would any of you do it again?- resulted in many fewer raised hands.

For those who counsel executors, the reaction is not surprising. The workload, the endless calls from beneficiaries about their inheritance, the stress of deadlines and working with professionals, the necessity of keeping meticulous accounting and even the rafts and rafts of paper and documents that must be kept, make the thankless job time-consuming and frustrating. More correctly, the job is worse than thankless. How often do we see disgruntled beneficiaries criticising the job the executor has done and seeking to reduce the compensation that the executor has sought?

But, it can get much, much worse. When one takes on the job of executor, she is putting her own personal assets on the line. As Justice Maurice Cullity stated in his seminal article (Personal Liability of Trustees and Rights of Indemnification): “The risk of personal liability is an incident of the office of trustee.” 2

Personal liability can result in contract and tort.

Liability in Contract

An executor who contracts in relation to the estate is personally liable to the contractor.

The starting point is, of course, that a trustee, in that capacity, deals with third parties as a principal. Ignoring at this stage situations in which relationships of trust and agency coincide, the traditional rule has been that a trustee normally incurs personal liability to the full extent when contracting with a third party. The trustee may limit that personal liability to the value of the trust assets, or limit it to the extent that a right of indemnity exists against such assets, but that depends essentially on the terms of the contract with the third party…3

Where an executor hires a solicitor,4 broker, realtor or undertaker, the executor is the primary debtor, but the creditor who provided the services may be subrogated to the executor's right of indemnity against the estate if it was an expense properly incurred.5 Indemnification from the estate is available only if the contract is a “proper one in the circumstances”.6

Liability in Tort

Negligence by the executor can render the executor personally liable to the beneficiaries and creditors of the estate. Some examples where executors could be found negligent are:

  1. improperly interpreting, or not properly following the terms of, the Will;7
  2. paying the wrong amounts to the wrong parties;8
  3. improper disbursements for funeral and creditor claims;9
  4. improperly preferring one creditor over another;10
  5. missing an heir11;
  6. not prudently investing the estate assets12;
  7. breach of the even hand rule;13
  8. self-dealing14;
  9. delay in payment to beneficiaries;15
  10. not properly protecting estate assets, for example not changing locks or purchasing fire insurance or keeping a property in repair16;
  11. not selling assets in a timely way;17
  12. improvident sales of assets;18
  13. failing to invest excess cash;19
  14. unreasonably prosecuting or defending litigation on behalf of the Estate20;
  15. not prosecuting a claim against a 3rd party in time21;
  16. improper delegation of duties;22
  17. improvident settlements; and
  18. failure to keep accurate records of the administration.

Under Ontario’s Estates Act and in many other jurisdictions, a Judge may order damages against the executor for misconduct, neglect or default which results in loss to the estate.

There are many examples of cases where courts have found that executor’s have breached their duty as fiduciaries. In some cases, the executor’s compensation is reduced and no additional damages are ordered against the executor.

However, in the recent Ontario decision of Justice George Strathy in Zimmerman v. McMichael Estate, (2010 CarswellOnt 3481) the trustee was found to have been negligent in the administration of the trust. In addition to being deprived of compensation, the court ordered that he reimburse the estate personally. The trustee was also required to pay the beneficiaries over $270,000 in costs from his own pocket.

Whether or not the allegation of negligence against an executor is ultimately upheld by a court, the executor is still put to the expense of defending such a claim. In many cases, the costs awarded to a successful executor will not completely indemnify him or her and thus, he or she is personally liable to some extent, for his or her own defence costs.

LawPro Coverage for Executor/Lawyers

As lawyers, we have professional E&O insurance which may protect us when we act as an executor.

LawPro’s standard E&O policy insures lawyers in respect of “Professional Services”. Those are defined as follows in the 2012 Policy:

(z) PROFESSIONAL SERVICES means the practice of the Law of Canada, its provinces and territories, and specifically, those services performed, or which ought to have been performed, by or on behalf of an INSURED in such INSURED’S capacity as a LAWYER or member of the law society of a RECIPROCATING JURISDICTION, subject to Part II Special Provision A; and shall include, without restricting the generality of the foregoing, those services for which the INSURED is responsible as a LAWYER arising out of such INSURED’S activity as a trustee, administrator, executor, arbitrator, mediator, patent or trademark agent.

The manner in which your appointment as Estate Trustee came about is particularly relevant to the coverage issue. LawPro’s current view is that if a lawyer was appointed as Estate Trustee by a client of the lawyer’s firm, the lawyer’s services as Estate Trustee in the administration of the estate falls under the definition of “Professional Services”. In those circumstances, the appointment arose from the practice of law. If, on the other hand, the lawyer was appointed as an Estate Trustee by a family member or friend who is not a client of the firm, LawPro takes the general view that your executorship is not covered by the definition of Professional Services.

A lawyer who is appointed as Estate Trustee by a client is still covered even if he or she retains separate legal counsel to act on his or her behalf and does not perform the legal work relating to the estate himself or herself.23

There is some coverage for retired lawyers who act as an Estate Trustee in circumstances where that lawyer would otherwise have been covered (e.g. where the appointment arose from her practice of law). This “run-off” coverage continues, but unless excess coverage is purchased, is limited to $250,000, in the aggregate. In any case, LawPro recommends that a retired lawyer should advise LawPro of any estates for which she is administering as Estate Trustee.

Lawyers personally pay the premiums for that policy and, if a claim is made on it, the lawyer is responsible to pay the increase in the premiums and the deductible.

Executor's Insurance

A relatively new product –Executor’s Insurance24- has been unveiled to the profession and the public.

Executor’s Insurance, like title insurance, two decades ago, may become a routinely recommended product to executors. The policy provides coverage to executors for Damages arising out of a Claim as a result of the executor’s error, omission or negligent act in the performance of, or failure to perform, an executor’s duties. These damages include:

  1. defence costs;
  2. damages to correct the error or to make the estate whole;
  3. costs awarded against the Insured; and
  4. reasonable expenses.

Policy Points of Interest

ERAssure’s policy contains a few notable points:

  1. Coverage applies even before a formal claim is commenced;
  2. Damages include compensatory damages, but do not cover a reduction of executor’s compensation;
  3. The policy does not cover income or probate tax liability, but does cover certain defence costs in certain circumstances; and
  4. Coverage requires probate of the Will, but still applies to multiple wills when the executors and beneficiaries are the same.

The benefits seem clear- a client won’t have to put his or her own house on the line when granted the “honour” of acting as executor. The executor would also have some protection for legal costs incurred in defending a negligence claim by the beneficiaries which might not be covered by the Estate.

As well, assuming that the estate itself can look to the policy to be made whole from the executor’s negligence without having to chase the executor for damages would be appealing to the beneficiaries. In the Zimmerman case, the trustee ultimately died before repaying the estate. In the Globe & Mail, one of the beneficiaries was quoted as saying “I’m not sure that [we] will recoup anything, but we’ll see.”

Policy Premiums

Two questions immediately jump to mind: How much does it cost? Who is going to be responsible to pay the premiums?

The cost of the policy depends on the size of the estate. For an estate of $1,000,000 the cost for a three year policy is approximately $2,000. Coverage extends to estates of any size, but certain limits of insurance may vary depending on the circumstances of the estate.

The issue of whether the premiums can be paid from the estate or are the responsibility of the executor personally is not clear. As an executor is generally entitled to indemnification for costs incurred in his duties, a strong argument can be made that a policy of insurance is an indemnification of his possible costs. In addition, there is likely a benefit to the beneficiaries. For example, the executor incurs expenses in successfully defending a claim for negligence brought by one of the beneficiaries. Without Executor’s Insurance, the executor would look to the estate to pay those expenses. If there is a policy of Executor’s Insurance in place, the insurance will cover those expenses.

To date there has not been a judicial decision regarding this issue.

Benefits/Risks to Lawyers

Executor’s Insurance can provide protection to Lawyers. Lawyers are increasingly being sued by their executor/clients in cases where the executor is sued by the beneficiary. Common situations are where the executor claims that he was not properly advised by the lawyer, for example, not being advised to keep proper records or the requirements of the Trustee Act for prudent investing. These claims arise once the beneficiaries commence a claim against the executor.

In situations where there is Executor’s Insurance, the executor would not have to make a claim against the lawyer. Instead, any damages and costs the executor incurs as a result of the claim are covered and there is no need to bring the lawyer in as a 3rd party.

ERAssure’s policy waives the subrogation rights against the lawyer in every case.

For lawyers who are acting as executors, Executor’s Insurance also provides an alternative to putting one’s own E&O insurance on the line. If a claim is made against the lawyer for negligence in respect of his administration of the estate, the lawyer can rely on the Executor’s Insurance policy, which has no increased premiums or trailer fees.

However, the very existence of Executor’s Insurance gives rise to risks to lawyers as well.

Advising Clients about Executor’s Insurance

Take the following example: You are retained by an executor. You do not mention the existence of Executor’s Insurance. He is later sued by a beneficiary for not discharging his executor’s duties and is found personally liable for damages. His lawyer writes to you asking why you did not advise him that he could have purchased Executor’s Insurance.

As a matter of risk management, whether one is a proponent of Executor’s Insurance or not, a simple statement that such insurance is available will avoid this risk.

“I confirm that I advised you that:

? executors may incur personal liability for improperly carrying out their duties. Your personal assets may be at risk if you are found liable;

? there may be insurance coverage available for executors which could protect the executor’s from incurring damages and costs of claims of negligence.

If you are interested in finding out more about Executor’s Insurance, please let me know.”

If the client does not wish to pursue Executor’s Insurance you may wish to confirm that in your reporting letter as well.

Advising the Testator

Similarly, a testator who wishes to protect her executor from liability should be advised of the availability of Executor’s Insurance. If the testator desires that the executor purchase insurance, a clause authorizes its purchase and premium payment from the estate may be indicated.

I authorize my Trustee(s) to purchase, at the expense of my estate, such errors and omission insurance as my Trustee(s) determine(s) in his/her/their sole discretion is sufficient to protect my Trustee(s) against claims and losses arising from errors or omissions in the administration of the estate. The cost of such insurance shall not be deducted from the compensation to which my Trustee(s) is/are otherwise entitled for so acting.

Closing

While it is clear that Executor’s Insurance will not cover all potential liability, it does provide similar coverage to LawPro in respect of executor’s liability and perhaps even broader circumstances.

Whether or not, one is going to use Executor Insurance for oneself, it is likely something that should be raised with every executor-client to not only protect the client, but also to protect the lawyer.

1 The assistance of Noah Weisberg, Hull & Hull, LLP is gratefully acknowledged.
2 “Personal Liability of Trustees and Rights of Indemnification,” [1996] 16 E.T.J. 115
3 “Personal Liability of Trustees and Rights of Indemnification,” supra at 127
4 See as an example: McComb Dockrill v. Kikas, 2007 CarswellOnt 171 (Ont. S.C.J.)
5 Weldon v. Canadian Surety Co. (1966), 64 D.L.R. (2d) 735 (N.S. Co.Ct.)
6 Halsbury's Laws of England, 4[th] Edition, Vol. 17(2), at para. 469
7 Patton, Re, [1931] 3 D.L.R. 544 (Ont. H.C.); Smullen Estate, Re (1995), 6 E.T.R. (2d) 299 (Ont. Gen. Div.); additional reasons at (June 26, 1995), Doc. A110/94 (Ont. Gen. Div.); McRae v. McRae Estate (1994), 2 E.T.R. (2d) 225 (B.C. C.A.); leave to appeal refused(1994), 4 E.T.R. (2d) 14 (note) (S.C.C.).
8 See Re Diplock Estate; Diplock v. Wintle, [1948] 1Ch. 465 in which it was held that a claim could succeed against a beneficiary wrongly paid funds from an estate but only for the shortfall after suing the executors.
9 Stag v. Punter (1744), 3 Atk. 119; Hancock v. Podmore(1830), 1 Barn. & Adol. 260. Loewen Funeral Chapel Ltd. v. Yanz (1999), 27 E.T.R. (2d) 269 (Man. Q.B.); Midgley v. Midgley, [1893] 3 Ch. 282 (Eng. C.A.)
10 Zajachowski v. Worebetz (1937), [1938] 2 W.W.R. 575 (Sask. C.A.).
11 See Re Gareau Estate, 1995 CarswellOnt 821, 9 E.T.R. (2d) 25 (Ont. C.J. (Gen. Div.)
12 Tebbs v. Carpenter (1816), 1 Madd. 290; Fales v. Canada Permanent Trust Company (1977), 2 S.C.R. 302
13 Smith, Re (1971), 18 D.L.R. (3d) 405(Ont. C.A.).
14 Daly v. Brown (1907), 39 S.C.R. 122 (S.C.C.); MacCulloch Estate (Trustee of) v. MacCulloch (1986), 22 E.T.R. 34 (N.S. C.A.)
15 Seaman v. Dee (1672), 2 Lev. 40
16 Davies v. Nelson (1927), 61 O.L.R. 457 (Ont. C.A.); Bentley v. Canada Trust Co. (1992), 48 E.T.R. 111 (B.C. S.C.)
17 Kemp v. Kemp (1996), 12 E.T.R. (2d) 290(Ont. Gen. Div.); Zurosky Estate, Re, [1992] O.J. No. 1294 (Ont. Gen. Div.)
18 Redmond v. Mitchell Estate (1995), 9 E.T.R. (2d) 203 (Alta. Surr. Ct.); Bronson v. Hewitt, 2010 BCSC 169, 58 E.T.R. (3d) 14;
19 Litton v. Litton (1719), 1 P. Wms. 543; Morris v. Dillingham, 2 Ves. Jun. 170; MacIntyre Estate, Re (1989), 92 N.S.R. (2d) 110 (N.S. Prob. Ct.).
20 Laird v. Lyne Estate, [2004] B.C.J. No. 45, 5 E.T.R. (3d) 132, 2004 CarswellBC 47, 2004 BCSC 39 (S.C. [In Chambers])
21 Hayward v. Kinsey (1701), 12 Mod. 568; Powell v. Evans (1801), 5 Ves. 838; Stiles v. Guy (1849), 1 M. & G. 422.
22 Wagner v. Van Cleeff (1991), 5 O.R. (3d) 477(Ont. Div. Ct.); reversing (1989), 70 O.R. (2d) 641 (Ont. Surr. Ct.); additional reasons at (February 6, 1990), Doc. Ottawa-Carleton 6065/88 (Ont. Surr. Ct.)
23 These statements represent LawPro’s current position in these general circumstances. Each insured should satisfy himself or herself as to coverage in specific circumstances.
24 The only current provider is ERAssure.

Jordan M. Atin, J.D., C.S., TEP, can be reached at (416) 369-0335 or jatin@hullandhull.com.