‘Small
is beautiful’ may be the new mantra, but charities attempting
to manage on limited resources may find smallness creates
a host of problems – such as ensuring that they are
adequately covered.
The Charity Commission recently noted the need for trustees
to secure adequate third party insurance, after its investigation
into a Nottinghamshire-based charity. It reported that the
chairman had failed to insure against third party liability,
forcing it to draw £537,000 from its own funds to settle
a personal injury claim.
The charity, Al Jamia Al Islamia, was set up to provide lodging
and tuition for students of the Koran. The Commission found
that it had borrowed £650,000 over a seven year period
from members of the Muslim community, an income that it failed
to properly account for. It had also allowed its building
in Flintham, near Nottingham, used as an educational facility
and student accommodation, to become run down.
Following a serious accident at the property that resulted
in a personal injury claim, the chairman decided to sell the
building and move to smaller premises in Manchester, for which
he paid a deposit of £10,000 plus £44,000 for
refurbishment. However, this money was lost when the High
Court blocked the sale of assets, pending the outcome of the
court action.
The Commission opened its inquiry into Al Jamia Al Islam in
June 2001, to investigate allegations that the chairman had
dominated decision making to the exclusion of the charity’s
other trustees, and committed it to transactions against its
best interests. It was also concerned by the charity’s
financial position and its administration.
Shortly after the investigation got underway, the Commission
froze the charity’s main bank accounts and subsequently
suspended the chairman, who died before the inquiry was completed.
Much of the investigation work was completed by late 2001,
but the ongoing personal injury claim and the possibility
of further regulatory action meant that the Commission did
not close its books until May 2005.
However, the Commission did not publish its findings until
this February (2008), after the remaining trustees resolved
legal issues relating to the charity’s property and
affecting its future.
The investigation found that neither the chairman nor the
trustees had ever taken any professional advice, or had the
Manchester property valued, before spending funds. The Commission
only unfroze the charity’s bank accounts once it was
satisfied that the trustees were capable of discharging their
duties.
A new chairman and new trustees have been appointed now that
the investigation is over, although the property at Flintham
is still held by the Official Custodian for Charities and
cannot be sold without its consent.
How much is enough?
The Al Jamia Al Islamia case serves as a reminder to trustees
that they must be active in protecting their charity’s
assets and also check it is adequately insured against accidents
and other claims. This prompts the question of how much
insurance is regarded as ‘adequate’ for a small
charity.
The case raises other issues, says Zurich’s head of
charities and the voluntary sector, Paul Emery. Was the
absence of appropriate insurance due to a lack of understanding,
a deliberate decision to chance going without cover, or
was it due to a flaw in administration?
It certainly exposes poor governance at the trustee level,
which could suggest there is still only a limited awareness
of risk management on the boards of many charities. Zurich
responded to the Commission’s findings by alerting
it to research revealing that many charities lack the necessary
insurance expertise.
“If there is a lack of understanding at trustee level,
the charity really needs to raise the level of skills represented
on the board,” says Emery. “It also has to recognise
that certain things, such as revenue streams, aren’t
insurable.
“It’s not necessary for trustees to actually
become insurance experts, but if there were a greater level
of governance applied to risk management they would be able
to ask the right questions. This would help the realisation
that some areas should be insured, while others can be covered
by other means.”
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There is also a consortium of charity risk managers among
the membership of the Association of Insurance and Risk
Managers (AIRMIC) who can help improve this understanding,
he adds.
Zurich has recently updated its insurance covers for charities
under the title ‘Insight’, which, it says, aims
to accommodate a wide variety of insurance and risk management
requirements. These range from a simple all-in-one package
for smaller organisations – generally suitable for
the 91 per cent of charities in England and Wales with annual
income of £250,000 and below – to the greater
degree if flexibility and sophistication required by larger
organisations.
“Our proposition is on the basis that new covers are
needed for charities and this needs to be coupled with making
both insurance and risk management understandable,”
says Emery. “There is a general lack of awareness
that was uncovered by our research.”
The launch has been accompanied by ‘plain English’
guides to insurance and risk management that the group believes
makes the process “as simple as possible”.
Sticking to the basics
Ansvar is another insurer to have recently launched a new
product. Starter Connect is, as the title suggests, aimed
at smaller and start-up charities.
The market has seen the ‘package’ approach recently
dominate, but some charities may feel that they don’t
need all of the covers provided by a package policy, says
Mark Ingram, Ansvar’s head of insurance operations.
“We recognise that the premium outlay can be significant
for a charity with only limited resources and nearly 60
per cent of registered charities in England and Wales receive
an annual income of less than £10,000, which explains
their reluctance to spend too much on insurance premiums.”
However, the tendency to keep insurance covers to only the
basic essentials and minimise the cost can create hazards
if the charity subsequently expands its operations and income
starts to grow.
Its potential exposures are likely to develop further if
it begins using the services of volunteer workers –
who should really be treated as employees and given the
protection of employer’s liability insurance –
carries out fund raising activities or has regular dealings
with members of the public.
And in common with many home- owners, some charities carry
buildings cover but go bare on contents and had no recourse
to insurance if last summer’s floods, for example,
affected their premises. Business interruption cover should
also be considered, so that if the premises are affected
by fire or flood, insurance is in place to provide for the
cost of renting out alternative accommodation.
If the charity is based from home, a homeowner’s policy
may appear to be adequate, but will not extend to cover
all of the potential liabilities from the work carried out.
This can be remedied if the policy is ‘topped up’
to include working from home, says Lindsay Gray, senior
liability underwriter for Ecclesiastical Insurance.
He believes that either through naivety or innocence, a
number of small charities also carry no public liability
insurance as, unlike employer’s liability, it is not
compulsory. However, the evidence is mostly anecdotal and
not many have the deficiency revealed in the same way as
Al Jamia Al Islamia.
“The claim against that charity went back to 1993
so, in addition to the damages awarded, the legal costs
are likely to have been substantial,” says Gray. “Public
liability cover will pick up the legal expenses incurred
in defending a claim, in addition to the claim itself.”
His colleague Martin Turner observes that some charities
specifically offer advice to the public, thereby creating
a quasi-professional indemnity risk. An example could be
advice offered by a Citizens Advice Bureau that turns out
to be deficient and results in a third party losing money.
And an increasingly litigious society has persuaded more
charities to consider trustee liability insurance, to indemnify
them against claims arising out of their wrongful administration
or management of the charity. However, cover is restricted
to genuine errors and mistakes and does not extend to criminal
fines or penalties, nor to conduct that is against the charity’s
best interests. Al Jamia Al Islamia’s trustees, who
deferred to the wishes of an overly dominant chairman, were
failing in their basic duty to exercise their judgment independently.
The Charities Act of 2006 has made it easier for charities
in England and Wales to take out trustee liability cover,
as they no longer have to apply to the Charity Commission
for specific permission says Turner – except for cases
where the governing document needs to be specifically amended.
Trustees seeking further guidance on how extensive the charity’s
insurance portfolio should be can also look to the Commission
itself for guidance. The Publications and Guidance section
of the Commission’s website www.charity-commission.gov.uk
offers Publication ‘CC49 – Charities and Insurance’,
a guide giving recommendations and advice.
Rosie Chapman, the Commission’s executive director
for policy and effectiveness says: “The point is that
trustees should look at the risks to which they’re
exposed and insure accordingly.
“Using charity funds for needless insurance is a waste
of money, but being underinsured could end up costing an
organisation a lot more. Our related guidance is a good
place to start.”
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