Should we incorporate, and should we buy trustee indemnity insurance?

England and Wales: This page sets out the position in full. Scotland: covered — the same three mandatory exclusions, under the 2005 Act’s own s.68A rather than s.189, with one real difference: Scotland attaches no express best-interests decision formula to the purchase, so a Scottish minute does not have to recite one. Northern Ireland: covered — the exclusions and the best-interests decision map almost word for word onto England and Wales, under s.93 of the 2008 Act, and the incorporation half has one fewer option because Northern Ireland has no CIO.

What must trustee indemnity insurance exclude?

Trustee indemnity insurance bought with charity funds must exclude some things. These are fines, regulatory penalties, some defence costs and conduct a trustee should have known was against the charity’s interests. Trustee indemnity insurance is a policy the charity pays for. It covers some personal liabilities a trustee incurs for breach of trust or breach of duty.

This page sets out the rules for trustees in England and Wales, where the Charity Commission’s guidance applies. It also sets out the parallel rules in Scotland and Northern Ireland. Then it covers incorporation, the other half of the decision. It builds on what trustees are personally taking on; if the board has not worked through that yet, start there.

Buying cover is allowed. Charities Act 2011 s.189(1) says the trustees “may arrange for the purchase, out of the funds of the charity, of insurance designed to indemnify” them. The cover is against personal liability for breach of trust or breach of duty.

The power also reaches liability incurred as directors or officers of a body corporate carrying on activities on behalf of the charity. That means your trading subsidiary. Almost nothing published about this says so.

Then s.189(2) turns round and makes the exclusions compulsory. The statute says the terms of the insurance “must be so framed as to exclude the provision of any indemnity” for a set list. The list has 3 paragraphs, (a) to (c), excluding 4 things. Here is s.189(2) in full, because it is rarely reproduced anywhere:

“(2) But the terms of such insurance must be so framed as to exclude the provision of any indemnity for a person (“P”) in respect of—
(a) any liability incurred by P to pay— (i) a fine imposed in criminal proceedings, or (ii) a sum payable to a regulatory authority by way of a penalty in respect of non-compliance with any requirement of a regulatory nature (however arising),
(b) any liability incurred by P in defending any criminal proceedings in which P is convicted of an offence arising out of any fraud or dishonesty, or wilful or reckless misconduct, by P, or
(c) any liability incurred by P to the charity that arises out of any conduct— (i) which P knew (or must reasonably be assumed to have known) was not in the interests of the charity, or (ii) in the case of which P did not care whether it was in the best interests of the charity or not.”

Read paragraph (c) twice, and read the words in the brackets. “Must reasonably be assumed to have known” is an objective test. Not knowing does not bring a trustee back inside the cover. A trustee who did not realise a decision was against the charity’s interests, but who ought to have realised, is outside the cover.

Now look at the statute as a whole. It requires the policy to leave out regulatory penalties. It requires the policy to leave out conduct you should have recognised as against the charity’s interests.

Together, those two exclusions describe almost exactly what a worried trustee pictures when asking about this cover. As the liability explainer puts it: the cover stops where the worry starts.

Two narrower points change what a policy is worth. s.189(3) defines when a conviction “has become final” for the purposes of exclusion (b). So the statute does not require a policy to exclude defence costs unless and until such a conviction becomes final. The exclusion bites at the end, not at the beginning; what a particular policy pays before then depends on its wording.

And nothing here is a reason not to buy cover. It is a reason to know what you have bought, and to say so to the board that is about to rely on it.

What must the trustees’ decision to buy cover record?

In England and Wales, the trustees must decide that they are satisfied buying the cover is in the charity’s best interests, and the governing document must not forbid it. The minute is the evidence of that decision, so it should record the decision, the reasons and the check of the governing document.

This is the part that makes trustee indemnity insurance a governance step rather than a purchase order. Three subsections govern the decision itself, not the policy.

s.189(4). The trustees “may not purchase insurance under this section unless they decide that they are satisfied that it is in the best interests of the charity for them to do so.” That is a condition on the power. Without the decision, s.189 does not authorise buying the cover at all.

s.189(5). The duty of care in s.1(1) of the Trustee Act 2000 applies to a charity trustee when making that decision. So the decision needs the care and skill reasonable in the circumstances. It is not a formality to wave through.

s.189(6)(a). The section does not authorise buying cover that the charity’s trusts expressly forbid. Check the governing document before the meeting, not after it.

s.189(6)(b) then does the opposite job. The usual rule against trustees taking a personal benefit out of charity funds does not block buying the cover. So the objection people expect is not the one that applies.

What that means for the minute is specific. The statute requires the decision, not a form of words, but the minute is the only evidence of it. It should record that the trustees decided they were satisfied that buying the cover is in the charity’s best interests, with reasons. A minute that records only that the cover was bought leaves out the part that matters in law. The same minute should record that the governing document was checked and does not prohibit the cover.

Scotland is the exception, and it is a genuine one rather than a drafting difference. The Scottish provision, s.68A of the 2005 Act, has no counterpart to s.189(4) or (5). A Scottish minuted decision does not need to recite the best-interests formula.

The general s.66 duty of care and diligence still governs the decision, as it governs any trustee decision. But the Scottish section does not contain the express, minutable step that s.189(4) creates in England and Wales.

Is incorporation an alternative to insurance?

No. Incorporation and insurance are often treated as alternatives, and clearing that up is the main job of this page.

Incorporation changes who is party to the contract. In an unincorporated trust or association, the trustees sign the lease and the employment contracts in their own names. They are personally liable on them. The same goes for any agreement with another organisation — see set up a partnership or collaboration agreement before anyone signs one.

In a company or a CIO, the charity signs, holds the land in its own name, and third-party limited liability applies. That is a change to the future. It does not undo a signature already given.

Insurance pays out on some liabilities after the event, within the exclusions above. It does not change who signed anything.

So for a charity worried about a lease or about staff, insurance is not a substitute for incorporation. It addresses a different risk entirely.

Three things belong in the incorporation half of the decision, and all three surprise people.

It is not a conversion. Changing from an unincorporated charity to a CIO means four things at once:

• setting up and registering a new CIO
• moving the assets across
• dealing with any permanent endowment, designated land or special trusts
• closing the old charity

There is no statutory conversion route that starts from an unincorporated charity. The steps are on move an unincorporated charity to a CIO.

The statutory route only ever runs from a company, a CIC or a registered society into a CIO. That route is on convert a charitable company to a CIO. The new CIO needs its own bank accounts, its own registrations, and its own HMRC and Land Registry entries. Contracts and staff do not follow on their own, and TUPE may apply.

Legacies are the biggest single risk. The CIO is a new charity. So a will benefiting the old, now-closed charity does not read across by itself.

The Commission treats a structure change as a form of merger. It points trustees to the register of merged charities for this reason. Skipping that registration risks legacies lapsing; how to register is on execute the merger and register it.

Incorporating can itself trigger a pension liability. CC3 warns about it in the same breath as recommending incorporation. The step taken to reduce risk can crystallise a debt. That risk is why this page’s verdict is that you need help, not that you can do it yourself.

One point of vocabulary catches people out. Incorporating the trustee body under Part 12 of the Charities Act 2011 is not incorporation of the charity. It does not limit anyone’s liability.

Trustee-body incorporation is a property-holding convenience. The liability explainer sets out why.

Trustee indemnity insurance in the wider insurance programme

Trustee indemnity is not required by law. Saying so plainly is useful, because the covers around it work differently. Employers’ liability is a statutory duty, with limited exemptions, the moment the charity has anyone under a contract of service. The Employers’ Liability (Compulsory Insurance) Act 1969 covers Great Britain, and a 1972 Order does the same in Northern Ireland. Motor insurance is a statutory duty if the charity owns or runs a vehicle.

Public liability is not required by law at all. But it is often a condition of a venue, a lease or an event contract. There the requirement comes from the contract, not the law.

Trustee indemnity, professional indemnity, buildings, contents and cyber sit in the discretionary group. Charities buy them where there is real exposure or where a contract or funder asks for them.

The practical consequence is about gaps. A claim lands somewhere in that programme, and the argument is usually about which policy it lands in. That is why the programme as a whole belongs to buy the insurance you actually need. Placing trustee indemnity alone, without the rest of the programme, is how charities pay for cover twice and still find a hole.

This step gives no premium figures. None were established for it, and CC49 was not read for this step. Be suspicious of any figure you see elsewhere without a source attached.

Scotland and Northern Ireland: the parallel rules

Both nations allow the cover, with the same mandatory exclusions. They differ from each other on the minuted best-interests decision.

Scotland. s.189 is an England and Wales provision and does not apply. Scotland has its own, separately enacted near-parallel, s.68A of the 2005 Act, inserted in 2010. Its exclusions are almost word for word the same three categories.

Two Scottish differences matter. First, s.68A has no equivalent of s.189(4) or (5), the minuted best-interests decision and its duty of care. Second, s.68A(3) carries Scottish machinery with no English counterpart. It takes certain convictions quashed under the Criminal Procedure (Scotland) Act 1995 out of the exclusion. These quashed convictions are the Scottish appeal equivalents of an acquittal.

On incorporation, the logic transplants directly. A SCIO becomes a body corporate when OSCR enters it in the Register. From that moment it has legal personality separate from its trustees and members. So contracts are in the SCIO’s name.

An unincorporated Scottish charity’s trustees are personally exposed exactly as in England and Wales. OSCR’s own guidance adds one SCIO-specific point with no precise CIO equivalent. SCIO members have no liability to contribute to the SCIO’s assets on winding up.

The three-structure comparison below is this project’s own, built from several sources. No single OSCR document sets them side by side the way CC3’s table does.

Structure (Scotland)	Contracts signed in	Third-party liability
Unincorporated trust or association	The trustees’ own names	Not limited
SCIO	The SCIO’s own name	Limited
Charitable company	The charity’s own name	Limited — company law is reserved, so the position is the same as England and Wales

Northern Ireland. Charities Act (Northern Ireland) 2008 s.93 allows the cover and imposes the same three mandatory exclusions. Its wording maps almost one to one onto s.189. Northern Ireland does have the best-interests requirement.

s.93(4) says the trustees may not buy the cover unless they decide they are satisfied it is in the charity’s best interests. The Trustee Act (Northern Ireland) 2001 duty of care then applies to that decision, under s.93(5). Section 93(8) works like s.189(6). An express prohibition in the governing document blocks buying the cover, but the general no-personal-benefit rule does not.

CCNI’s own plain-language gloss is worth having in front of a board. Verbatim, indemnity insurance will protect you for a breach of trust “unless: you have been found to be legally responsible (liable) for the breach of trust; you did anything that you knew (or should have known) was not in the charity’s best interests.”

On incorporation, Northern Ireland has one fewer option than England and Wales. Northern Ireland has no CIO, because Part 11 of the 2008 Act was never brought into force. So the incorporated route is a charitable company.

CCNI describes its limited liability as protecting decisions made “openly, honestly and to the best of your ability”. CCNI says it never covers fraud or deliberate wrongdoing.

Relief after the event runs alongside insurance in all three nations. It works another way: a decision by a regulator or a court, after the fact, rather than a policy bought in advance.

England and Wales, s.191. Northern Ireland, s.91. Scotland, a court only, under Trusts (Scotland) Act 1921 s.32. In England and Wales and Northern Ireland the Commission’s relief power expressly does not reach personal contractual liability. That is, again, the exposure an unincorporated charity is most likely to have.

Common mistake: buying trustee indemnity insurance and treating the liability question as closed

Insurance feels like a complete answer. The statute requires the policy to exclude regulatory penalties and criminal fines. It also requires it to exclude conduct the trustee knew or ought to have known was not in the charity’s interests. The cover stops exactly where the worry starts. A board that has not read s.189(2) usually does not know that.

Common mistake: incorporating without taking advice on pensions

Incorporation is presented everywhere as a form-filling exercise. CC3 warns that it can trigger a pension liability. The step that was supposed to reduce risk can crystallise a debt instead. That is why this page’s own verdict is “get help”.

Worked example

Wrenfield Village Hall is an unincorporated association with two employees and a lease. Its committee decides that trustee indemnity insurance is the cheaper, faster answer. It buys a policy instead of incorporating.

It has bought cover for the wrong thing. The trustees remain personally party to the lease and to both employment contracts. Insurance does not change who signed.

If the charity cannot pay the rent, the landlord’s claim is against the trustees. The Commission’s relief power does not reach contractual liability. Incorporation would have changed who was party to the next lease. Insurance addressed a different risk.

The policy is not worthless. It responds to breach of trust and breach of duty claims within its exclusions. But the minute that records buying the policy should say which risk the board thought it was managing. Here, the honest answer is that the policy does not cover the risk the committee was worried about.

With the liability position decided and minuted, the next step is to set your meeting rhythm and quorum.