Liability Insurance and Special Purpose Trust Funds

Regulation 4/01 under the Charities Accounting Act allows charities to:

Indemnify and buy liability insurance for their directors, officers or trustees; and
Combine special purpose trust funds.

This bulletin provides a general explanation of the regulation. It is intended to help you understand the regulation and is not intended to be legal advice. Charities planning to take advantage of the regulation should read it first to fully comprehend how it may affect their charities. The regulation is available at law libraries or on the Government of Ontario's e-Laws site www.e-laws.gov.on.ca. If you have questions about how it applies in your particular circumstances, you may want to consult a legal advisor knowledgeable in charities law, or for financial matters, an accountant.

BACKGROUND

What the Regulation Does

Authorization to indemnify and buy liability insurance - The regulation allows charities, if the conditions of the regulation are met, to indemnify directors, officers and trustees and to buy liability insurance for them without first obtaining a court order. This will protect directors, officers and trustees against losses they may incur through managing the charity in good faith.
Combining Restricted or Special Purpose Funds – The regulation allows charities to combine special purpose funds for investment purposes, provided they follow the rules set out in the regulation.
Restricted or special purpose trust funds involve money given to the charity to be used for a particular purpose. In this bulletin they are called special purpose funds.

Examples of special purpose funds are money given to a university for a scholarship fund or money given to a medical charity for cancer research.

Before the regulation came into effect, charities had to invest money donated for a special purpose separately from all other money of the charity, including other special purpose funds. They could not combine money given for two purposes in one investment.

What the Regulation Does Not Do

The regulation is permissive, not mandatory. It allows charities to choose whether they wish to indemnify their directors, officers and trustees or to purchase liability insurance for them. It is up to each charity to decide whether it is appropriate for that charity to provide an indemnity or purchase insurance for its officers, directors or trustees.

The regulation does not take priority over written documents or court orders concerning the charity. This means that a charity cannot make a payment if a will, or the document that creates a trust (the Letters Patent if the charity is a corporation, the constitution for an unincorporated association or the trust deed for a trust) does not allow the payment. Directors or trustees should review the Letters Patent, constitution or trust deed before making a payment allowed under the regulation.

If the charity is a corporation, the Corporations Act will also apply.

Responsibilities of Charities

Charities that indemnify or purchase liability insurance for their directors, officers or trustees, or combine special purpose funds, are responsible for ensuring that all of the requirements of the regulation are met. They must also keep records showing that the requirements of the regulation have been met. For more detail, see subsection 1(3) of the regulation.

DIRECTORS AND OFFICERS LIABILITY INSURANCE AND INDEMNITY

The regulation allows charities to indemnify their directors, officers or trustees. This means the charity can agree to compensate them for any financial losses they may incur in the course of managing the charity in good faith.

The regulation also allows charities to buy liability insurance. The liability insurance would require an insurer to compensate for financial losses suffered in the course of managing the charity in good faith. For more detail, see subsections 2(1) and 2(3) of the regulation.

Limits on Providing an Indemnity or Indemnity Insurance

Charities are only authorized to give an indemnity, or buy indemnity insurance, under certain conditions. They are:

the indemnity or insurance cannot compensate for a loss resulting from a director being dishonest or acting in bad faith in administering the charity -- Subsection 2(2);
the indemnity or insurance cannot limit the right of anyone, including the charity, to sue the person being indemnified -- Subsection 2(4);
the charity cannot buy insurance if, at the time the insurance is purchased, the cost of the insurance would unduly impair the charitable work of the charity -- Subsection 2(6);
the charity cannot compensate a person for a loss or continue to pay premiums on insurance if making the payment would render the charity insolvent. This does not necessarily mean a charity cannot pay an indemnity if the payment would leave the charity insolvent. If the charity is insolvent, it will have to apply for court approval before making the payment -- Subsection 2(7).

Factors to Consider

The factors a charity must consider before giving an indemnity or buying liability insurance are:

the degree of risk involved in administering the charity - how likely it is that the director, officer or trustee will suffer a financial loss through administering the charity - paragraph 2(5)1;
whether there are other practical means of significantly reducing the risk - paragraph 2(5)2;
whether the amount and cost of the insurance is reasonable given the risk to the director, officer or trustee of suffering a financial loss. If the risk of loss is low, the cost of insurance purchased by a charity should also be low -- paragraph 2(5)3;
whether the cost of the insurance is reasonable given the revenue of the charity, - it is not usually reasonable for a charity to spend a significant part of its income on liability insurance -- paragraph 2(5)4;
whether the charity will benefit by giving the indemnity or buying the insurance. For example, will the charity attract better directors or be able to get more income if it buys the insurance - paragraph 2(5)5.

Not all factors will be equally important to all charities. Some factors may not apply to some charities. All charities that consider providing an indemnity or buying insurance must weigh each of the factors and must keep records showing that they have considered those factors.

Combining Restricted or Special Purpose Funds (Section 3)

Before the regulation came into effect, charities had to keep money given to them for a special purpose separately from all the other money of the charity. Charities could not combine money given for different purposes even for investment.

The regulation now permits charities to combine special purpose funds with other special purpose funds for investment purposes. The money no longer has to be kept in separate investments, provided the charity follows the directions set out in the regulation.

The regulation does not allow a charity to combine special purpose funds with the charity's general funds. It will not affect the requirement to restrict the use of funds only for the "special purpose" for which they were donated.

Conditions for Combining Special Purpose Funds

Funds can only be combined if it will be beneficial to both funds. For example, if combining funds will result in one fund getting a lower rate of return than it would have if it had been separately invested, then the charity cannot combine the funds.

If a charity combines special purpose funds, all of the gains, losses, income and expenses on the combined property must be split between the funds combined. Each fund should receive, or pay, its proportionate share in accordance with generally accepted accounting principles.

Record Keeping

If a charity combines special purpose funds, it must keep complete records. The regulation sets out the records the charity must keep. The charity must keep separate accounts for each special purpose fund and for the combined fund.

The record keeping requirements set out in the regulation are in addition to requirements that may exist under any other law. This means that, if a charity combines funds, it must keep the records required by the regulation and the records required by other laws relating to the funds.

Records Which Must be Kept for Each Purpose Fund

If a charity combines special purpose funds, it must keep the following records for each of the individual funds:

the date the special purpose fund was combined with other funds and its value before it became part of the combined fund - paragraph 3(5)1
if part of a special purpose fund is combined with other funds, and part is not, the value of the part of the fund not combined - paragraph 3(5)2
if additional assets are contributed to a special purpose fund, the charity must record their source and value and the date on which they were received - paragraph 3(5)3
if additional assets are contributed to a special purpose fund that is part of a combined fund, the charity must record the date the additional assets were combined with other funds and the value of the additional assets on that date - paragraph 3(5)4
the share of the revenue of the combined fund that belongs to each special purpose fund and the date on which that calculation is made - paragraph 3(5)5
the share of the expenses of the combined fund that must be paid by each special purpose fund and the date on which that allocation is made - paragraph 3(5)6
the amount spent from the combined fund for the purposes of any one of the special purpose funds, and the date on which the money was spent - paragraph 3(5)7

Records Which Must be Kept for the Combined Fund

If a charity combines special purpose funds, it must keep the following records for the combined fund:

the value of each special purpose fund before it became part of the combined fund, and the date on which each special purpose fund became part of the combined fund - paragraph 3(6)1
if additional assets are contributed to a special purpose fund that is part of a combined fund, the charity must record the value of the additional assets and the date on which they were received. The charity must also record details of the special purpose fund to which the additional assets were contributed - paragraph 3(6)2
the revenue received by the combined fund, the share of that revenue that belongs to each special purpose fund and the date on which that calculation is made - paragraph 3(6)3
the expenses incurred by the combined fund, the share of the expenses of the combined fund that must be paid by each special purpose fund and the date on which that allocation is made - paragraph 3(6)4 the total amount distributed from the combined fund for each of the special purpose