THOUGHT LEADERSHIP

Family Office Management Liability Issues

 


Successful family offices combine financial, philanthropic, legal, and administrative operations and help ensure that family objectives are achieved from generation to generation. However, these responsibilities create a range of liability exposures for the family office executive and professional staff. Like all directors, officers, and professionals, those working for family offices can be sued for everything from professional negligence to mismanagement of funds and employment discrimination.

A family office manager’s exposures rival those of corporate directors and officers. Family office executives perform many services commonly associated with trust operations and assume those duties and obligations as well. Ultimately, family offices are employers with the same workplace concerns and liabilities faced by larger organizations. The family office executive should be mindful of the liability risks that exist in the family office setting.

Directors and Officers Role

The primary duty of any director or officer of a family office is to represent responsibly the interests of the family as an entity, as well as any other operative interests, in leading and managing the chosen affairs of the family. Family office executives can be held liable, just like a director or officer of a public company, should their misjudgment affect the family members.

Professional and Trustee Services

Professional services provided by a family office involve fiduciary standards of care. Family office executives must administer their accounts according to the provisions of the office as well as in accordance with the law. Examples of the many sorts of claims that may arise from this professional and/or trust practice include:

  • Improper delegation of authority to a third party.
  • Failure to treat family members impartially.
  • Failure to comply with terms of the charter or account.
  • Payment of invalid claims against the family.
  • Improper record keeping.
  • Malpractice in estate planning, tax planning, or deviation from investment goal strategy.
  • Lax or inept oversight of investment managers.

Employment Practices

Wrongful discharge, discrimination, harassment, and defamation claims represent serious risk exposures to employers, and their directors, officers, and supervisory employees. Various provincial and federal legislation serve as a vehicle to bring an action against an employer, including family office managers. 

Protective Measures – Indemnification and Insurance

Often the best protection a family office manager can employ is to obtain indemnification provided by the family office itself. However, even written indemnification is not without its limitations:

  1. The office may be insolvent or lack sufficient attachable resources to fund the indemnity.
  2. The indemnification provisions may not be broad enough to encompass a given claim situation.
  3. The family office board itself may not authorize indemnification.

Insurance programs, written broadly enough, will also help protect the family office professional against directors and officers liability, professional errors and omissions exposures, and employment practices risks. In addition, appropriate insurance coverage can complement existing indemnification provisions — in some circumstances exceed them — and absorb indemnification costs assumed by the family office.

Management Liability Red Flags

Does your family office:

  • Have professionals on staff?
  • Provide accounting or tax planning services to clients?
  • Assist in estate planning for clients?
  • Perform investment advisory services for clients?
  • Form and maintain private investment funds or investment partnerships?
  • Select and oversee outside professionals or outside professional service firms?
  • Have individuals who serve as trustees of family trusts?
  • Work in conjunction with a private trust company?
  • Assist with the placement and management of domestic staff?
  • Coordinate the placement of insurance for clients?
  • Perform administrative or support services for any family foundations?
  • Assist clients with structuring and operating small businesses?
  • Have its own pension plan for employees?

 

This document and any recommendations, analysis, or advice provided by Marsh (collectively, the “Marsh Analysis”) are not intended to be taken as advice regarding any individual situation and should not be relied upon as such. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Marsh shall have no obligation to update the Marsh Analysis and shall have no liability to you or any other party arising out of this publication or any matter contained herein. Any statements concerning actuarial, tax, accounting, or legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as actuarial, tax, accounting, or legal advice, for which you should consult your own professional advisors. Any modeling, analytics, or projections are subject to inherent uncertainty, and the Marsh Analysis could be materially affected if any underlying assumptions, conditions, information, or factors are inaccurate or incomplete or should change. Marsh makes no representation or warranty concerning the application of policy wording or the financial condition or solvency of insurers or reinsurers. Marsh makes no assurances regarding the availability, cost, or terms of insurance coverage. Although Marsh may provide advice and recommendations, all decisions regarding the amount, type or terms of coverage are the ultimate responsibility of the insurance purchaser, who must decide on the specific coverage that is appropriate to its particular circumstances and financial position.