AALU: Malpractice Suit Against Trustees

Malpractice Suit Against Trustees Who Failed to Inform Beneficiaries of Potential Policy Lapse

The successor trustees and beneficiaries of a family trust sued a Michigan lawyer for malpractice in her handling of a policy owned by the trust when she was the trustee. The lawyer sought coverage from her malpractice insurer, but it denied her claim because she had failed to notify them of the reasonably foreseeable possibility that the family trust would pursue a malpractice claim against her. 

It is not advisable for the lawyer who drafts a will or trust to be the trustee of that trust (or for the agent involved in the case). In fact, many firms discourage or even prohibit their attorneys from doing so, except where the clients are closely related to the attorney (e.g. family members).

This case highlights some advantages of a professional corporate trustee – who is likely to have an organized process and organized infrastructure for payment of life insurance premiums and warning procedures in the case of impending policy lapses over other types of trustees.

This case also provides an important lesson about malpractice coverage – emphasizing both the importance of having it and the importance of honestly and fully answering the questions in the application and completing any policy requirements in a timely manner.

The best practice is for every estate and business planning professional to have adequate malpractice coverage and to understand its limitations and exclusions, including any exclusion for acting as a fiduciary.

Read the full AALU report here.