Successful family offices combine financial, philanthropic, legal and administrative operations to help ensure that family objectives are achieved from generation to generation. With these responsibilities comes a range of liability risks that, even with the most loyal employees, invested stakeholders and close client relationships, increases the family office’s susceptibility to lawsuits. As with so many other circumstances, when there is a perceived violation of rights, a financial loss or a perceived breach of contract, litigation often follows.
PROFESSIONAL AND TRUSTEE SERVICES
Many family office executives or key family members are assigned as a personal trustee for family trusts. In this capacity, such trustees may unknowingly expose their personal assets to claims, such as those brought by the trust beneficiaries. Perceived wrongful acts by trustees in the rendering of their responsibilities may result in claims by the trust beneficiaries. Such claims can be costly to defend, even if they lack merit.
Many family offices provide wealth management services which pool investable assets into private funds or other investment vehicles for the family. These strategies may create added liability to the family office and its designated managers, officers and committee members. For example, consider claims that might arise from a failure to fulfill a capital call on equity investments, or a failure to perform due diligence on fund investment managers. Further, if a family office executive takes on an outside directorship with a fund within the portfolio, another level of personal liability is created for that executive.
Family offices face the same concerns and liabilities larger organizations do.
Reviewing these risks and implementing tools such as indemnification through insurance can help employers avoid costly defense and liability payments.
Wrongful discharge, discrimination, harassment and defamation claims filed by an employee of the family office can present serious exposures to the family office, its directors, officers and other supervisory employees. Various state and federal statutes prohibiting discrimination based on race, color, age, sex, religious beliefs and physical disabilities serve as a vehicle to bring an action against an employer, including the family office’s management.
PROTECTIVE MEASURES – INDEMNIFICATION AND INSURANCE
Often, the best protection a family office manager can secure is indemnification provided by the family office itself. However, even written indemnification is not without its limitations and may result in a personal financial risk to directors, officers and trustees.
Insurance programs, written broadly enough, will help further protect the family office professional against directors and officers liability, trustee liability and professional errors and omissions exposures. Further issues that such insurance programs protect against include fund liability, employment-practices risks and fiduciary liability in the sponsorship of employee benefit plans. Additionally, appropriate insurance can complement—and often exceed—existing indemnification provisions, to absorb the costs the family office has assumed.