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September 24, 2013

Q&A: Should a Church Set Up a Cash Reserve for Legal Expenses?

Would such an arrangement help cover legal costs and settlements?

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Q: Should our church have a reserve set up to help fund a defense effort if we're ever sued? This money would help pay legal expenses, church administrative costs to assist with discovery and other needs, and possibly even a settlement or awarded damages, if any arise.

A: There is no compelling reason in most cases for a church to have a reserve for legal expenses. This is why you have liability insurance. A reserve may be advisable if legal expenses are anticipated that are not covered by insurance (such as employment disputes). But the better response to these risks is to obtain insurance coverage.

There still may be some legal expenses that are outside of any insurance policy, but they will be rare. A small reserve fund that carries over from year to year would be an option. I have never seen a church do this, however.

Richard R. Hammar is an attorney, CPA, and author specializing in legal and tax issues for churches and clergy. He is a graduate of Harvard Law School, and attended Harvard Divinity School. He is the author of several books, including Pastor, Church & Law, the annual Church and Clergy Tax Guide, Reducing the Risk, the biannual Compensation Handbook for Church Staff and the Essential Guide to Copyright Law for Churches, all available at YourChurchResources.com.

He also is senior editor of Church Law & Tax Report, a bimonthly newsletter reviewing significant legal and tax developments for churches and clergy, and Church Finance Today, a monthly newsletter for church treasurers.

Related Tags: cash reserves, insurance, law, lawsuits

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