Should I Serve As A Director Or Officer ?

By: Thomas M. Kallman

Most directors and officers are fully aware of their responsibilities in managing the business and affairs of corporations. However, a surprisingly large number do not fully understand the potential personal liabilities they face when the corporation they serve falls on hard times.

Many directors and officers do not investigate these liabilities and the scope of their corporation's directors and officers liability insurance until it is too late. Generally, statutes require that the directors and officers of a corporation shall act honestly and in good faith; and exercise the care, intelligence and skill that a reasonably prudent person would exercise in comparable circumstances.

It is important to note that a director can avoid liability with respect to these duties in some instances if the director relies upon financial statements of the corporation represented (by an officer of the corporation or any written report of the auditor of the corporation) fairly to reflect the financial condition of the corporation, or a report of a lawyer, accountant, engineer, appraiser or other person whose profession lends credibility to a statement made by such person.

Even though a director can avoid liability with respect to these duties in those circumstances, there are still many statutes that otherwise impose liability on directors and officers. Many of them impose not only a civil liability to make payment, but also impose a criminal liability that may involve fines or imprisonment.

Some directors and officers seek to avoid these statutory liabilities by simply resigning as a director or officer when they foresee that the corporation is in financial difficulty. This action may not shield them from personal liability regardless. All directors and officers of corporations, whether public or private, large or small, should be aware of the potential personal liabilities they face. Even though they may have carried out their duties diligently, they may still face personal liability in some instances. Therefore, in addition to "doing their jobs", directors and officers should be aware of their potential personal liability and, among other things, analyze the need for directors' and officers' liability insurance.

Today, the number of policy forms and cases interpreting them has multiplied. The specific language found in these policies differs from insurer to insurer and from policy to policy. Any coverage analysis must take into account the specific language found in the policy at issue. As a general matter, clear policy language will govern the application of coverage to a particular claim.

Directors and officers of non-profit organizations or condominium associations require different protection than directors and officers of for profit entities.. The terms and conditions in these policies reflect the specific needs of each.

A directors & officers liability policy may cover civil or criminal defense costs, legal representation expenses, damages, judgments and settlements for both individual directors and officers and the company. Whether allegations arise from breach of statute, negligence, breach of fiduciary duty or mismanagement, the policy will respond. Directors and officers can become legally obligated to pay on account of claims against them for any wrongful acts that they commit.

Since such insurance cover is still available at comparatively low premiums, I believe that it should be a fundamental requirement. It should also be borne in mind that the company can purchase this coverage on behalf of its directors as a legitimate business expense. If your board of directors were not provided adequate coverage, it would be advisable to resign immediately to avoid personal financial exposure. Inquire about your board's protection immediately.

Thomas Kallman is President of TMK Risk Management Inc dba Kallman Insurance Agency at PO Box 266736, Weston, Florida 33326. Phone 954-389-5897. Visit the website at www.tmkrisk.com. Your questions are always welcome.

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