Cannabis D&O Insurance: Do Private Canna-Businesses [Really] Need It?

Directors and officers (D&O) insurance likely isn’t the first policy that comes to mind when considering the cannabis industry. It may not even be on your risk management radar. But for companies of a specific size, whether publicly traded or privately held, cannabis D&O insurance can help protect exposures you may not be thinking of. Here’s how to know if you need D&O insurance.

The Rise of the Cannabis Industry

As the cannabis industry has grown over the last decade, so has the size of the companies operating within this space. The spread of legalization across the US and North America and decriminalization around the world has led to a large influx of money and the necessity of protecting one’s investments.

The legal landscape of the cannabis industry is one littered with gray areas. Legalization has been stitched together piece by piece and state by state, leaving a trail of confusing regulations, red tape, and financial risk. Cannabis can be a “green rush” for investors and entrepreneurs, but it can also be a financial sinkhole with the wrong decisions.

Unique Risks Faced by Private Cannabis Companies

Most cannabis companies operating in the industry today are privately held and financed. While this gives leaders a greater degree of control, it also opens more exposure to financial risk and other kinds of risk.

Regulatory risk

Cannabis businesses are subject to a wide range of municipal, state, and federal regulations. These regulations can be confusing and heavy-handed, but a company that is out of compliance will face serious repercussions. Directors and officers could find themselves personally responsible for paying fines, fees, or dealing with criminal charges.

Litigation risk

The cannabis industry is as rife with litigation as every other industry, whether filed by dissatisfied consumers, disgruntled ex-employees, or competitors. If the lawsuit names specific executives within a company, they could become financially liable for the outcome.

Even when meritless, lawsuits can be costly and drain a company’s time and financial resources. Cannabis D&O insurance can help protect the directors and officers of the company from the financial burden of these lawsuits.

Well-known cannabis brand Cookies faces several lawsuits, and CEO Berner is directly named in nearly all of them. Without D&O insurance, his personal assets could be at risk in court.

Reputation risk

A company’s reputation is a precious and fragile thing. An adverse event like a product recall, regulatory violation, or lawsuit can damage that reputation, negatively affecting the ability to attract new consumers, investors, and employees. Cannabis D&O insurance can help protect the directors and officers of the company from the financial impact of an adverse event.

Importance of D&O Insurance in Mitigating These Risks

Directors and officers insurance can help mitigate many of these risks. D&O insurance protects the assets of specific individuals (corporate directors and officers) and a company’s bottom line in the case of lawsuits.

Many privately held companies have limited financial resources to draw on, especially in the case of a lawsuit. D&O insurance can protect a company’s bottom line from the financial impact of a lawsuit, meaning your company can allocate resources to deal with the problem without devastating your quarterly or annual profits.

Cannabis D&O insurance kicks in if and when specific executives are named in lawsuits. This policy has a three-pronged protection umbrella; protecting the personal assets of company directors and officers, covering legal fees for lawsuits, and protecting companies’ balance sheets from the costs incurred when dealing with lawsuits.

When Cannabis D&O Insurance is Important

• Misrepresentation. You’ve spent months courting investors, trying to find the right fit. Now that the documents are signed, the investor is trying to back out of the deal by claiming you misrepresented your company to them, and they’re suing. With D&O insurance, your company can be protected from legal bills.
• Fraud. A lawsuit has been filed against your company, claiming fraudulent acts against a supplier. Typical insurance policies don’t cover fraud, but certain types of D&O insurance do. If you’re covered, your insurance will pay to defend you against the allegations until (and if) they’re proven true.

In addition to protecting the personal assets of directors and officers, cannabis D&O insurance can also help to:

• Attract and retain qualified directors and officers.
• Improve the company’s reputation.
• Reduce the risk of bankruptcy.
• Comply with regulatory requirements.

Cannabis D&O insurance is an important risk management tool for cannabis companies. It can help protect the company and its directors and officers from financial ruin, improve its reputation, and reduce the risk of bankruptcy.

Key Considerations When Shopping for D&O Insurance

What must you do when shopping for the right directors and officers insurance policy? Keep these factors in mind:

Getting the right coverage

There are several types of D&O insurance policies — Side A, B, and C. Finding a solid balance between these tiers depends on your risks and exposures. For example, you might need additional Side A. These are best identified through a risk management plan, which can be created by your company or alongside a cannabis risk expert.

Compare carriers

Many insurance companies offer D&O insurance because it is necessary for companies of a specific size across all industries. But many of these companies don’t understand the complexities or nuances of the cannabis industry, so it’s crucial to partner with one that does.

Understand policy exclusions

Of course, D&O insurance does not apply in cases of egregious behavior — it is meant to protect people acting in a company’s best interest, not bad actors trying to use a large company to hide their actions. If an executive is truly engaged in fraud or illegal profits, D&O insurance will not cover the costs or protect their assets.

Check policy limits

No insurance policy is inexhaustible. It’s vital to understand the policy limits of your cannabis directors and officers insurance and ensure they’re sufficient for a worst-case scenario. No one wants to think about multiple claims being filed against their company or executives, but it is too late to take action when it’s happening.

Understand your company’s needs

• Size. The size of your company, team (including who holds a seat on your Board), and profits affect the amount of D&O coverage you need. The larger the company, the bigger the risk and the more coverage you need. However, it’s also essential for smaller companies to have adequate coverage as well, especially with limited financial resources.
• Vertical. The type of cannabis business you have, and the vertical you operate in affect your D&O coverage needs. Plant-touching businesses, like retailers and cultivators, need more coverage than ancillary companies, like consulting or public relations.
• Finances. The depth of your financial resources impacts how much D&O coverage your company needs. Companies with limited financial resources benefit more from robust D&O policies that protect your bottom line, while companies with deeper pockets may opt for smaller coverage policies.

Protecting your cannabis company can seem confusing; however, we’re a full-service insurance brokerage working with carriers worldwide to offer you the best coverage possible. We’re here to help! Please reach out to us today by emailing [email protected] or calling 646-854-1093 for a customized letter of commitment or learning more about your cannabis insurance options.