Opinion: The battle for directors and officers liability coverage in the cannabis industry

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Eric Rahn

When it comes to mitigating risk in the cannabis industry, the stakes are sky-high.

Companies large and small, public and private, for-profit and not-for-profit are all exposed to costly litigation.

As operators try to navigate the regulatory minefield while dealing with market volatility and mounting pressure by investors to turn a profit, we’re witnessing a surge of legal action against companies’ boards of directors.

With the number of new lawsuits tripling in the past two years, directors and officers liability insurance (D&O) is in hot demand.

Why then, with all the pent-up demand, is it so difficult to access affordable coverage with the necessary limits?

Availability of cannabis insurance

As the cannabis industry continues to grow and mature, legal restrictions at the federal level remain a significant challenge in securing insurance coverage.

Despite explosive industry growth and opportunities in the cannabis space, many of the large, traditional insurance carriers are not willing to write the risk for fear of federal restrictions.

There’s a confluence of factors driving the hardened insurance market.

The question remains, when will that change?

At the moment, there are several bills floating around Congress that, if or when approved, will result in an industrywide sea change on many levels.

All eyeballs are on the Marijuana Opportunity Reinvestment and Expungement (MORE) Act, a bill to legalize marijuana nationwide, which passed in the House on April 1, 2022.

The measure now heads to the Senate for a second time, where it faces an uncertain fate.

Another key piece of reform that could impact the availability and pricing of cannabis insurance is the Secure and Fair Enforcement (SAFE) Banking Act, a bill designed to protect financial institutions and insurance companies that want to provide the lucrative cannabis industry with access to commercial bank loans, federally approved insurances and other mainstream sources of capital.

Passage of the MORE and SAFE Banking acts would remove some of the major barriers cannabis operators face when buying insurance.

However, neither will fully address the problem of high commercial insurance prices.

There are other factors at play, particularly for D&O.

The biggest insurance challenge

With the recent uptick in M&A activity, new deals and ongoing consolidation in the space, the market is ripe for litigation involving shareholder and investor disputes, noncompliance with state regulations, allegations of mismanagement, failure to disclose risks to shareholders and investors and even securities fraud.

Cannabis companies are fighting this battle on two fronts:

  • How can they ward off the risk of lawsuits brought against boards?
  • How can they attract and retain the talent they need to lead their company in this hardened market?

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The only way to protect a company’s corporate directors and officers (as well as spouses and estates) from being personally liable in the event the company is sued is to have D&O insurance.

In the event of litigation, a comprehensive D&O policy will cover legal fees, fines, settlements and other expensive costs.

Not only does D&O protect your C-suite, but it’s also crucial for attracting and retaining top talent as well as drawing in new investors to scale up your business.

Most executives will not even consider joining your organization without a D&O policy in place.

Herein lies the biggest challenge.

Risks in the cannabis industry consistently exceed the availability of insurance.

Lately, we’ve seen more carriers adding D&O to their offerings.

Despite this flooding of the market, premiums remain high and capacity constraints continue to create problems.

The current premiums for D&O have raised the barrier of entry into the cannabis industry.

We are seeing more cannabis companies needing excess limits but finding it extremely difficult to purchase up to and above the $10 million threshold.

The few insurance carriers shouldering the industry’s exposure are mitigating their own risk by inflating D&O premiums and capping their limits.

Solutions to securing D&O coverage

This valuable advice can help make it a smoother process:

  • Consult an independent insurance broker who specializes in D&O specifically for the cannabis industry. Brokers offer multiple policy and product lines from a broad selection of carriers and stay on top of every development in the industry.
  • Don’t make the mistake of assuming your board is protected under your general liability policy. You should always carefully review your insurance policy with your broker and attorney to understand what coverages you have and don’t have. When obtaining D&O quotes, check to see if the policy includes other coverages you might need, such as employment liability protection insurance. Not all carriers provide additional coverages, so be careful when selecting your plan.
  • Beware of D&O policies that are overpriced and underdeliver. This is especially important with D&O, as the typical lower limits and sublimits could place your board members’ personal assets at risk. It’s important to understand your premium/deductible (i.e. retention)/policy limits and what additional liabilities and exposure the company will have to continue to underwrite.

Any cannabis company that is serious about growing its business, securing venture capital or investment funding and attracting/retaining top executive talent needs to invest in D&O insurance.

Despite the high premiums for D&O and the lack of capacity, options are available.

Your broker should do the legwork for you and present coverage options and cost comparisons, so your board can make an informed decision.

Eric Rahn is managing director at S2S Insurance Specialists, a cannabis insurance broker located in Boca Raton, Florida. He can be reached at eric@s2sinsure.com.

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