It is no secret that cannabis companies are more vulnerable to lawsuits and threats than their non-cannabis counterparts. This is mainly because of the nature of the market, investor relationships, and a complicated landscape filled with regulations and laws.
Common Challenges Cannabis Companies Face
Some of the challenges that cannabis companies face when running their business include the following:
- Federal laws surrounding the consumption of cannabis
- Not enough bankruptcy protections
- Insufficient access to resources and capital and increasing investor demands
- Different trade practices that differ from state to state
- High acquisition and merger activity
- Licensing requirements based on states
- Federal, state, and local tax laws on cannabis products
A cannabis business’s officers and directors can be sued, which increases the overall risk for a cannabis company. Exposure to litigation includes complications, such as claims of mismanagement, shareholder disagreements, and policing by government agencies. The best way to mitigate this risk is by getting D&O (Directors & Officers) insurance.
What is D&O Insurance?
Private cannabis industries face threats from unexpected directions, which is why it is integral for business leaders to safeguard their assets and help potential officers and directors see the potential in their company. This is where D&O Insurance comes into play.
Directors and Officers Liability insurance is a coverage that safeguards a company and its officers and directors from any financial liability. In case of a mishap or allegation by customers, shareholders, vendors, or employees, D&O insurance will ensure that the cannabis company cannot be held financially responsible.
While this coverage does not cover any illegal actions, it can cover the costs of wrongful lawsuits in settlements, legal fees, and defense costs.
What Does D&O Insurance Cover?
D&O insurance can cover many things, but expect three major agreements- Side A, Side B, and Side C.
The policy’s structure dictates which agreement is included in the policy. Here is what you need to know about them:
Side A
The officer or individual may be responsible for any loss if a company is insolvent and indemnification is barred due to the law. Side A aims to protect one’s assets if faced with a non-indemnifiable loss.
This boosts protection for an organization, especially if it needs more resources to pay for losses in case of bankruptcy.
Side B
Side B reimburses a corporation for any expenses that may have arisen when it was defending the officers and directors of its organization.
Side B helps protect the corporate assets of a business.
Side C
Commonly referred to as entity coverage, Side C takes care of an organization’s interests in case a corporation is sued along with its officers and directors.
This coverage protects from settlements, legal fees, and other costs that are a part of the terms and conditions. This coverage is recommended for non-profit and private companies rather than public companies as it only protects the latter from security claims.
Why Cannabis Remains Risky for Insurers
When viewed from the perspective of the insurance industry, cannabis is a risk that many insurers are not willing to get into. Many states have not gotten around to legalizing cannabis, and the United States Drug Enforcement Administration lists it as a Schedule I drug, making it illegal at the federal level.
Moreover, carriers do not feel comfortable underwriting an emerging market where there is a lack of information. Since the cannabis industry is still developing, there is a lack of actuarial data to ignore the liability.
While federal legislation may end up throwing the cannabis industry under the bus, the Safe and Claim Acts protect insurance companies and financial institutions wanting to help the cannabis industry. This means that companies do not have to worry about any federal penalty. In addition, the MORE Act will ensure that cannabis is decriminalized.
Of course, it may take some time for the federal legislation to become a part of the law, which is why cannabis businesses must secure D&O insurance.
The Best Time to Talk to Your Broker
It can be challenging for cannabis business owners to understand what kind of insurance is right for their business.. However, insurance brokers can help you through this process by serving as reliable advisors to help find the correct range for their enterprise.
Safeguarding the many facets of a cannabis business is challenging, and organizations often search for an insurance broker who understands the industry.
If you are looking for a coverage plan for your cannabis industry to protect your business, reach out to the professionals at MFE Insurance. Contact us at 213-266-7990 or request a quote online today!