Before a director, officer or investor signs on with a cannabis company, he or she will want to have proper protection in the event of a claim against the company. This means that adequate insurance coverage is essential for businesses looking to attract talent and capital, according to Patrick Ryder, vice president of management liability and a cannabis segment leader with insurance broker HUB International.
“Any time that you’re building out a board of directors, one of the first steps that you would want to take is implementing a robust directors and officers insurance program,” Ryder says.
Regulatory exclusions in insurance policies are one challenge for the cannabis industry as it relates to directors and officers (D&O) policies, he says. This type of exclusion bars coverage when a claim is brought by federal or state regulators against an organization. A regulatory investigation could create financial loss, Ryder says, which in turn could result in a lawsuit brought by shareholders. Therefore, cannabis businesses cannot afford to have regulatory exclusions on their D&O policies, he says.
Due to the cannabis industry’s highly competitive landscape, employers should also consider offering an employee benefits program in order to attract the best talent, Ryder says. Liabilities stem from the development, implementation and administration of these programs, he adds, and fiduciary liability insurance should be implemented to protect assets as it relates to those exposures.
In addition, from an employment practices standpoint, companies should be protected against exposures relating to hiring, termination and overall work environment, Ryder says. This includes first-party liability coverage for the organization to ensure protection in the event of harassment, discrimination and hostile work environment claims, as well as third-party liability coverage to protect against claims from outside vendors or customers.
Companies that are raising capital should also have D&O insurance policies in place to protect against liabilities that can stem from certain regulations, Ryder says. “To have roadshow coverage, which is coverage that protects your organization from statements or representation that you make inside a fundraising campaign, is very, very important.”
In addition, businesses undergoing a public offering, whether an IPO or RTO, should ensure that the transaction is covered by insurance, as these activities often trigger changes in the control provision in D&O policies.
Overall, selecting the right D&O coverage relies on operators identifying their unique exposures and working with experienced brokers to find the policy that works for their specific business, Ryder says.
“Not every dispensary looks the same, not every manufacturer looks the same, and certainly, from a D&O standpoint, not every company from an investor profile looks the same,” he says. “You can have private equity money. You can have venture capital money. You can have public money. And given those different risk profiles, there are different ways that policies need to be created."
