Member Blog: Understanding D&O Coverage for the Cannabis Industry

by Jon Spratt, Greensite Insurance Services

Cannabis industry companies face more and sometimes greater threats than non-cannabis companies because of the emerging nature of the market, a complex regulatory landscape, and investor relations.

Because of the challenging landscape, cannabis organizations have some unique risks they may face while running their businesses including:

• High investor expectations and limited access to capital
• The federal status of cannabis
• Varying trade practices from state to state
• Lack of bankruptcy protections 
• Increased merger & acquisition activity 
• State-by-state licensing requirements
• Cannabis-specific local, state, and federal tax laws

Private companies in the cannabis market face threats from many directions, business leaders need to protect their assets and be able to attract top potential directors and officers to their company. The increased exposure to litigation includes disputes such as shareholder disagreement, allegations of mismanagement, and actions by regulatory agencies. Lawsuits can be levied against a cannabis company’s directors and officers and create risk for these individuals and the cannabis company. One way to help mitigate the risk of future losses is by getting Directors & Officers (D&O) insurance. 

Directors & Officers Liability Insurance, or D&O, is a coverage designed to protect an organization and its directors and officers from being held financially responsible for legal action taken by an organization’s employees, vendors, customers, or shareholders. D&O insurance primarily covers the costs associated with an allegation and wrongful lawsuits including defense costs, legal fees, and settlements. D&O insurance does not cover illegal acts.

What is generally covered with D&O Insurance?

Coverage varies, but typically D&O policies encompass three main insuring agreements: Side A, Side B, and Side C. The structure of a policy depends on which of these three insuring agreements are included. Each insurance agreement can specify a distinct insured party. 

Side A

When indemnification is either barred by law or an organization is insolvent and unable to indemnify, the individual director and/or officer can be at risk and responsible for losses. Side A offers protection for an individual’s personal assets in case of a non-indemnifiable loss. 

This offers an extra layer of protection if a company is unable to pay for losses in cases like bankruptcy or regulatory investigations.

Side B

Side B provides reimbursement for the defense of a corporation for expenses incurred while defending its organization’s directors and officers. This protects a company’s corporate assets.

Side C 

Side C, also known as entity coverage, protects a corporation’s interests if a corporation is named in a suit alongside directors and officers. This coverage provides entity asset protection for legal fees, settlements, or other related costs for covered claims, subject to a policy’s terms and conditions. Side C has a broader implication for private and non-profit companies, as Side C typically only protects public companies from securities claims.

When should you have conversations with your broker? 

Buying the correct insurance coverage can be a confusing undertaking for Cannabis business owners. Insurance Agents/Brokers are critical in helping their clients navigate this process and serve as trusted advisors to find the best fit for their client’s businesses. This article aims to demonstrate the differences between admitted and non-admitted policies and their implication for your Cannabis clients.

Running a cannabis company can be challenging and often requires leveraging an insurance broker that understands the cannabis industry. Some questions to help decide when to have conversations about Directors’ & Officer’s coverage include: 

• Are you planning on taking on new investors during the next 12 months? As you take on investors, it increases your risk profile as shareholders can sue on their own behalf or in the name of the corporation. These suits may allege a breach of a director’s or officer’s fiduciary duties of care and loyalty to the company. This type of litigation can result in issues of conflict between the shareholders, the company, and the individual director and officer defendants.
  
• Are you hoping to hire an executive or team of executives within the next 6-12 months? As the cannabis market begins to expand, cannabis companies are looking to attract top talent and at the executive level, D&O coverage is an advantage to many candidates.

What is an example of a recent lawsuit within the cannabis industry? 

Private companies in the cannabis market face threats from many directions. Business leaders need to help protect their assets and be able to attract top potential directors and officers to their company. Below is a recent example of a lawsuit from the Cannabis industry:

• PH Invesco LLC v. Pure Harvest Corporate Group Inc et al., case number 1:22-cv-00094, in the U.S. District Court for the District of Wyoming. Colorado-based cannabis farm Pure Harvest Corporate Group Inc. was hit with a suit by a lender that claims the farm and its CEO breached the terms of a $4,000,000 line of credit it took out. (2022)

This information is provided for general informational purposes only and is not intended to provide individualized business, insurance, or legal advice. All descriptions, summaries, or highlights of coverage are for general informational purposes only and do not amend, alter or modify the actual terms or conditions of any insurance policy. Coverage is governed only by the terms and conditions of the relevant policy.

Jon Spratt leads Greensite Insurance, a specialty MGU providing boutique insurance coverage to the rapidly expanding Cannabis industry. Greensite launched in 2021 and is partnering with agents/brokers to help better protect their clients. Jon also runs a business accelerator that develops and launches new programs on behalf of Aon programs.

Greensite Insurance Services is the brand name for the brokerage and program administration operations of Affinity Insurance Services, Inc. a licensed producer in all states (TX 13695); (AR 100106022); in CA & MN, AIS Affinity Insurance Agency, Inc. (CA 0795465); in OK, AIS Affinity Insurance Services Inc.; in CA, Aon Affinity Insurance Services, Inc., (CA 0G94493), Aon Direct Insurance Administrators and Berkely Insurance Agency and in NY, AIS Affinity Insurance Agency