Both the adult-use and medical marijuana industries are growing at an incredible pace. The massive push to normalize the consumption of marijuana, whether it is patients viewing cannabis as just another form of medication or adults seeing marijuana like alcohol, will eventually make the legal cannabis industry as mainstream as any other business industry. Bearing that in mind, cannabis businesses need to understand how to manage their risks appropriately. The risks inherent to the cannabis industry are the specialty of S2S Insurance Specialists. Financial risks for a company starts at the top, hence the creation of Directors and Officers Liability Insurance.
If you are taking outside investor funds from private equity sources, venture capital or friends and family, you need D&O Insurance. Directors and officers bear the most risks associated with owning a privately held, non-profit or publicly traded corporation. As the owner, director or officer of a cannabis business you may take on roles within the company that require providing professional advice or making difficult decisions. Any owner, director or officer in a management positions may be the focus of potential litigation.
All businesses are vulnerable to being sued by shareholders, customers, suppliers, employees or competitors. A recent Towers Watson survey showed that public, private, and non-profit companies all face directors and officers litigation risks. In fact, as the director or officer of a business that handles state legal marijuana, your challenges are more complex with the current State and federal banking, employment and transportation issues the that the cannabis industry faces..
Cannabis is still a Schedule 1 substance, which means it is listed on the Controlled Substance Act making it as illegal of a substance as exists on the federal level. Despite the fact that 30 states have legalized medical marijuana and nine states have either implemented an adult-use market or are in the process of setting one up, banks remain reluctant to accept funds from a cannabis company forcing cannabis business to operate on a cash-only basis. Working exclusively with cash makes filing taxes, especially with tax code 280E preventing marijuana business owners from writing off normal business expenses, difficult to simply organize expenses and income. Considering these additional challenges, Directors and Officers Liability Insurance for marijuana companies is that much more important. Staying organized is the key to having a successful cannabis business.
Directors and Officers (D&O) liability insurance protects the personal assets of directors, officers and their spouses in the event they are personally sued by employees, vendors, competitors, investors, customers or other parties for acts while managing a company. It covers legal defense fees and settlements, and provides the standard indemnification provisions that hold officers harmless for losses due to their position at the company.
Some examples of insurable claims in the cannabis industry have resulted from various aspects of the operations. Let’s say a budtender is in the unfortunate circumstance of being on shift during a robbery or a cannabis trimmer hurts themselves due to faulty machinery. The care of cannabis plants during the cultivation process often involves highly sophisticated equipment, especially for indoor grows, and the preparation of cannabis concentrates can create intense fire hazards. The naming of cannabis strains is a sensitive issue as well. There is no standardized method of naming strains and recent lawsuits against the creators of Gorilla Glue and Girl Scout Cookies ended up in favor of the plaintiffs. The cannabis industry involves many financial hazards in all reality, which makes insurance for marijuana all the more important.
A director or officer could be sued for any of the following reasons:
- Failing at their fiduciary responsibilities
- Misrepresenting company assets
- Using company funds inappropriately
- Misrepresentations by the board of directors
- Failure of the board of directors to take appropriate actions
- Infighting between board members and shareholders
- Not following the laws of the workplace
- Stealing intellectual property or taking a competitor’s customers
- Failure meet state and federal requirements
- Not managing the company properly
Do not think for a moment that your company has to be generating millions of dollars each year for these financial risks to become a reality. According to a 2016 CHUBB survey, financial losses due to lawsuits for the above reasons ranged anywhere from $387,000 to $17 million. Needless to say, losses such as these would devastate most companies, especially a small cannabis business trying to find footing in this complex space. Unless of course that company has taken on the right sort liability insurance for cannabis.
S2S Insurance Specialists provides Director and Officers Liability Insurance for companies in both Canada and the United States. We cover Canadian cannabis businesses including public Canadian companies that are operating exclusively in Canada or in the United States as well. We also provide policies for private U.S. cannabis companies which includes startups and both emerging and mature companies. We write policies from US$1M to over US$25M+.
D&O Liability Insurance can also cover:
- Employers Practices Liability – which protects an employer from a lawsuit filed by an employee for a wrongful act
- Fiduciary/Crime – which covers an employer from a theft by an employee
- Errors and Omissions – which covers General Counsel costs and other professional advice fees, especially for companies practicing in the medical marijuana space.
Directors and Officers Liability Insurance does not cover marijuana companies for any illegal acts.
It must be brought up since the cannabis industry is transitioning away from the illicit market. All cannabis companies must be operating with all of the state licenses and permits necessary to operate legally. Missing, not understanding or forgetting to go through the proper measures to receive a valid license from your state will never be excusable. Please take the time to make sure your cannabis business is setup properly with the state or any cannabis insurance coverage could become void.
Understanding the risks associated with owning a business that directly handles the marijuana plant or an ancillary business connected to the marijuana industry is the business of S2S Insurance Specialists. We are advocates for cannabis, but more importantly we are insurance professionals. Insurance for marijuana companies is essential. We want you to know that you can count on us to not only provide you with proper coverage but also in helping you understand the risks inherent in owning a marijuana company. Those risks start at the top with the directors and officers of a marijuana company. Liabilities exist everywhere in the cannabis industry, whether it is banking or merchant service issues, the Schedule 1 status of cannabis or the normal day-to-day risks of owning any company. Let us help you cover all of your bases and avoid financial setbacks to help you survive and flourish in this new incredible industry where there are no limits for where your company could go.
Contact us at S2S Insurance Insurance Specialist, www.s2sinsure.com or call 1-954-790-6604 and talk to Eric or David Rahn.