Do You Need D&O Insurance to Protect Your Cannabis Business?

Do You Need D&O Insurance to Protect Your Cannabis Business?

Within the Commercial Insurance market, Director and Officer (D&O) insurance provides coverage for executives from lawsuits related to a company’s business. Learn why D&O insurance is a great additional protection for any company within the cannabis industry.

 

What is D&O Insurance?

Director and Officer Insurance is a policy obtained by a company to provide coverage to company executives from potential lawsuits that are related to their roles within the company. Lawsuits can come from outside of the company, such as competitors or creditors, or within the company, such as investors or shareholders. While many companies will legally indemnify their executives from any potential wrongdoing related to their management decisions, various states often place limitations on executive indemnification, putting company officers at risk. So, many companies will take out a D&O policy on behalf of executives to cover them in the event that a company’s legal indemnification is limited.

 

Does My Cannabis Business Need D&O Insurance?

Like most businesses, a cannabis business needs to determine if the risks for executives merit the costs of obtaining a D&O policy. However, the Cannabis industry has existed in a legal grey area since its inception a handful of years ago. Therefore, it is to be expected that premiums and coverage specifics will be different from more traditional businesses. The vast majority of small businesses that are run by the founders or have limited investors usually do not obtain D&O insurance. However, the larger and more established the business, the more likely that the company will carry such coverage. An additional advantage of the obtaining a D&O policy is the ability to attract higher caliber executives and management to the industry. As the Cannabis industry continues to gain acceptance, both investors and operators see the potential opportunities. However, most will require additional protection before devoting their careers to a new industry with multiple financial and legal challenges.

 

What Are Best Practices to Obtain D&O Insurance?

Currently, there are fewer underwriting choices for the Cannabis industry than there is for other industry. However, it is still possible to obtain D&O Insurance for your cannabis if you follow the following suggestions:

  • Know How to Explain Your Business: A cannabis business should be conscientious in explaining both their type of business for underwriters, where it exists within the industry (farming, distribution, retail sales) and how it works. The better a potential insurance company understands your business, the easier it will be for them to issue you a policy that is correct for your company.
  • Document, document, document: Meticulous and comprehensive record-keeping of your cannabis business will help allay an underwriter’s fears. While it is imperative to keep clean financial records it is also important to be able to document Board meetings and decision making.  
  • Check for Insurance exclusions within a potential policy: It is common that most D&O policies will have exclusions related to your state’s regulatory policy, however, the vast majority of D&O policies are obtained to protect the assets of executives from a company’s potential insolvency (bankruptcy) which an underwriter may or may not be willing to underwrite. Make sure your insurance broker reviews any potential carve-outs to make sure that the exclusions are appropriate to your business.

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If you have additional questions on if D&O Insurance is correct your business or how to apply for it, please feel free to check out our Cannabis Industry page, reach out to me at 626.703.1556, or just email me at ctobin@boltonco.com. I can help you avoid a lot of headaches and make sure you have the right coverage.

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Corey Tobin

About Corey Tobin

With close to a decade of industry experience, Corey has worked with a number of small and medium-sized businesses and is knowledgeable about property and casualty, life and health insurance. Corey specializes in working with elevator contractors, manufacturing, distributing, healthcare and construction. Additionally, he is focused on the unique needs and challenges facing cannabis related business, including dispensaries, cultivators, extractors, developers and much more.

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