Directors and Officers Liability Insurance in the Cannabis & Hemp Industries

Directors and Officers Liability Insurance in the Cannabis & Hemp Industries

The legal cannabis and hemp industries have enormous room for growth. One report from New Frontier Data shows that legal cannabis sales will come close to $30 billion by 2025.

Despite the potential growth of legal cannabis and hemp sales, the industry is still very young. As a new industry, no one knows what will happen. Companies may reach or exceed the projection from New Frontier Data. Then again, the cannabis industry faces a lot of risks that could harm cash-strapped businesses struggling to earn profits.

The wide range of risks makes it crucial for the directors and officers of cannabis companies to get liability insurance that protects them from personal financial loss.

Risks Can Come at Unexpected Times

The cannabis and hemp industries face some ongoing dangers. A lot of states still haven’t adopted recreational cannabis laws. Nearly 18 states don’t even allow medical marijuana.

Luckily, most cannabis and hemp companies understand federal and state laws well enough that they can avoid prosecution. Plenty of other risks, however, can come at unexpected times.

In March, one of the world’s largest cannabis companies announced that it would layoff 500 employees and close two of its indoor cultivation facilities. The Canadian company says that it made the changes because:

  • The recreational cannabis market grew slower than expected in Canada.
  • Changes to federal law permitted outdoor cultivation after the company had invested in expensive greenhouses.

The cannabis company couldn’t have foreseen these risks when it spent a significant amount of money developing indoor cultivation facilities intended to meet the anticipated demand.

Risks That Could Harm Directors and Officers

Other hazards that could harm the directors and officers of legal cannabis and hemp companies include:

  • Failing to meet profit expectations.
  • Falling short of security requirements that protect inventory and cash.
  • Letting customers purchase more products per visit than allowed by local law.
  • Selling products that don’t comply with safety laws, such as labeling products and placing items in childproof containers.
  • Data breaches that leak customer information to criminals.

Like any business, cannabis and hemp companies can also get accused of things like:

  • Breach of duty.
  • Breach of contract.
  • Misrepresentation.
  • Unfair competitions.
  • Misappropriating trade secrets.

Any of these risks could leave companies open to lawsuits from investors, vendors, customers, or government agencies.

Protection Offered by Directors and Officers Liability Insurance

When companies make mistakes, directors and officers can expect repercussions. Failing to label a product correctly, for example, could mean that a vendor can sue the supplier. If the supplier mislabeled the product, the vendor could very well win the suit.

Directors and officers liability insurance helps ensure that the repercussions only affect the business. The insurance offers personal protection to directors and officers who hold policies.

Depending on the policy, directors and officers liability insurance may pay for legal defense related to:

  • Company performance.
  • Decisions that exceed a position’s role.
  • Not complying with regulations.
  • Regulatory infractions.
  • Mismanagement of funds.

Directors and officers liability insurance does not cover all activity, though. Business leaders should not expect liability insurance to protect them from:

  • Property damage.
  • Personally profiting from misdeeds.
  • Fraud.
  • Litigation started before getting liability insurance.

Finding Directors and Officers Liability Insurance for Cannabis Companies

Hundreds of insurance providers sell directors and officers liability insurance policies. Unfortunately, few of them are willing to sell policies to the directors and officers of cannabis companies. Even when a company operates legally, insurance providers tend to avoid the cannabis and hemp industries.

Directors and officers liability insurance also tends to cost a lot more for business leaders in the hemp and cannabis industries. Directors and officers working in the cannabis industry can expect to pay two to 10 times more than those working in areas like technology and manufacturing. Prices can range anywhere from $20,000 to $100,000 per year.

The industry has faced similar challenges from banks and lenders. Until Congress changed its “suspicious activity report” rule, most banks decided that they didn’t want to work with hemp growers, manufacturers, and sellers. Thankfully, the law has been changed to make banks feel at ease when creating accounts for hemp businesses.

The recreational cannabis industry, however, still faces a lot of challenges that prevent companies from accessing the services they need from banks and insurers.

Hopefully, the insurance industry will evolve as more states legalize recreational cannabis. Some insurance companies, however, will probably stay away from cannabis until the federal government lifts prohibition. Until that day comes, directors and officers will have to spend higher-than-average amounts of money on liability insurance available from a handful of companies.

Do Cannabis and Hemp Companies Need D&O Liability Insurance?

Anything can happen in a rapidly evolving market. Investors may feel angry when they don’t see quick returns. Government agencies may pursue litigation against cannabis companies that operate within the law. Business leaders could make bad calls that hurt company performance.

Given the unknown level of risk, it makes sense for companies to protect their directors and officers with D&O liability insurance. Without a reliable insurance plan, experienced CEOs and managers may choose to stay in other industries until they see more certainty. Losing those people would limit a company’s ability to reach or exceed expectations. That makes D&O liability insurance essential.

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March 10, 2020Comments Off

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