CANNABIS INDUSTRY firms are seeing significant hikes in their directors and officers (D&O) insurance rates after a number of them have been sued by unhappy investors.
According to a report by Reuters, large cannabis companies like Medmen Enterprises, Canopy Growth, CannTrust Holdings, Aphria Inc. and Columbia Care have all been sued by shareholders, and industry insiders say they expect more litigation in the short run. Accusations against the top executives at these firms include:
• Making false claims,
• Aiding and abetting in fraud,
• Failing to act in the interest of all shareholders, and
• Attempting to defraud investors.
Investors poured money funds into the industry over the past few years as more states started legalizing cannabis for recreational use and medicinal purposes.
But many cannabis companies, like others, have been suffering during the COVID-19 pandemic, causing sales to flag and targets to be missed. This has prompted more investors suing.
Cannabis consulting firm Siva Enterprises predicts a 50% increase in litigation over the coming year, Reuters reported.
Spiking rates
To protect their top executives and board members against these kinds of lawsuits, companies purchase directors and officers insurance, which will cover legal expenses in the event a company executive is sued for alleged wrongful acts in their capacity as a director or officer.
Coverage can extend to defense costs arising out of criminal and regulatory investigations and trials, as well as civil and criminal actions that are often brought against directors and officers simultaneously.
Intentional illegal acts and fraud, however, are typically not covered under D&O policies, which leaves the company and executives exposed if they are found to have engaged in such activities.
As a result of this tide of litigation, D&O insurance rates for publicly traded cannabis companies have exploded, policies are often difficult to place and insurers are adding more exclusions and increasing retention levels (what the insured has to pay out of pocket before coverage kicks in).
For $1 million in coverage, D&O insurance rates for public companies have more than doubled to $250,000 in the past year.
Additionally, we have seen policies with a $1 million limit and a retention level of between $500,000 and $1 million.
This increase in premiums and insurers pulling back has left some cannabis firms unable to secure D&O insurance coverage, or they are having to settle for policies with lower limits and coverage that may not be adequate.
In the best of times D&O coverage for the cannabis industry is a rare product, because many insurers won’t cover the industry because of federal laws under which cannabis is still illegal.
Also, Lloyd’s of London and the insurance regulator of Bermuda have prohibited insurers from underwriting cannabis coverage in the United States.
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