We are cannabis attorneys, so naturally we like to tout good news for the cannabis industry. If that is what you are looking for here, however, don’t read the rest of this post. Simply put, there has not been a ton of good news for the industry lately. Cash remains scarce and banking reform is not moving. Sales have been resilient, but the COVID-19 crisis continues to act as a headwind. States, including Illinois, are facing increased obstacles to get fledging markets off the ground. Once promising mergers and acquisitions have failed. And now a recent article from the Insurance Journal suggests a new looming problem in increased directors and officers (D&O) insurance costs.
D&O insurance generally protects directors and officers from personal liability for their role in company operations. Federal illegality has made that insurance expensive from the get go. Many insurers are not even in the space (Lloyd’s of London and the Bermuda insurance regulator does not allow insurers to underwrite U.S. cannabis companies), minimizing supply and increasing costs. According to the article, entry-level D&O insurance for public companies is $250,000 for $1 million in coverage, and that is with a $1 million retention that the company must pay before the insurance even kicks in. Even in Canada (where cannabis is fully legal), D&O insurance is multiple times higher (3 to 7) than D&O coverage for a company in a non-cannabis, decade-old industry,
A more recent development—shareholder lawsuits—is threatening to send those costs even higher. In the last 30 months, there have been over 25 shareholder lawsuits against cannabis company officers and directors, including against such well-known cannabis companies as Medmen Enterprises, Canopy Growth, CannTrust Holdings, Aphria Inc., and Columbia Care. Many of the cases make serious allegations and threaten serious liability. More of these lawsuits are likely on the way considering some of the challenges in the industry. Kirk Miller from Nine Point Strategies paints a grim picture of insurance prospects, stating “[w]ith both Lloyd’s and [insurers from] Bermuda pulling out of the U.S. cannabis market, coupled with the 25+ security class-action lawsuits over the last two-and-a-half years…underwriters’ appetite for cannabis is narrowing.”
The ramifications of the increased cost of D&O insurance could also be felt beyond the bottom line. The risks that increased D&O premiums are reflecting will make it harder for cannabis companies to attract top talent. It is already a significant risk for an executive to leave the non-cannabis sector, and the risk of shareholder liability only adds to that. This could create a vicious cycle—talented executives don’t enter the industry because of the risks, and the less talented executives that remain only increase the risks through problematic management. We are not at that point yet, but we are keeping our eye on comings and goings in the industry.
Please check our blog for continued updates on all types of happenings in the cannabis industry.