Cannabis and the D&O market in 2022
In the early days of 2022, cannabis companies and investors have cause for guarded optimism. The once very real specter of federal intervention in the burgeoning industry seems to have faded into the background as successive presidential administrations have declined to push the issue, and now, all but two states have legalized cannabis in some form. With the cannabis industry reporting record profits despite a global pandemic and continued federal illegality, and numerous states and localities turning to it to fill revenue gaps left by COVID-19, it seems fair to say that cannabis has gone mainstream (see Earl Carr “What You Need to Know About Cannabis in 2022 and Beyond” Forbes).
Yet, as much as some things change, others stay the same. Despite the maturation and growth of the cannabis industry and its significant players, the directors and officers (D&O) insurance marketplace remains treacherous. Many major insurers still refuse to offer D&O coverage to the cannabis industry altogether (see Matthew Lerner “Finding D&O coverage remains a challenge for cannabis companies” Business Insurance), while a minority have decided that the opportunity outweighs the risk – with “opportunity” here meaning the ability to charge cannabis policyholders premiums between two and ten times the market average for coverage that is often quite limited. (See David Kennedy “Directors and officers liability insurance is increasingly important – and costly – for cannabis companies” MJBizDaily).
Cannabis companies, for their part, face a Hobson’s choice: either pay a substantial mark-up for a D&O policy that may or may not provide any meaningful coverage, or remain completely uncovered (others have turned to alternatives like captive insurance, a topic for another article (see, e.g., Ryan Smith, “ARS Launches Captive for Cannabis Company,” Insurance Business Magazine)). At a time when D&O insurance is increasingly expensive across all industry sectors, these factors have led some analysts to describe the cannabis D&O marketplace as “a hard market within a hard market.” (See Kimberly E. Blair, Jonathan E. Meer, & Ian A. Stewart “Cannabis Directors and Officers Liability: Cause for Optimism?” The National Law Review Vol. XI, 189, July 8, 2021)
Navigating the D&O marketplace
While a policyholder has little power to affect the broad market trends making D&O insurance overly expensive, by engaging with experienced coverage counsel and broker support for a careful review and negotiation of specific policy language, the policyholder can at least make sure they’re getting what they paid for. This is especially true for cannabis D&O policies, where exclusions specific to the industry often go farther than they seem, and generic exclusions carelessly thrown into a policy can potentially void coverage altogether.
An example of the former is the “regulatory exclusion,” typical in some form for D&O policies issued to the industry, which excludes coverage for claims and investigations made as a result of regulatory action (see “Addressing D&O Insurance for the Cannabis Industry” GB&A Insurance (last visited Jan. 3, 2022)). While such an exclusion may be understood by the policyholder as applying to cannabis regulations, overly broad wording could potentially apply the exclusion to all sorts of regulatory behavior, from corporate governance to bankruptcy. Diligent review can ensure that these regulatory exclusions contain proper language limiting them to cannabis regulations, thus preventing them from creeping up unexpectedly in other situations.
For an example of the latter sort of exclusion, one need look no further than the “intentional acts” exclusions, common to D&O policies across all industries, that exclude coverage for claims arising out of intentional illegal acts by directors and officers (see “Reading the Fine Print: Are Your Directors and Officers Protected?” Shield Banking). These generic exclusions, which may not be problematic for most companies, obviously take on new meaning in the context of an industry that is illegal under federal law, where virtually all conduct by directors and officers could be characterized as intentionally illegal. Here, careful review can ensure that such a provision is made exclusive to non-cannabis-related acts, making it clear that the policyholder’s contravention of federal drug law will not void coverage.
The cannabis industry must be proactive. By retaining savvy counsel from experienced lawyers and brokers, cannabis policyholders can better navigate the treacherous waters of overbroad and problematic exclusions, among other complex policy terms. Cannabis companies considering the purchase of new or expanded D&O coverage would thus do well to invest upfront in a careful review of the policy language. Such an investment could pay off in the event of claims later.