Why Protection for Cannabis Business Directors and Officers Is Essential
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Why Protection for Cannabis Business Directors and Officers Is Essential

Claims against directors and officers (D&O claims) have been rising steadily for the last two decades.

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July 10, 2019

When cannabis was illegal, cannabis business leaders had to worry not just about losing their freedom but all their property and assets via civil asset forfeiture. Post-legalization cannabis business leaders will find they still need to manage a similar risk, except now instead of being prosecuted and losing everything as criminals, they need to worry about losing personal assets through civil litigation.

Not only can directors and officers be liable for the crimes or missteps of the corporation at large, it is extra murky for businesses in the cannabis industry because they either are profiting from an illegal drug or serving other businesses that do.

Claims against directors and officers (D&O claims) have been rising steadily for the last two decades. According to Travelers, one in three companies is likely to experience a D&O claim—and the semi-legal cannabis industry is no exception. Directors and officers can be sued directly by pretty much anybody; investors, customers, regulators, competitors, employees and vendors.

Fighting a D&O claim is expensive, and can lead to personal or company bankruptcy.

Many cannabis industry directors and officers have no protection at all or they are receiving protection from an agency that could drop them, should they find out they are working with the plant.

RELATED: Why Cannabis Investors Should Focus on Risk Management

Some policies that do deal with cannabis money have restricted definitions in the claim that would only cover regulatory investigations, and some exclude federally illegal acts. Sometimes the policy will still be sold despite a lack of certainty that everyone involved with the policy – the client, broker, their wholesaler or managing general agent- has disclosed cannabis industry involvement. Most major insurers, like Lloyd’s of London, have explicit policies against working with cannabis industry money in the U.S.

For those parties that touch the cannabis industry in any way, they need to review their coverage and ensure that they have disclosed their involvement with the industry in their applications for coverage. Any company that takes money from the cannabis industry in any way could become the subject of a civil RICO suit. They have to ensure they are protected in the event of such a claim. Proper disclosure to insurers will ensure you are not left on the hook without coverage. 

That said, there are a lot of pitfalls to relying on D&O claim policies that don’t specifically address the cannabis industry, including finding out purchased coverage doesn’t actually sufficiently protect directors and officers.

There is a lack of tailored coverage for the industry; there are quirks and idiosyncrasies to the cannabis industry that need to be reflected in your policies, or you can be on the end of a denial of coverage when you thought you had protected yourself.

Anyone selling investments to third parties needs to have coverage that effectively responds to allegations from investors and regulators. Cannabis investment to date has been hugely influenced by family offices and very wealthy individuals making investments they can afford to lose on and who understand that returns are not guaranteed. But there are individuals who have invested who are banking on this providing them with a return, and when that goes wrong, they will sue.