Despite the fact that the Federal Government still classifies cannabis as an illegal, Schedule I substance, cannabis businesses are continuing to grow and prosper in the states that have allowed its recreational or medical use. As the cannabis industry develops, so does the need for insurance services. It is an uncharted territory for these companies and the ancillary businesses associated with them. Furthermore, the apprehension of insurance brokers to enter this industry space has left business owners without the adequate counselling on how to protect their companies with the right coverage and limits.
As is true with any business, the rapidly growing cannabis industry has to deal with a great number of contractual obligations. Business and supplier contracts, insurance contracts, leases, etc. This contractual liability exposure is often overlooked as an issue regarding insurance, when it can be one of the most detrimental. A breach of contract in this industry can lead to heavily litigious processes that many growing companies are not prepared to deal with. It is essential that the insurance broker reviews these contracts in place with other parties, and makes sure that the policy language and requirements are met in order to provide the proper protection.
Another source of uncertainty for the legal marijuana industry is how to protect members of the board of a company from legal implications relating to their investors. This coverage that is, again, often overlooked, is called Directors & Officers liability. It is a form of liability insurance that covers directors and officers for claims brought against them while serving on a board of directors or as an officer. In effect, the policies function as "management errors and omissions liability insurance," covering claims that result from managerial decisions that have negative financial consequences. With the developing laws around this industry, it is important to have this protection, as an external legal issue can directly affect the profitability of the shareholders of a company. New firms with a great deal of start-up investment have the greatest exposure in this regard. The pressure to grown and perform is extremely high, and legal red tape can severely impact business operations. It is a way of providing a safety net against one’s investors. A review of your legal obligations to shareholders with your insurance broker is crucial to determining your D&O exposure.
It is important that insurance brokers take the time to educate their clients on all aspects of coverage for their cannabis business insurance. There is too much capital at stake in these emerging businesses to ignore the exposures that could potentially harm them. At Cannabis Insurance Associates, our coverage review process pinpoints these risk exposure areas, and allows us to allocate the correct coverage at an accurate limit to help provide coverage in this highly uncertain marketplace.