Takeaways from Our Conversation on Cannabis D&O

April 29, 2022 by Don Jergler

Directors and officers insurance is pricey and difficult to obtain in most business sectors, but by some accounts cannabis businesses may pay up to 50% more in premiums for D&O – if they can get it.

A Fitch report out in late March shows “several years of U.S. director and officers’ insurance rapid premium growth led to a material decline in 2021’s direct loss ratios, which may continue in the near term.”

For our latest Insuring Cannabis podcast we spoke Dave Zerones, a sales leader with Greensite Insurance Services, a cannabis management liability program launched by Aon in February, and Walt Baker, vice president of directors and officers liability at Golden Bear.

Following are takeaways from that conversation.

Baker has been in D&O for more years than some professionals have had a career.

“I’ve recently heard the D&O liability market for cannabis companies has been described as a hard market within a hard market,” Baker said. “And, frankly, the D&O rates and retentions for the cannabis industry have been quite elevated. And, as well, getting capacity for limits over $10 million is quite a challenge for buyers.”

Asked to put a number on rates he was seeing for D&O for cannabis compared with non-cannabis companies, he said it was difficult because the market was so new.

“But what I’ve seen and the articles that I’ve read and the information I’ve looked into is sometimes the cannabis companies have to pay upwards of 50% more than the regular commercial D&O policy,” he said.

Greensite works with Golden Bear, and it distributes through brokers and agents across the country where it’s legal, providing coverage for plant-touching and non plant-touching operations.

Zerones gave his thoughts why D&O is a tough line of business.

“So we know how tough it is outside of the cannabis space,” he said. “And then, D&O inside the cannabis space is coming into an even tougher segment. And it has to do with the amount of money that’s flowing in the space from an investor point of view, the M&A transactions, the other kinds of fundraising, companies trying to go public. So, there’s really a lot of activity right now in the cannabis space from a funding standpoint. And whether there’s funding activity, there’s definitely going to be exposure and potential losses that D&O can help protect against.”

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Lawsuits, and claims as a result of those actions, aren’t making the space any easier.

One suit he touched on was MXY Holdings, which sells cannabis products under the Moxie brand. On July 19, 2021, a group of the foreign investors filed a shareholders’ derivative lawsuit in California asserting asserts a derivative claim for breach of fiduciary duty.

“In May of 2021, they were going to go public to raise capital. And then during that process, they raised about $30 million, but they never completed the IPO by the target date,” Zerones said. “And then, the director stepped down and didn’t secure placement, a replacement for himself, and then in July of last year, a suit was filed. And so, that lawsuit is still ongoing. It’s still in the process, but it’s indicative of what’s happening in the space…from a funding perspective of there’s a lot of investors coming into the space, and it’s a challenging space from a regulatory perspective across the country. So that’s just one example of how funding can be challenging, especially in those failure to launch situations.”

Some good news for insureds: Zerones thinks D&O won’t always be so difficult for cannabis.

“I think the wonderful thing that’s happening in the management liability space is that more carriers are coming in,” he said. “So, there are going to be more solutions available today obviously than there were two years ago. And so, you’re going to see through competition what customers want and what is really necessary and what is going to support those customers as they grow and prevent them from having large losses. So I think the competition’s really going to help. And that is going to really dictate what’s going to survive and what’s not.”

He added: “I think the expertise in the D&O space is unique for what we’re trying to do, but everybody taking a different approach is really going to help the customer in the end be able to purchase products that are viable, profitable, and can protect them.”

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