D&O Insurance for Cannabis Industry
In a majority of the U.S. states and Canada, consumers can buy and use cannabis. But it’s nearly impossible to obtain the necessary coverage to sell it.
Although cannabis sales have reached record highs in the wake of COVID-19,1 it remains difficult to find insurance for cannabis business’ directors and officers. Without directors and officers (D&O) insurance, it can be a hard sell to attract professionals to governing boards.
A decade ago, major insurers were willing to cover companies that sold cannabis for medicinal use, because they were operating as healthcare entities. However, all but a few carriers have exited the market even though 14 states now allow public use while medical cannabis sales are legal in 36 states.
Cannabis still too risky for insurers
From the standpoint of the insurance industry, cannabis is still considered a major risk. Many states have not legalized cannabis, while the U.S. Drug Enforcement Administration lists cannabis as a Schedule I drug and it remains illegal at the federal level.2 That makes cannabis a business that many carriers aren’t willing to cover.
What’s more, carriers aren’t willing to underwrite a new and emerging market that lacks data. Because the cannabis industry is still in its early stages, there’s not enough actuarial data to override the liability.
Pending federal legislation could throw the door wide open for the cannabis industry. The SAFE and CLAIM Acts provide safe harbor for financial institutions and insurance companies seeking to service cannabis businesses without the threat of federal penalties. In addition, the MORE Act would essentially decriminalize cannabis.3
However, it may be a long time before such federal legislation is signed into law (despite some progress through Congress). In the meantime, cannabis businesses will need to become creative in getting D&O insurance.
Finding D&O coverage in a nearly non-existent market
Traditional D&O insurance policies for cannabis are still available, albeit with a number of exclusions. It’s important to work with a broker with direct access to the cannabis markets and that can negotiate to reduce or eliminate exclusions.
But it’s also incumbent to consider other, non-traditional options:
- Alternative risk transfer solutions. Public cannabis companies may be able to take advantage of alternative risk transfer options. These are vehicles that set aside a pool of money to help indemnify directors and officers in the event of a loss or lawsuit. Alternative risk transfer solutions take on a number of different forms; they are available to specific businesses based on underlying business characteristics and risk profiles.
- Managing General Agent (MGA). New capacity is available through MGAs, and an MGA may be able to provide private D&O coverage with aggressive pricing and retention modeling. While such a policy may not address every exposure for a cannabis business, the policy will not contain creditor, bankruptcy or major shareholder exclusions. Working with a broker who owns his or her own MGA — or has access to multiple distribution channels — is one of the best ways to find the best coverage options and premiums.
The light at the end of the tunnel
As the cannabis industry expands and states continue to legalize recreational and medicinal use, eventually, there will be enough opportunity for insurance companies to enter the market and build more standardized policy forms that will reduce rates for D&O and P&C coverage.
Because numerous states have already seen the positive effect cannabis sales have had on their tax revenue, expansion is likely to continue on a state-by-state basis.
