The latest installment of the Business Insurance Cannabis Update webinar series featured insights from industry experts Mathew Grimes of Hub International, Sebastian Alia of Hudson Insurance Group, and Ben Sibthorpe of CannGen Insurance Services — covering some of the most recent developments with D&O coverage. Among the highlights of this panel discussion:
- The D&O market saw substantial rates increases last year for reasons other than COVID — the pandemic was an added wild card. Carriers were correcting what they felt were soft rates, which was exacerbated by an increasingly aggressive plaintiff bar. At the same time, many carriers have reduced capacity, lowered limits, and writing stricter terms and conditions.
- Cannabis was labeled a hard market on steroids. While claims have slowed, that’s because the courts themselves have slowed with COVID limiting operations. Carriers are concerned over a possible rush to the courthouse in coming years as the statue of limitations on COVID-era claims nears — all these claims will be filed at one time. COVID also gives them an opportunity to judge whether or not recent rate increases are sufficient; new management liability issue may arise as plaintiffs question how businesses managed their corporate affairs and employee well-being.
- As the cannabis industry matures, expect insurance rates to be more on the money. That’s because the regulatory data and insurance data is all getting better with the current wave of state legalization. Companies may see less of the 40% and 50% yearly increases that are now common.
- Should the Senate take positive action on the CLAIM Act, the sister legislation to the SAFE Act for insurance companies, don’t expect the big-name insurance companies to rush en masse into the cannabis space. While the Act would remove money laundering and other criminal concerns over insurers dealing with cannabis businesses, the major carriers still see cannabis as a major risk because of changing regulations on the state side, particularly in markets like California. There are fewer than 10 carriers actively writing D&O coverage for cannabis, and specialty carriers will be the first to enter as regulations ease, followed by the blue chips well down the road.
- It’s vital that cannabis businesses find carriers who will treat them as legitimate business partners; some may only be getting into cannabis for the rate opportunity and writing de minimis coverage that leaves clients bare when claims come in. Taking a base policy and adding exclusions that pare it down to nothing may let a company that buys it say they “have insurance” — but not that they “have coverage.” No one buys insurance for the paper it’s printed on
- Today it’s difficult to find D&O limits higher than $10 million, and that’s a problem in the market. If you only have, say, $5 million in coverage and a $20 million demand is made, you have intense pressure to settle. If you have higher limits, you can better protect directors and officers by mounting a defense.
- Some companies are choosing to go without complete D&O coverage and purchase Side A coverage alone to just protect directors and officers. Others, especially mom and pop operations, are choosing to go bare. Neither is a productive path for attracting top talent; no private equity lender or venture capitalist that wants a seat in the boardroom will sit there naked. And even if there is Side A coverage, why would they provide capital to a company that is setting itself up for bankruptcy?
- Can members of an advisory board be insured under a D&O policy? The short answer: it depends. Underwriters will decide on a case by case basis: who’s on the board? Are they qualified? Do they add value? Are they acting at arm’s length? Geography and jurisdiction also come into the evaluation.
- Even though you may not be seeing much D&O litigation in the private space, there are still significant claims there — they just don’t make headlines the way claims affecting public companies do. In particular, SPACs are vulnerable to valuation suits claiming the directors failed in their fiduciary roles either by undervaluing an asset that was sold or paying too much in bidding for an acquisition. Other claims that filter up to the D&O level include not handling tax returns properly, selling product to minors, or ignoring interstate commerce regulations. Mistakes and malfeasance can and do affect investors as well as management.