As the cannabis industry evolves with a changing legal and social scape, the insurance coverage needs for cannabis businesses change along with it. Directors and Officers Insurance is integral to covering cannabis businesses. Cannabis business owners need Directors and Officers Insurance to protect their company’s board members and executives.
Overview: Directors and Officers Insurance
Directors and Officers Insurance, or D&O Insurance, protects a company’s directors and officers’ assets if sued. It covers directors and officers of a company from settlements, legal costs, investigation costs, and judgments.
D&O protects from financial detriment and personal liability if an executive breaches fiduciary duty, mismanages, or commits other wrongdoings.
It protects the company when its executives are sued for wrongful acts and omissions.
D&O v.s. Other Types of Insurance
D&O, however, does not cover employee claims. These are covered by Employee Practices Liability Insurance (EPLI).
Additionally, bodily injury and property damage are covered by General Liability Insurance, not D&O.
Errors and Omissions Insurance covers professional mistakes or negligence by any employee. In contrast, D&O covers wrongful acts and omissions of only executives. Intentional misconduct and crimes are not always covered.
If directors and officers commit a professional mistake before the policy is implemented, it will not be covered.
D&O Insurance Cost Determination
While integrated risk management is the best way to address the risks of your cannabis business, let’s review what an insurance carrier determines the cost of your D&O insurance policy to be.
- Cannabis industry risks
- Revenue
- Company size
- Claims history
- Limits and deductibles on policy
- Risk management integration
Do You Need D&O Insurance?
Any business with a board of directors and executive officers should have D&O Insurance. Companies seeking outside funds from shareholders and investors often have D&O because it is a sign of responsibility.
Large and small companies alike can benefit greatly from D&O insurance. Large companies have many directors and officers, but small companies lack the resources of bigger businesses. Therefore, businesses of any size could find D&O useful.
So why is D&O so important for cannabis businesses specifically?
Cannabis Businesses Need D&O Insurance
D&O claims are the top reason for losses, according to cannabis business owners. This is why D&O Insurance is particularly valuable to cannabis business owners.
The cannabis industry is newly legal and expanding. Therefore, having protections in place for those in management positions who might do something wrong in the face of many confusing regulations and laws is very important.
When a business is new, it is vital to protect its reputation; D&O Insurance can help protect it.
Additionally, new cannabis businesses are seeking directors and officers to join their company to help it grow. Without a good D&O Insurance policy, many directors and officers will refuse to join.
Investors who are promised growth by the directors of a cannabis company that then loses money on their investment are suing more and more in the industry as well.
As cannabis businesses grow and change, mergers happen pretty regularly. D&O Insurance is a valuable asset in mergers that covers dishonest management in a business deal.
The Risk of AI
An interesting emerging risk for directors and officers is artificial intelligence.
While AI is an incredible tool for increasing a business’s efficiency, it is known to commit mistakes that can harm the company and its customers. Because AI performs part of the job of directors and officers, they are blamed for any AI mistakes.
A company whose directors and officers understate their use of AI in their disclosures may face large problems. Therefore, if the AI does something incorrectly, the directors and officers are liable because of this lack of disclosure. Essentially, the AI was doing their job, and they didn’t say so, which makes it the executive’s fault.
Even beyond this, directors and officers are currently viewed as largely responsible for the implementation, or lack thereof, of AI into companies. Implementing AI is a dangerous game.
Here are some of the biggest perceived risks of using AI in company operations:
- If directors and officers do not disclose how involved AI is in making corporate decisions, this introduces legal liability.
- Directors and officers can be seen as negligent if the AI fails in such a way that it introduces parties to make claims, such as discrimination and privacy violations.
- If the AI is flawed and the directors or officers fail to address it, they can be liable for product liability.
- AI can create flawed reports on behalf of directors and officers. This effectively means that the directors and officers misrepresented the information in those reports.
- If an AI incidentally uses inside information from another company to set something like prices, this can lead to competition claims.
A lack of Directors and Officers Insurance when using AI for business matters is a dangerous game. If your cannabis company is doing so, address those risks before moving further.
A True Story
Cannabis businesses are seeing lawsuits regarding director and officer mismanagement quite a bit these days.
In one story, Shane Lynn sold his Vermont cannabis business to SLANG, another cannabis business, in a multi-million dollar merger. This merger was agreed to under the pretense that SLANG was expected to grow at such a rate that Lynn would be paid millions of dollars in a few years.
This, however, was a deceitful promise made by a few previous executives and board members at SLANG, who were found to be negligent and representative of the company’s bad finances leading up to the merger.
Lynn handled the merger of stocks. This means that he needed SLANG to perform well to get the payout from the merger.
Partner with POWERS Insurance
Insurance alone is not enough to fully protect your business. Managing risk involves various strategies, with a key focus on addressing your financial risks. The first step is to implement a strategic risk management plan.
We can help with that! We will conduct a comprehensive assessment of your risk profile to identify known and unknown risks.
At POWERS Insurance & Risk Management, we stand by your side. We understand the unique risks that cannabis businesses face. We want to help you understand those risks and prepare accordingly.
Our role is to help you select the insurance product that best suits your needs, ensuring you maximize your policy’s benefits. Following this, we will collaborate with you to develop an integrated risk management plan that empowers you to make informed business decisions.
Schedule a free consultation today.
