D&O Insurance Costs Rising for Cannabis Execs as Investors Sue

Canadian and U.S. cannabis companies are facing a spike in already high costs of insurance to protect top executives from personal liability, following a slew of lawsuits by disgruntled investors alleging fraud and misinformation, with more such action expected.

Source: Reuters | Published on July 8, 2020

Glass jar full of Cannabis Sativa for sale at a market stall.

Some of the biggest cannabis companies, including Medmen Enterprises, Canopy Growth, CannTrust Holdings, Aphria Inc and Columbia Care, have faced shareholder litigation, accusing leaders of false claims, failing to act in the interest of all shareholders and attempts to defraud investors.

The lawsuits are yet another sign of souring sentiment against an industry that has failed to deliver on promises of boundless growth. And the rising costs are another headwind for companies already shuttering operations and cutting jobs due to slower-than-expected demand.

"More frequently we’re seeing prospective investors and board members requiring (directors' and officers') coverage in place prior to engaging with a company in order to ensure adequate protection in the event of...litigation," said Charles Grodecki, senior vice president at insurance brokerage AmWINS Brokerage of the Carolinas.

"With claims starting to roll in, we’re beginning to see higher entry-level premiums."

Cannabis companies generated a lot of investor excitement in recent years as the drug was legalized for recreational use in Canada and 11 U.S. states as well as the District of Columbia. Marijuana is authorized for medical use in many more.

But investors have faced losses as well as coronavirus-driven market downturns, and they are increasingly likely to target companies and executives who have not delivered on big promises, like cannabis firms, said Ian Stewart, partner at law firm Wilson Elser.

That could drive rates and deductibles higher, with the industry already paying well above what non-cannabis companies pay for similar insurance products.

"We expect a flurry of cases holding directors personally liable," Stewart said.

Avis Bulbulyan of cannabis consultancy Siva Enterprises, estimates a 50% spike in litigation.

A spokeswoman for Canopy declined to comment. Medmen, CannTrust, Aphria and Columbia Care did not respond to requests for comment.

Source: https://www.nytimes.com/reuters/2020/07/08/business/08reuters-marijuana-insurance-analysis.html