Directors & Officers Liability Insurance in the Cannabis Business

When one finds themselves in the middle of an engaging conversation in any social gathering, Directors & Officers (D&O) coverage is likely not the topic. It’s not sleek or exciting but proves to be a very
necessary coverage for many business owners.

D&O can be best described by its actual definition, and there are many different instances where this
line of coverage simply cannot go overlooked. Those businesses with investors and board members tend
to be the most vulnerable to the areas a D&O policy covers.

Today we will talk a bit about how important it is for cannabis business entities to purchase this
coverage and consequently sleep better at night.

Directors & Officers Liability Insurance

D&O is liability insurance payable to the directors and officers of a company, or to the organization
itself, as indemnification (reimbursement) for losses or advancement of defense costs in the event an
insured suffers such a loss as a result of legal action brought for alleged wrongful acts in their capacity as
directors and officers. Such coverage can also extend to defense costs arising from criminal and
regulatory investigations or trials; in fact, civil and criminal actions are often brought against directors
and officers simultaneously. Intentional illegal acts, however, are typically not covered under D&O
policies.

One of the most common claims that can trigger a D&O policy revolves around the misappropriation of
funds and the cannabis niche dramatically lends itself to such claims.

Caleb Johnson, Director of Business Development & Client Relations – Conway Cannabis Practice.

The Investment

The cannabis industry requires a significant amount of start-up capital. This is especially true for states
like Missouri, which requires a specific amount of funds to be available even to work toward getting
approved for a cannabis business license. Many of the purveyors of these entities didn’t have this level
of funds sitting idle in a bank account or tucked under a mattress.

• $500,000 for cultivation applicants
• $300,000 for dispensary and manufacturing applicants
• $200,000 for testing facility applicants
• $150,000 for transportation applicant

As well as the amount for the initial application and the renewal application

• $10,000 for cultivation facilities
• $6,000 for dispensaries and manufacturing facilities

Because these amounts are so enormous, right out of the gate, most cannabis entrepreneurs have had
to enlist the assistance of investors. However, in most med-states (except Oklahoma, for example),
there is no guarantee that you will get one location to start and equally no guarantee that once you get
your first location up and running, you will be granted any more licenses within or outside of the
intended vertical.

Do You Get the Cannabis License?

So, the risk comes when you handle the monetary transactions for your investors in the scenario of a
business lottery, such as cannabis. If the entrepreneur does not get the license they seek, then two
significant concerns come from that.

1. Did you do everything within your power to apply for and obtain the license for which
   you are seeking approval?
2. You are guaranteeing your investors that you are knowledgeable and educated to apply
   for and obtain a cannabis license – think of this as a bond or a warranty in the
   construction world. The investors are putting their faith in your expertise.
3. If you did not get approved for the license, you would likely need to pay all the money
   back to your investors, and to expect that you will not have spent any of it throughout
   the process is often not a reasonable expectation.
4. What if you get approved for a license and incorrectly calculate the cost of what it takes
   to get the operation up and running?
5. Did you answer everything on the cannabis application correctly? Mind you – these
   applications are massive and more closely resemble the technicalities of an engineering
   manual.

All five of these scenarios lend themselves to you facing a possible misappropriation of funds claim.
Although they are often associated with some “sticker shock,” professional policies such as D&O can give your investors peace of mind and better protect you as you navigate your entrepreneurial journey.

Conway’s leading experts specialize in insurance and risk management for all aspects of the cannabis industry. Through our expertise and innovation, we have delivered comprehensive solutions nationally since 2012.

Learn more about our comprehensive Cannabis Solutions today.