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D&O Insurance Policies Are Essential in Cannabis.

By | Cannabis Community, Featured Article, HR, Insurance, Risk Management | No Comments

Cannabis businesses run a higher risk of facing a “D&O claim,” or a lawsuit aimed directly at the directors and officers of the company rather than at the company itself.

While directors and officers of cannabis-touching companies may no longer have to worry about losing their freedom for choosing to work in the industry, they still have to worry about losing their personal assets through civil litigation. That’s right—their personal assets!

Cannabis businesses run a higher risk of facing a “D&O claim” or a lawsuit aimed directly at the directors and officers of the company rather than at the company itself. In some cases, fighting a D&O claim is so expensive it can bankrupt both a company and its owners. D&O claims in all industries have been steadily increasing for the last two decades and unsurprisingly, more and more of these claims are now popping up in cannabis. It is essential for any business taking the risks of working in the industry to plan ahead and protect themselves from this sort of expensive and damaging litigation.

Fortunately, cannabis businesses have the ability to safeguard their business with specialized D&O insurance coverage. D&O insurance coverage provides broad balance sheet protection for the organization in addition to asset protection for the directors and officers who may be held personally liable for their actions. Lawsuits can be filed by a variety of stakeholders, which is why potential claims can arise from various scenarios. Some common D&O risk scenarios include:

● Shareholder actions or derivative claims

● Reporting errors

● Misrepresentation of prospectus

● Failure to comply with regulations or laws

● Insolvencies

● Creditor claims

● Divestitures

● Competitor claims

Why D&O Coverage is Essential for Cannabis Companies

Any business has the potential to be sued by its employees, competitors, or shareholders. In the cannabis industry it is even more perilous for directors and officers who must also navigate constantly evolving regulations and limited banking resources.

Due to federal law, state-legal companies operate in a grey area, making it difficult to access capital, use banking services, obtain adequate insurance coverage, and access other services that make traditional businesses competitive. Most insurance carriers will exclude claims that fall within federal jurisdiction, so it is important for any cannabis business to seek out coverage that is catered to the industry by people who understand and support it.

While D&O claim insurance is still rare in this emerging sector, it is available—and essential—for cannabis companies. D&O liability insurance protects the personal assets of directors, officers, and their spouses if a suit is ever filed. Most policies cover defense costs, legal fees, and settlements.

Traditional business financing is not available in the cannabis industry, which forces businesses to seek out capital from outside investors, private equity sources and/or venture capital. If an investor feels they were misguided, deceived, or wronged, they may decide to file suit directly against the company’s directors and officers. Any time a business takes on a new investor, they increase the pool of people who could file a D&O claim against them.

All of these factors contribute to a vulnerable industry with steadily increasing D&O class action lawsuits. Here are just a few of the industry’s most notable cases so far:

● Canadian LP CannTrust’s CEO Peter Aceto violated regulations by growing cannabis in unlicensed rooms. His actions led to an 85% decline in the stock’s price, a class action lawsuit, and a personal loss of $8 million in the form of stock options.

● Canadian LP Aphria’s executives were accused of overvaluing Latin American assets. The stock lost over 60% of its value, the company’s co-founders and CEO resigned, and a class action lawsuit was launched.

● American cannabis company MedMen’s executives are facing a $20 million lawsuit over accusations that include a lack of transparency as well as the directors and officers enriching themselves at the expense of shareholders.

● Cronos Group shareholders filed a securities class action lawsuit against the company as well as CEO Michael Gorenstein. The complaint alleges that Cronos’s statements regarding the size of its distribution agreements were intentionally omitted due to their relatively small size in comparison to the premium investors were paying for the stock.

Cannabis Exclusions and Why They Matter

It is necessary to work with an insurance brokerage that specializes in cannabis to reduce risks. Most cannabis companies still operate as startups, and exclusionary clauses put their personal assets at risk. Many policies contain specific cannabis exclusions, so businesses need to seek out policies that cater to the industry. Cannabis insurance brokerages are trained to spot exclusions in policies which leave directors and officers personally liable for damages.

Insurance companies that provide D&O claim coverage to cannabis companies often exclude certain types of claims in the cannabis industry:

● Bankruptcy exclusions

● Creditor exclusions

● Major shareholder exclusions

● Class action exclusion

● Fraud

● Prior acts

● Fines and penalties.

D&O Coverage as a Recruiting Tool: A Must-have for Cannabis Executives

A cannabis company with specialized D&O coverage has a significant competitive advantage in the hiring process. Many experienced executives coming to cannabis from other industries have become accustomed to working with companies that ensure their personal assets are safe from litigation. Whether a company is recruiting a new CEO, president, risk manager, or CFO, the first question these individuals will ask is simple: Does your company have D&O coverage?

If the answer to this question is no, then it is likely the company has already lost the recruit. When looking for a new landing spot, no corporate executive is going to risk joining a team where they can be held personally liable for their decisions.

When a company purchases D&O insurance, they can reassure potential hires their personal assets are not at stake. The insurance policy will often provide protection against some of these common claims:

● Disputes regarding human resources and employment law

● Failure to implement a plan that follows cannabis regulations

● Fraudulent misrepresentation in corporate dealings

● Negligence while performing duties

As a company continues to grow, D&O coverage becomes increasingly more important. This is especially true for companies working towards a public listing or in the process of sourcing additional funding.

 

 

Or, read the article at the Cannabis Business Times:

Kirk Miller is a commercial insurance, risk management, and business strategy leader with more than 20 years of cannabis consulting and insurance industry experience. Kirk is an Executive Producer at Nine Point Strategies. Follow him on LinkedIn:

How to Address Employee Personal Hygiene Issues

By | HR, HRI Events, Training | No Comments

Focus Groups: All Employers

Who Should Attend: Managers, Supervisors, Owners, Human Resources

Webinar – 30 minute PowerPoint

COST: Non-Clients $49.00, HRI Clients, GGRA, & PACE are Free (with coupon code)

Employees with body odor can cause a disruption in the workplace; other employees may feel uncomfortable and, in extreme cases, be unable to perform their jobs. Employees may also begin to talk about the problem in the workplace, which disrupts work even more. Managers may feel ill-equipped to deal with this type of situation and seek guidance from HR. This webinar will provide you with ideas on

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Employee Dress Code and Employer Compliance

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Focus Groups: All Employers

Who Should Attend: Managers, Supervisors, Owners, Human Resources

Webinar – 30 minute PowerPoint

COST: Non-Clients $49.00, HRI Clients, GGRA, & PACE are Free (with coupon code)

Taking the awkwardness out of addressing an employee who dresses inappropriately. Adding a dress code policy to your employee handbook will not only make it easier to address employees who may not be following the policy, but it also gives them a better understanding of what is or isn’t acceptable attire for the workplace. It also helps managers maintain a consistent approach to the issue, which will

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” Workplace Violence/Active Shooter Training – What Employers Need to Know”

By | HR, HRI Events, OSHA, Public Blogs, Training | No Comments

On April 12th at 1:00 pm, we will be doing one of our most-attended webinars this year, ” Workplace Violence/Active Shooter Training – What Employers Need to Know”. As you already know, this is a very hot topic and highly litigious area for all employers. For more details, see our website at www.strattonagency.com  of contact an HR Representative at 925-556-4404 for more details.

Update on the 2018 Flu Season – What Employers Need to know

By | HR, OSHA, Public Blogs, Safety | No Comments
  • As of 1/5/18, there have been 28 flu-related deaths under age 65;
  • As of 1/17/18, there have been 42 flu-related deaths under the age of 65;
  • What is mainly circulating this year is the H3N2 and tends too cause more severe disease;
  • As of 1/17/18, at least 3,269 people in the state have tested positive for the flu, however it is believed this is very much under-reported;
  • As the number of confirmed cases of influenza grows, it is important to increase employee health and safety protocols for each place of employment, including disinfection of all surfaces and continually washing hands;
  • Health officials have recommended a full seven days to stop the cycle of spreading influenza;
  • Some hospitals are starting to initiate “flu protocols”. At Loma Linda Medical Center in San Bernardino County, the medical staff has erected a triage tent outside the emergency room to handle the influx of flu patients. Some of you will remember similar protocols some years back for the H1N1;
  • Employers should review illness protocols with employees and start to address the need for additional help to cover for sick employees;
  • Start stocking up on required personal protective equipment as needed including gloves. If N95 respirators are used, please see us to assist you with meeting Cal OSHA requirements.
  • We can also assist you with flu and handwashing posters;
  • It’s not too late to get flu shots!

If you should have any questions, please contact us at 925-556-4404

Reminder! California Employers Must Provide Notice of the Federal and California Earned Income Tax Credit

By | HR, Public Blogs | No Comments

California employers should remember that they must revise their notice to employees regarding the federal Earned Income Tax Notice to include California’s version of it. Effective January 1, 2017, employers must revise their notice to employees regarding the earned income tax credit when issuing W-2 or 1099 forms.

If you should have any questions, please contact your HR Representative at 925-556-4404.