Brokers with cannabis clients need to keep an eye on the changing legal landscape and cannabis companies’ evolving needs, paying particular attention to directors’ and officers’ liability, a managing general agency told Canadian Underwriter recently.
Recreational cannabis became legal in October 2018. This past October, products like edibles and cannabis-infused beverages were legalized, meaning brokers need to know the ins and outs of their particular clients’ cannabis products to ensure continued coverage.
“Brokers and agents really need to be on the ball with the changing legal landscape and being aware of what their clients are doing and what new product they’re coming out with, as this can be a material change to a risk,” said Allison Sinha, senior underwriter in the property and casualty department of Burns & Wilcox. “It’s something that they need to let their insurance carriers become aware of.”
For example, Health Canada requires that edibles be prepared in a separate facility away from other cannabis products. So, a broker may need to make sure that insureds are adequately covered for different operations, suggested Sinha, who spoke with Canadian Underwriter late last month about what brokers with cannabis clients need to be thinking about in 2020.
From a D&O perspective, there are several questions to consider:
What are directors’ and officers’ past experiences?
“We see a really wide variety of board members…and a majority of them have experience in the pharmaceutical or farming industry,” Sinha said. “Which is really great, because they can bring those past experiences to the table to help navigate various legal and regulatory requirements and ensure that their companies are running appropriately and everything is above board.” Some directors come from different business backgrounds, including banking or other financial services sectors.
Have most directors of a cannabis company served on a board before?
“Yes, typically we see people who have served on boards prior to coming onto a cannabis board,” Sinha said. “It is something we look for and it is better for us if they have because we like to see track records and past experience in order to be able to provide them with the coverages they require.”
Are cannabis board members over-promising profits to shareholders?
“We have seen that in the past, and we do continue to see that on occasion moving forward,” Sinha said. “I think individuals are being a lot more cautious about over-promising because we have seen claims that have resulted directly from those situations, as well as scenarios in which the board thought it could provide [higher profits] and couldn’t.”
Health Canada has strict requirements for licensing, regulation and packaging of cannabis, such as ensuring edibles aren’t attractive to youth and children. “That’s really important for the insurance industry in particular,” Sinha said, “because it allows us to be able to insure these individuals knowing that the regulations are so strict.”
The federal health department also conducts frequent spot checks and can suspend or revoke licences if the licensee is found in contravention of the regulations. For example, if a licence is for 100 plants and the grower produces 102 plants, “then [the grower] would be at risk of having their licence revoked,” Sinha said. “As it relates back to insurance, if you are growing more plants than your licence allows, technically your operation is illegal so that could also put you at risk of not having your insurance coverage paid in the event of a loss.”
When recreational marijuana first become legal in Canada in October 2018, Canadian Underwriter heard that there was initially little appetite to insure the product. Has that changed with edibles? “I haven’t seen a large change, if a change at all,” Sinha said. “The insurance companies that are insuring cannabis risks have been prepared for this change for the past year. We’ve seen the edible regulations come out well before they were legalized, so it allows us to see what the landscape is looking like and to be able to amend our policies or change our appetite accordingly.”