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Protecting the Decision-Makers

Protecting the Decision-Makers

The role of directors’ and officers’ insurance in the legalized cannabis industry

This blog was provided by David Kerr, National Practice Leader, Life Sciences at Gallagher.

Directors and key managers are responsibility for making key decisions that shape the trajectory of the organization they serve. In light of this profound responsibility, safeguarding decision-makers from a legal perspective is crucial. This emphasis on legal safeguards parallels the comprehensive protection afforded to the entire business entity.

Few industries are as fast moving as the cannabis sector. Companies seek to balance product development and innovation with the need to operate in a challenging regulatory landscape. In a complex risk environment, cannabis companies and their senior executives must be aware of their potential liabilities.

Decisions made by directors and senior officers can help drive innovation and growth within the sector, as well as recognition for the company and its work. Senior executives are judged by their decisions and could be held personally responsible for the consequences. As a result, many companies are now ensuring that they have the most appropriate insurance for their needs, including directors’ and officers’ insurance.

What is Directors’ and Officers’ Insurance?

Directors’ and officers’ (D&O) liability insurance indemnifies management and the board of directors for claims, which may arise from the decisions and actions taken within the scope of their duties. Common claims include:

  • Breach of trust
  • Breach of duty
  • Misleading statements
  • Error
  • Wrongful trading
  • Neglect

Claims can be made by employees, shareholders, investors, competitors, regulators or third parties. Directors’ and officers’ insurance can cover expenses associated with defending such proceedings, including compensation costs. This insurance coverage not only serves to safeguard individuals but also plays a crucial role in protecting the company itself.

What Protection Does D&O Insurance Afford?

Protection of directors and officers

D&O insurance covers individuals—current, future and past directors, as well as nonexecutive directors, subsidiaries and officers of a company. It is designed to protect their personal assets in the event of a claim against them relating to their decisions and actions taken within the scope of their duties. It can also protect spouses who may be brought into a lawsuit because of shared property interests or transferred property.

Directors and officers can personally face significant fines and disqualification periods, and without cover in place, would be responsible for the financial implications. Without D&O insurance, directors are subject to investigation, even years after leaving the company.

Protection and benefits for the company

As well as covering the personal liability of company directors and officers, D&O policies can also provide company reimbursement in the event that the company has paid a claim on behalf of its directors and officers. This can prove to be vital in protecting the balance sheet of the company.

In addition, having a solid directors and officers liability insurance policy can be instrumental in attracting potential board members to a company. Because of the increased risk to their personal assets, directors and officers are increasingly looking to evaluate their company’s D&O insurance, seeking assurances that their coverage is as broad as possible with limits sufficient to protect them.

D&O Risk Exposures in the Cannabis Industry

Navigating the complex risks of this sector can be challenging for companies and their directors. Key areas for concern that could lead to D&O claims include:

  • Company insolvency
  • Regulatory investigations
  • Shareholder/investor action
  • Accusations of bribery/corruption
  • Defamation
  • Harassment/discrimination
  • Intellectual property
  • Mergers and acquisitions

Benefits of Leveraging the Assistance of an Insurance Broker

Utilizing the expertise of a seasoned and well-informed insurance broker is essential when negotiating and securing directors’ and officers’ coverage, especially in the intricate cannabis industry. Engaging the support of an experienced broker in this field will increase the likelihood of obtaining fitting coverage. Brokers will adeptly negotiate, on your behalf, suitable coverage terms and pricing, taking into account the nuances of the current D&O market dynamics. Serving as advocates for their clients, brokers can also assist in navigating through the claims process.

About the Author

David Kerr, BComm, CIP, CRM

National Practice Leader, Life Sciences


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