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  • Andrew Mangialardi

Bill C-45 - and the Importance of D&O Insurance for Canadian Cannabis Companies

With the explosion of interest cannabis production in Canada comes an increasing number of questions concerning the legal requirements for the budding industry. Of which, insurance is a prominent topic.

New industries often require new legislation, and this is no different for Cannabis producers. In April 2017, the Canadian Government introduced Bill C-45, a piece of legislation designed to legalize and govern the production, distribution and consumption of cannabis.

Following its proposal, entrepreneurs around the country have been gearing up to enter the vibrant (and profitable) new industry. However, there are a few precautions that need to be considered first. Among these is Directors and Officers Liability (D&O) Insurance.

Here’s what you need to know about D&O Insurance as it pertains to the cannabis industry:

What is Directors and Officers Liability Insurance?

Directors and Officers Liability Insurance is a safety net for directors, officers and the company itself. D&O policies protect the personal assets of a company's directors and officers as well as those of their spouses should they be sued for wrongful acts related to managing the company.

What does Directors and Officers Liability Insurance cover?

D&O insurance covers a company’s individual officers for claims made over actions taken in their normal course of duty that are not criminal or in malicious opposition to the company’s interest.

D&O insurance provides indemnification in the event of major losses in your business. It also covers the cost of defense in the event that investors choose to sue. Officers of a company can be viewed as personally liable for business losses (whether or not they are culpable) and can be at risk of personal losses. D&O will also reimburse the company in event that the company has to pay for a claim made by a third party.

Why does D&O insurance exist?

This type of insurance exists so that leaders of an organization can continue to operate and run a business without the looming fear of being on the hook with investors, employees, or competitors.

Running any business carries an inherent risk, and it is rarely possible for individual directors and officers to guarantee success. D&O allows for the confidence of talented leaders in a company to operate their business with the confidence of having personal financial protection.

Why do Cannabis Businesses Need D&O Insurance?

As stated above, operating any business has the inherent risk of failure. When it comes to operating a cannabis business that is considered unknown territory, risks are likely to be even higher – making D&O Insurance essential. Here’s how D&O insurance can help you address these challenges and risks.

New industry, little guidance

Being a new industry, there is not a lot of data available to track historical successes or find positive role models to emulate. This means that most decisions made by officers in cannabis businesses are done so as pioneers. This in itself is taking a greater risks compared to more traditional businesses.

The stigma of an illegal history

Companies also have to face the stigma around the cannabis culture that exists due to its history of illegality in North America. This stigma will also apply to the directors and officers, who may be dissuaded from signing on.

Increased risk = talent limitations

Because of these increased risks, you may find it's more difficult to recruit the best possible talent, without some form of reassurance. If you’re looking to onboard an amazing team of directors and officers with the talent to maximize profit, having.

Seek alternative forms of financing

Lastly, because of the nature of the cannabis industry, companies have found it inherently difficult to raise money to kick-start their operations. Rather than go the standard route through the banks, the stigma attached to the industry has forced them to look to alternative methods of financing. One of the most common methods is by issuing an IPO and raising public capital. In doing so, risks some of the grey area of risks become black and white in the public eye. Which makes D&O an essential mitigation tool for public cannabis companies.

Mitigate your risk by getting D&O insurance.

With the emergence of Bill C-45, entrepreneurial interest in cannabis is skyrocketing. As an emerging industry, there remains a lot of questions about the potential risks and how to mitigate them.

Obtaining D&O insurance allows you to mitigate the risk and operate without fear of litigation in the event of major losses, while maintaining a team of top-tier talent.