D&O coverage and pricing for cannabis companies varies tremendously based on the operations and capitalization of the company. In this post we examine the different factors that are instrumental to the underwriting process and why it affects pricing/coverage.
How Much Capital Have you raised?
Directors and Officers insurance is primarily intended to cover the board of directors and executives for claims made against them for misrepresentations or misappropriation of assets. The more capital you have raised the higher the exposure. For example if one company has raised a 1M seed round and another raised a 20M series B, the latter company will have a more expensive premium per million of coverage because the exposure is larger.
What type of Capital have you raised?
In this day and age there are various ways to raise capital. Companies can get access to capital via venture capital / private equity (institutional), friends and family, crowdfunding, public offering, loan, convertible note, etc. Crowdfunding and public offering capital have the highest exposures as more shareholders are involved and there is significantly increased regulatory exposure.
Are you Plant Touching or Not?
This is a key distinction that insurance carriers always ask. Plant Touching operations will have a higher exposure from a D&O perspective due to regulatory considerations. Companies that are merely brands and control the IP do not have as much regulatory exposure as plant touching operators, thus their D&O will be much less expensive typically.
Marijuana (THC) or Hemp (CBD)?
This is another key distinction that underwriters look at and some markets will not write companies that operate in the THC space as it is much more scrutinized from a regulatory perspective and it is not federally legal. Hemp is much more widely accepted and there are more markets that can write Hemp based exposures that THC. Ultimately if two companies have the same exact structure except one focuses in Marijuana and the other in Hemp, the D&O pricing for a Hemp based company will likely be less expensive. Also a lot of D&O policies will come with a Cannabis Regulatory Endorsement which limits coverage for THC operators, but is not super applicable to Hemp based operators.
Any “Key Events” where a directors are making more representations and warranties that usual can lead to increased pricing per million of coverage. Key Events would include.
- IPO (Initial Public Offering)
- Fundraising (Private Equity, Venture Capital
- M&A Actvity
- Previous Bankruptcy
- RTO (Reverse Take Over)
Where a company is domiciled can have a significant impact on premium. If you take two identical companies, but one is purely operating in Canada and the other is solely domiciled in the US, the Canadian entity has a lower exposure/premium typically given the federal regulation differences. Additionally, D&O pricing can vary depending on the state an operator is established. For instance, companies that are headquartered in California typically will face higher premiums because California is very litigious and the legislation favors the plaintiffs. We have seen carriers explicitly state they will not write D&O coverage in the state of California.
Public vs. Private
Similar to any industry, D&O coverage for public enterprises vs. private will be much more expensive per million because there is a heightened exposure. This is because public companies have more shareholders and directors have a fiduciary duty to operate in the best interest of those shareholders. Also, the regulatory exposure of a public company is much higher. Public Cannabis companies that operate in the US have a very unique exposure as these enterprises need to list on a foreign exchange, typically the Canadian Stock Exchange or Toronto Stock Exchange because Cannabis is federally illegal still in the US. This dual regulatory exposure poses a larger exposure than your traditional public company operating in the US.
To better understand your D&O exposure and what to expect from a pricing perspective please feel free to reach out to the AlphaRoot team. We want insureds to understand the WHY behind premium/exposure rather than being told, “It is what it is!”