Every business comes with risk, but with the federal illegality of cannabis in the U.S., the sector faces more than its fair share of exposures. Cannabis companies operating in multiple jurisdictions are particularly vulnerable to risk, especially directors and officers (D&O) liability exposure. Whether your cannabis company is a multi-state operator (MSO) in the U.S. or a business domiciled across the border in Canada, you’ll need to work twice as hard to protect your business and its leaders.

Without the right risk mitigation procedures and strategies, if the worst happens, you and your leaders could not only face losing the business but losing personal assets as well.

Cross-Border D&O Considerations

D&O insurance at its basic level protects directors, officers and executives from liability based on their oversight of the company. But the industry’s relative immaturity in the U.S., along with the constantly shifting regulatory environment among states, presents insurance challenges.

Insurance policies — including D&O coverage — often cost significantly more for cannabis companies compared to other industries.¹ For cannabis companies operating in the U.S. but domiciled in Canada, traditional policies are unlikely to provide adequate protection for directors and officers.

Many American cannabis companies domicile in Canada to remove legal and regulatory barriers and access bigger financial markets, including the Canadian Securities Exchange, which presents complications for D&O coverage. For example, Canadian regulations require businesses to purchase policies from a licensed Canadian insurer; American coverage is not sufficient. And cannabis companies with Canadian head offices — even if it’s only on paper — must secure Canadian insurance.

Because they’re subject to Canadian regulations, a lack of acceptable insurance coverage could force the company to pay taxes to the Canada Revenue Agency on an insurance payout.

Best Practices for Risk Management

A good D&O policy takes both American and Canadian regulations into account to protect both the company and its leaders, wherever they are located.

As a starting point, consider these best practices for risk management:

• Create a risk management picture. Collect information from your risk managers on both sides of the border. Be sure to include any regulations or government guidelines, as well as any other typical business risks. This information will help you identify your risk and exposures.
• Review limit adequacy annually. Because insurance premiums can be so high, many business owners automatically go for the cheapest option. But low limits will disappear quickly in the event of a D&O claim. Ask for a quote with higher limits and learn about the differences between the policies so you can make an educated decision about which policy is right for your business.
• Ensure D&O coverage will protect you during a transition. If your business is considering a merger or acquisition, you will need to secure a new policy to cover the new business. But you’ll also need a tail or runoff policy to protect you and your directors and officers from legacy decisions. However, if you haven’t purchased a policy before, it may be difficult to find a carrier that’s willing to work with you.
• Conduct due diligence. Make sure all entities and subsidiaries of your cannabis business are named in your policies and covered. Be sure to check exclusionary language to ensure nothing falls through the cracks.
• Work with an expert. When it comes to cross-border risk management, only a sophisticated broker with an international presence will understand all the nuances. Your local broker may not be familiar with Canadian laws or the specific concerns of the cannabis marketplace. An expert in the industry who understands the challenges will be better prepared to advise you.

Contact HUB International’s cannabis insurance experts to learn more about D&O coverage for U.S. cannabis companies domiciled in Canada.

¹ Cannabis Industry Journal, “Cannabis Businesses Need D&O Coverage: What Does the Insurance Landscape Look Like?” March 16, 2022.