Cannabis

HIGH ON GOOD GOVERNANCE

Insurers want to see solid experience at the board level of cannabis companies.

By Jason Contant, Online Editor

Whether or not a cannabis company is following good corporate governance procedures can be the difference in finding liability cover for its directors and officers, HDI Global Specialty SE says.

After recreational marijuana became legal in Canada on Oct. 17, 2018, the qualifications of board members and executives of cannabis companies came under scrutiny by the nation’s underwriters. Sometimes board members or executives were really good at growing cannabis, but they didn’t know the ins and outs of corporate governance procedures, dealing with investors and lenders, or handling employees on the company’s books.

“Over the years, there were claims [regarding] business decisions or practices that people did that were [against] what proper corporate governance would be,” said Oren Schemool, head of financial lines underwriting with HDI Global Specialty SE–Canada, referring to things such as omitting expenses or misleading forecasts.

There was a wide variance of qualifications among board directors, observed Schemool, who was one of the first underwriters to start writing D&O coverage for cannabis companies.

Allison Sinha is a senior underwriter in Burns & Wilcox’s property and casualty department who specializes in cannabis insurance. She noted that cannabis underwriters often see a wide variety of board members, with the majority of them having experience in the pharmaceutical or farming industries.

“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,” Sinha said in an interview in December 2019. She added that some directors also come from different business backgrounds, including banking or other financial services sectors.

Most directors of a cannabis company have served on a board before coming onto a cannabis board, Sinha said. “It is something we look for, and it is better for us if they have. We like to see track records and past experience in order to provide coverages that they require.”

When recreational marijuana first became legal, D&O liability came into play in another way, Schemool said. At the time, a lot of money was being pumped into the sector by investors, he said. “But with the amount of money coming into the sector, this encouraged investors to make quick decisions that had the potential for a bad investment.”

For instance, investors sometimes quickly invested in companies with a limited amount of information, leading to a bad investment. “When you make a bad investment, a lot of times that leads to a D&O claim,” Schemool said. “I looked at too many business plans to remember and, as an underwriter, you’re trying to separate what you see as good business plans from bad business plans. I can tell you there was really a wide spread [in terms of] quality of business plans.”