Cannabis companies have more freedom to choose their resources and even their bank than ever before, but there is an often-forgotten vulnerability that could affect the personal assets of the owners–civil litigation.

Sometimes when a company faces a lawsuit, board members or owners are included as individuals in the lawsuit or are the sole target of the suit, which means their personal assets could be affected, not just the company’s assets. Cannabis businesses have a higher risk factor than others for what the insurance industry calls “D&O claims” or claims against the directors and officers of a company.

The expense of fighting a D&O claim can add up fast and has been known to bankrupt companies that weren’t prepared. This isn’t just a phenomenon for the cannabis industry, either. D&O claims are up across all industries over the last 20 years or so, but more are being filed against cannabis companies as they number of cannabis companies continues to grow in this young industry.

Directors and officers of cannabis companies can take steps to prepare themselves against this expensive predicament. That is what director and officer insurance is meant to cover, providing protection for the company’s balance sheet and protecting the assets of the directors and officers that lead the company.

There are several scenarios that can lead to a D&O claim, including:

  • Mistakes in reporting
  • Claims from competitors
  • Claims from creditors
  • Shareholder actions
  • Insolvency
  • Noncompliance with regulations

D&O insurance is a smart investment for any company, especially cannabis companies. But that doesn’t mean that any D&O policy will do. Cannabis companies need to work with insurers that understand what their needs are and how the industry operates, otherwise you might not get the coverage you’re hoping for when you need it most. You certainly need to be transparent with your insurer about the nature of your business.

You’ll need to understand the nuances of any policy you review. Some D&O policies don’t cover matters that fall under federal jurisdiction, for example. Here are a few common exemptions in D&O policies:

  • Fraud
  • Penalty fees
  • Class action lawsuits
  • Major shareholder lawsuits
  • Bankruptcy

Having D&O insurance isn’t just good for business; it can also help recruit qualified individuals to work with your organization. People are less likely to become board members or become partners with your organization if you don’t have D&O protection. This also includes potential investors that may be more enticed by a company that is properly protected, since traditional loans and other options aren’t as available to the cannabis industry as they are to others. Cannabis can already be seen as a risky enterprise and taking steps to mitigate those risks can make your company more appealing to potential employees and investors.

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Does your company have D&O insurance to protect your personal assets? How long did it take you to get a policy that worked for you? Or, if not, what’s stopped you? Let us know in the comments below.