New York state recently became the 16th U.S. state/territory to legalize and tax adult-use cannabis. With the passing of Senate Bill S854A, the Marijuana Regulation and Taxation Act has opened the gates to another potential billion in sales by next year alone as this rolls out.

With this new market opening up, many licensed cannabis and cannabis-related businesses will be needed as the infrastructure is developed to serve the state of New York. New markets do mean new risks, however. Insurance coverage will be needed for the large variety of businesses that it will take to create a production and distribution system for cannabis. Directors and officers (D&O) liability insurance is becoming especially important.

New York is home to Wall Street and is known worldwide for its financial sector, which means cannabis businesses operating in this space will be looking at risks that are unique to this state. Corporate mergers, investments and acquisitions are more likely to be pursued in this financial capital, and there are risks on many sides. Whether you run a public company or a private one, claims can come from vendors you do business with, your competitors, investors, or employees, for breaches like mismanagement, breach of fiduciary duty, or fraud. Such risks need to be properly covered for your individual business.

Leaders in a company are not immune from litigation directed at them, as recent shareholder lawsuits against major cannabis companies have shown. D&O liability insurance can help in the event this happens, but not all D&O policies are the same.

There are three separate types of D&O coverage:

  • Side A: This provides liability coverage for the individuals running the company, i.e. the directors and officers. Side A means that the insurer will agree to indemnify these individuals for all losses that they become obligated to pay due to “wrongful act” that they committed as a director/officer of the company.
  • Side B: This type of D&O liability insurance covers the corporation’s payments that it must make on behalf of its directors/officers if there is a loss due to “wrongful act” that the individual committed in their role for the company.
  • Side C: Also known as entity coverage, Side C D&O coverage is typically limited to covering security claims. The insurer will reimburse the business for liability coming from a defined group of claims filed against the company.

While this type of liability coverage can be crucial to a company’s successful growth, it can be difficult to come by for cannabis licensed and cannabis-related companies. As cannabis is still a federally scheduled drug, many insurers have been hesitant to provide services for the cannabis market, even with the need so great. With the potential for the Safe and Fair Enforcement (SAFE) Banking Act and the Clarifying Law Around Insurance of Marijuana Act (CLAIM) Act passing this year, the availability of D&O insurance could expand.

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Will the New York market open smoothly? Tell us your thoughts in the comments.