Canopy Growth logo

CGC - Canopy Growth News Story

$17.44 -0.5  -2.7%

Last Trade - 7:45pm

Sector
Healthcare
Size
Large Cap
Market Cap £5.09bn
Enterprise Value £4.41bn
Revenue £228.5m
Position in Universe 974th / 6400

ANALYSIS-Cannabis firms see jump in insurance costs to protect leaders as investors sue

Wed 8th July, 2020 11:00am
By Shariq Khan and Nichola Saminather
    TORONTO, July 8 (Reuters) - Canadian and U.S. cannabis
companies are facing a spike in already high costs of insurance
to protect top executives from personal liability, following a
slew of lawsuits by disgruntled investors alleging fraud and
misinformation, with more such action expected.
    Some of the biggest cannabis companies, including Medmen
Enterprises  MMEN.CD , Canopy Growth  WEED.TO   CGC.N ,
CannTrust Holdings  TRST.TO , Aphria Inc  APH.TO  and Columbia
Care  CCHW.CD , have faced shareholder litigation, accusing
leaders of false claims, failing to act in the interest of all
shareholders and attempts to defraud investors. 
    The lawsuits are yet another sign of souring sentiment
against an industry that has failed to deliver on promises of
boundless growth. And the rising costs are another headwind for
companies already shuttering operations and cutting jobs due to
slower-than-expected demand.  urn:newsml:reuters.com:*:nL4N2E03ES
    "More frequently we’re seeing prospective investors and
board members requiring (directors' and officers') coverage in
place prior to engaging with a company in order to ensure
adequate protection in the event of...litigation," said Charles
Grodecki, senior vice president at insurance brokerage AmWINS
Brokerage of the Carolinas. 
    "With claims starting to roll in, we’re beginning to see
higher entry-level premiums."  
    Cannabis companies generated a lot of investor excitement in
recent years as the drug was legalized for recreational use in
Canada and 11 U.S. states as well as the District of Columbia.
Marijuana is authorized for medical use in many more. 
    But investors have faced losses as well as
coronavirus-driven market downturns, and they are increasingly
likely to target companies and executives who have not delivered
on big promises, like cannabis firms, said Ian Stewart, partner
at law firm Wilson Elser.
    That could drive rates and deductibles higher, with the
industry already paying well above what non-cannabis companies
pay for similar insurance products.
    "We expect a flurry of cases holding directors personally
liable," Stewart said. 
    Avis Bulbulyan of cannabis consultancy Siva Enterprises,
estimates a 50% spike in litigation.
    A spokeswoman for Canopy declined to comment. Medmen,
CannTrust, Aphria and Columbia Care did not respond to requests
for comment. 
    The Horizons Marijuana Life Sciences Index ETF  HMMJ.TO  has
lost 61% over the past year, while the S&P 500 index is up 6%.
    
    RISING PREMIUMS
    Entry-level premiums for directors & officers (D&O)
insurance for public companies have more than doubled to
$250,000 for $1 million cover over the past year or so, on top
of as much as $1 million firms must pay before the coverage
kicks in, known as retention, according to AmWINS.
    Some insurers have also added exclusionary language specific
to cannabis and have raised retention levels, leaving some
companies unable to renew policies or forced to choose lower
limits with inadequate coverage, said Katie Verry, vice
president at broker CRC Insurance Services.
    Most major insurers do not offer cannabis D&O policies
because cannabis is not legal under U.S. federal law and the
nascent industry has increased risks. 
    There are even fewer insurers now, said Kirk Miller,
executive producer at cannabis risk-management firm Nine Point
Strategies. Insurance market Lloyd's of London and the insurance
regulator of Bermuda have prohibited insurers from underwriting 
cannabis coverage in the United States.  
    "With both Lloyd's and (insurers from) Bermuda pulling out
of the U.S. cannabis market, coupled with the 25+ security
class-action lawsuits over the last two-and-a-half years...
underwriters' appetite for cannabis is narrowing," he said. 
    The heavy demand and a dearth of suppliers has kept prices
extremely high.
    A cannabis D&O policy is about three to seven times more
expensive than a company in a decade-old industry, even in
Canada where marijuana is federally legal, said Richard McGee,
director at cannabis-focused underwriter Next Wave Insurance
Canada.
    Most of the lawsuits have not yet been heard in court. But a
determination of intentional wrongdoing or fraud could remove
legal protections against personal liability and trigger
insurance exemptions, leaving companies and executives' assets
exposed.
    In May, law firm Kasowitz Benson Torres named Columbia
Care's founders as defendants in a lawsuit on behalf of a group
of investors, accusing them of aiding and abetting in fraud.
    Sarmad Khojasteh, a partner at the firm, noted by email that
laws in Florida and New York do not shield corporate officers
from personal liability for negligence or misconduct. Columbia
Care did not respond to a request for comment.

 (Reporting By Shariq Khan in Bengaluru and Nichola Saminather
in Toronto
Editing by Denny Thomas and Cynthia Osterman)
 ((Nichola.Saminather@thomsonreuters.com; +1-416-687-7604;))
© Stockopedia 2020, Refinitiv, Share Data Services.
This site cannot substitute for professional investment advice or independent factual verification. To use it, you must accept our Terms of Use, Privacy and Disclaimer policies.