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Mergers and Acquisitions—Your Cannabis Insurance Checklist

pill bottle with marijuana leaf on it

While it’s not clear when the floodgates to cannabis banking services will open up, the industry is still plowing forward. On the whole, cannabis ended 2020 on a high note, and massive growth is expected at least through 2025. Because access to traditional financing continues to be a challenge, mergers and acquisitions (M&As) are necessary for meaningful expansion within the pot sector.

Indeed, It seems like weed M&As will be a key narrative in 2021, with each month bringing rumors of new deals. Even publicly traded companies are coming to the table. The most recent and notable of these mergers involves Aphria and Tilray, a partnership expected to create the largest cannabis retail operation in the world.

Obviously, not all purchases will be this substantial. In many cases, large, multi-state operators (MSOs) will acquire smaller, private operations and assets within their existing operating states. If you are one of these entities and you find yourself in this happy circumstance, congratulations! However, there are some key considerations to be aware of when it comes to your insurance needs.

Insurance Checklist for Cannabis Firms Considering M&As

Whether two companies are merging into one entity or one firm is acquired by another, it’s vital that everyone involved makes sure all risks are considered by conducting a thorough insurance coverage review. You don’t want to be surprised by a liability that arises during or after the transaction. While it’s impossible to anticipate every variable, here are a few things to start with:

      • Ensure any company officers’ or directors’ actions are adequately covered by director’s and officer’s (D&O) liability insurance. Also, carefully examine the “change in control” clause in these documents since the merger may void or modify the coverage.
      • Verify that the seller’s current policy limits and coverages are sufficient for its primary risks and look at potential liabilities not currently insured by the seller by reviewing the existing policies and claims history.
      • Be sure to check for any existing contracts that give additional indemnification or insured status to customers, affiliates, or suppliers of the seller. And look for any indemnities that other parties may have presented to the seller, too.
      • Identify where new exposures could arise if the current operation is expanded or moved to another location since new coverage or updates may be needed to ensure they are covered.
      • Consider any circumstances that might generate claims that could fall under the coverage the seller currently has. Also, be sure to pinpoint any variations in the process the buyer and seller use to report claims.
      • Examine all of your auto insurance policies. You might need to obtain policies for new drivers, commercial vehicles, cargo insurance, or more.
      • Don’t forget about Representations and Warranties Insurance. During and after an M&A, there is always the possibility that one party will claim the other party has somehow breached the agreements of the M&A. Since there are so many contracts and documents that make up the M&A, there is a genuine possibility that someone could unintentionally breach the agreement. To ensure the process runs smoothly, Representations and Warranties Insurance is highly advised since it significantly reduces both parties’ financial risk.
      • Remember that during the insurance review process, liabilities may be discovered that could adjust the purchase price or grant indemnification to the buyer.


  • Closing Thoughts

    Mergers and acquisitions are complex. It’s vital that all parties involved prepare themselves by conducting extensive research before closing the deal to ensure there are no gaps in coverage. Understanding how each party’s policies may be modified in an M&A is crucial to avoid being caught off guard with unanticipated and uninsured liabilities.

    Make no mistake, it’s a complicated process, but the right insurance broker can simplify it for you.

    Where your insurance needs are concerned, helping to merge cultures together so they can go forward with an aligned vision is one of our most important goals at Reliant. Whether you’re the one initiating the M&A or the one being acquired, we can help by facilitating a smooth transition and making sure everyone is on the same page.