Bill Kelly, Senior Vice President – US Management and Professional Lines, Canopius USA
Procuring appropriate coverage can be challenging for companies in evolving or emerging segments of the market. Increased regulatory scrutiny coupled with the inevitable volatility of new markets exposes companies and their executives to a host of potential regulatory risks and investment-related litigation. Inadequate D&O coverage for these risks could result in significant losses for a company at best, and financial ruin for its executives at worst.
Three high-growth areas that are greatly impacting the D&O market are: Cryptocurrency, Cannabis and the looming de-SPAC rush.
Far from its beginnings as a shadowy, untraceable form of currency, the cryptocurrency craze has exploded into the mainstream, with many publicly traded companies incorporating crypto into their business models. The number of companies developing mining and storage products, setting up exchanges, and providing some service related to crypto business, as well as companies that are adding cryptocurrency to their balance sheets has skyrocketed, with growth expected to triple by 2030.
Underwriting D&O policies for companies with crypto exposures poses unique risks, particularly related to an evolving regulatory framework, unclear accounting rules, cyber attacks and volatile crypto prices.
A company with inadequate storage, asset transfer, and recovery protocols in place opens itself not only to lost or stolen assets, but also to potential shareholder claims of negligence and breach of fiduciary duty. Increasing cryptocurrency regulations further compound the risk to directors and officers for failing to follow SEC regulatory and private securities actions.
Traditionally, D&O coverage has been hard, if not impossible, to come by for cannabis-related businesses. Most insurance carriers have refused to provide coverage for an industry not federally legalized, fearing regulatory compliance, shareholder litigation, investor disputes, and general mismanagement exposures. Faced with expensive coverage and restrictive terms, as well as intense pressure from investors to make profit, cannabis-related businesses often forego D&O coverage altogether, exposing themselves to a minefield of potential risks.
With all but two states legalizing its use in some form, the cannabis market has exploded, yet generally speaking, the insurance market has not kept pace. But it’s not all bad news. Expected passage of the SAFE Banking Act will likely help. This Act will open financing options to cannabis-related enterprises, many of which have been forced to operate as high-volume cash-based businesses at increased risk for theft and violent crimes. The Act would also remove regulatory penalties for providing financial services to legitimate cannabis-related businesses. This would enable many insurers previously prohibited from underwriting cannabis risks to consider D&O coverage for businesses with stable and secure forms of financing,
The meteoric rise in the number of SPACs over the past two years has brought with it an equally large uptick in litigation, making D&O coverage for SPACs among the most difficult and expensive to obtain. Skyrocketing valuations now returning to earth have unleashed a spate of investors alleging misinformation as expected milestones are missed. These suits can be far-reaching, often holding the SPAC entity, the target company it merged with, and both companies’ executives culpable.
As companies vie to complete acquisitions and de-SPAC before the two-year deadline or be forced to return investor money, an already risky market becomes riskier. Shareholder reliance on SPAC management teams and sponsors to select a viable target company exposes all entities to potential litigation if the two-year deadline is not met, or the newly formed company does not perform as expected. And with an onslaught of SPACs evaluating a finite number of suitable target companies, there are bound to be underperformers.
Adding to the risk is an increase in regulatory scrutiny of SPACs, creating additional exposures to individuals involved in an SPAC initial public offering. Because of this, D&O coverage is needed for the SPAC, the company it merges with, and the newly-formed post-merger, or de-SPAC, company.
Experience and thoughtful interaction matter
In a hard market, finding adequate D&O insurance is difficult, and for those in the rapidly growing, volatile, and highly scrutinized cryptocurrency, cannabis and SPAC industries, it can feel nearly impossible. It’s not enough to find capacity in these markets. Brokers need the support of underwriters experienced in working with new markets to structure cost-effective D&O insurance tailored to their unique coverage needs.
Although we are restricted from underwriting cannabis-related D&O risks at this time, the Canopius Management and Professional lines team has the experience of working with nascent, fast-growing areas. Our people have the critical thinking and market insights that enable them to take an independent and individual view of risk. We believe that’s what makes us different. Where we get this right, it results in close collaborations, in-depth insights and innovative, fairer risk solutions – something sorely needed to cover D&O risks in these emerging industries.