Takeaways from Our Conversation on Reps & Warranties in a Changing Cannabis Market

By | September 8, 2023

Go back just a few years to 2019-2020, when cannabis stocks started to really hit the market in the United States and Canada. Everyone was jumping in.

It was the green rush, but in retrospect, a few of those public companies may have “over-promised and underdelivered.” Bitten stockholders didn’t take it laying down; lawsuits ensued.

With all the changes in the cannabis market in the past year, one area of insurance that has remained surprisingly far in the background of conversations about the cannabis market is reps & warranties coverage. But don’t expect that to stay the case.

Jason Stone

For our latest episode, we spoke about Reps & Warranties coverage with Jason Stone, managing director, private equity and M&A at BMS Canada Risk Services Ltd., and Eric Freilich, an attorney director and head of deal origination, PEMA at BMS Group.

Following are excerpts from that conversation.

Stone talked about expected from claims and what insurance policies angry investors and their attorneys may be eyeing.

“We expect that there are going to be more and more claims come out,” Stone said. “Specifically with respect to sort of class actions. A lot of the cannabis companies in the U.S. are pursuing claims. We’re just not sure where they’re going to land. And the expectation really is around, ‘Is it really just because retail investors are upset that they bought into a stock that didn’t perform and therefore, the company’s management is looking at insurance, insurance products that they bought, whether it’s D&O or Rep and Warranty insurance or otherwise?'”

Eric Freilich

He also talked about who in the cannabis sector has been buying the coverage, and whether it’s a buy-side purchase that is typical.

“Typically in the space that we work in with respect to Reps and Warranties, it is definitely the buyer,” he said. “Obviously, we’re not able to name names, but it’s the big ones that you would normally think of both in Canada and the U.S. that purchased this type of insurance.”

In Canada, cannabis is federally legal, which makes the types of companies purchasing the coverage different.

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“So, anything that has ancillary sort of cannabis (application), and I’m talking about pipes, bongs, rolling papers, whatever, in the U.S. that that can be covered under R&W insurance,” Stone said. In Canada, we can do the whole gamut because it is federally legal. So anything plant-touching in the United States is not going to be able to be insured under Rep and Warranty insurance.”

Freilich pointed to an emerging trend in which there is an uptick in interest policies in the distressed space.

“And so particularly, with cannabis where there are a lot of distressed assets, you see buyers who would typically be purchasing these assets on essentially an as-is, where-is basis,” Freilich said. “They’re now looking to purchase these assets under a more traditional looking purchase agreement where, where there is recourse, but of course there can’t be recourse against the seller in the distressed context. And, so they’re using insurance as a way to get recourse against somebody, and we would expect that trend to continue, just as consolidation continues.”

Pricing is another trend, according to Stone. Pricing for R&W insurance in this cannabis space is between 2.75% and 3.5%.

“So, you know, just for round numbers, a $10 million insurance policy would go for somewhere between $275 to $350,000 all in cost,” he said. “The numbers have significantly changed over the past five years, where in 2021, policy premiums were 8% of rate online. So, 8% of the policy limit, that’s come down significantly. And what we attribute that to, and even in this space obviously, is really over capacity in the market. So, the insurance companies have realized whether they’re doing it from Lloyd’s or whether it’s a big insurance company like Chubb or Liberty or AIG, the pricing has come down because so many more people have gotten into the market.”


Topics Cannabis

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