The cannabis industry is a rapidly evolving sector, with mergers and acquisitions (M&A) becoming increasingly common. However, these M&A activities bring about unique challenges, particularly when it comes to acquiring commercial insurance. One key aspect that often gets overlooked is the role of the Master Service Agreement (MSA) between the two companies and having insurance carriers understand the agreement.
The Importance of Master Service Agreements
An MSA is a contract reached between two parties during a merger or acquisition that outlines the terms of the professional relationship. The length of time which it takes to attain licensing to operate in the cannabis industry can takes months. A bypass is via the MSA, in which the license holding party allows the new party the right to operate under their license. Details into what capacity the new party can operate, what licenses are being considered, assets being acquired and the insurance needs of the newly merged entity all should be outlined within.
Understanding the MSA for Proper Insurance Coverage
1. Scope of Services
The MSA outlines the scope of services to be provided by the acquired company. Understanding this scope is crucial for determining the types of risks that the company may be exposed to and therefore, the types of insurance coverage needed.
2. Indemnification Provisions
MSAs often include indemnification provisions, which can have significant implications for insurance coverage. These provisions determine who is responsible for any losses or damages that may occur.
3. Insurance Requirements
MSAs often specify the minimum insurance requirements that the acquired company must maintain. These requirements can serve as a starting point for determining the insurance needs of the merged entity. Discussing additional coverages is highly recommended, especially if there are tailing liabilities of the license holding party that are assumed via the MSA.
Strategies for Navigating Insurance Post-Merger
1. Engage an Insurance Broker with M&A and Cannabis Experience
Engaging an insurance broker with experience in M&A can be invaluable. They can help review the MSA and identify potential insurance issues that may arise post-merger. Additionally, having a broker that is knowledgeable of the cannabis insurance marketplace and has good standing relationships with the carriers will greatly help to expedite the process.
2. Conduct a Thorough Risk Assessment
A thorough risk assessment should be conducted pre-merger. This should take into account the information in the MSA and any new risks that may arise as a result of the merger.
3. Regularly Review and Update the MSA and Insurance Policies
The MSA and insurance policies should be regularly reviewed and updated to ensure they continue to meet the needs of the business as it evolves.
Deep Dive into the Cannabis Industry and Insurance
As we delve deeper into the topic, it’s important to understand the unique aspects of the cannabis industry that make insurance coverage so critical.
Regulatory Landscape
The cannabis industry operates under a complex regulatory landscape. With cannabis being legal in some states and illegal under federal law, businesses in this industry face unique legal and operational challenges. These challenges can significantly impact a company’s risk profile and insurance needs. With all this being said, the insurance marketplace’s appetite to entertain cannabis risks is becoming less stringent.
Product Liability
Product liability is a significant concern in the cannabis industry. Given the nature of the products, businesses can potentially face claims related to product quality, efficacy, and safety. Understanding the trailing liabilities is also crucial to determine what potential claims or insurance costs the new party will be assuming.
Property and Equipment
Cannabis businesses often have substantial investments in property and equipment, including cultivation facilities, crops, retail locations, and manufacturing equipment. These assets can be at risk from various perils, including fire, theft, and vandalism, making property insurance a key consideration.
Workers’ Compensation
Like any other industry, cannabis businesses have a responsibility to provide a safe working environment for their employees. Workers’ compensation insurance is a legal requirement in most states and protects businesses from the financial impact of workplace injuries. If employees are rolling over to be used with the new party, then past claim history, including experience modifiers, will be considered by carriers.
The Future of Insurance in the Cannabis Industry
As the cannabis industry continues to grow and evolve, so too will its insurance needs. Insurers are continually developing new products and coverage options to meet these needs. Businesses in the industry need to stay informed about these developments and work closely with their insurance advisors to ensure they have the right coverage in place.
In conclusion, while navigating commercial insurance in the cannabis industry post-merger can be complex, a thorough understanding of the MSA and a strategic approach to risk management can help businesses ensure they are adequately protected. As the industry continues to evolve, staying informed and proactive in managing risk will be key to success.
Each month, Swarts Manning insurance experts cover relevant topics for your business. Stay tuned for more discussions about managing your insurance and industry-specific tips.
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