Insuring Cannabis: Not Business As Usual, Yet
The legalization of cannabis in many states is helping the industry to become mainstream and gain access to insurance products taken for granted in other economic sectors.
But there is still a long way to go until the cannabis insurance industry becomes completely normalized. The uncertainties and limitations of available coverage also impact cannabis-adjacent businesses, such as warehousing, transportation, security, packaging, marketing, and many others.
As the North Bay cannabis industry continues to grow, the need for insurance coverage becomes paramount, but there are still significant coverage gaps to fill.
Although most state and local governments have strict licensing requirements, including proof of insurance or surety bonds, there is still a perceived legitimacy issue. Many insurers are wary to insure what is still an emerging and unknown risk, preferring to gather more information and determine what the loss ratio trends look like before offering insurance products to the cannabis industry.
Other carriers shy away because of their conservative profile, the perceived stigma, and the continued federal illegality. As a result, there are relatively few carriers willing to write coverage for cannabis businesses, and most of them are surplus lines carriers, which frequently offer limited coverage.
However, that is changing, and a few enterprising insurers are taking advantage of this new, large and underserviced market.
The California Department of Insurance has been actively encouraging commercial insurance companies to write insurance for all aspects of the cannabis industry. If the cannabis industry is to thrive, business owners, workers, property owners, and consumers alike must be able to rely on the protections available to other industries. Last year, the first admitted commercial carrier was approved to offer various types of cannabis insurance coverage in California and a second carrier was approved last month, with more looking to following suit. As more carriers are admitted, increased competition will allow cannabis businesses to shop for better protections and better prices.
Given that the cannabis insurance market is still developing, North Bay cannabis business operators should proceed with caution, but should not forgo proactively obtaining as much coverage as possible as part of their risk management plan. The minimum insurance required for licensure is often insufficient.
There are numerous different types of insurance that cannabis businesses may need, including but not limited to property, premises liability, crime and theft, crop, auto, cargo, commercial general liability, product liability, product recall, workers’ compensation, directors and officers, professional liability, employment practices liability, and excess or umbrella insurance. Each presents its own obstacles. Due to the novelty and complexity of adequately insuring the cannabis market, it is important that any business that touches cannabis consult with a qualified, experienced broker.
When working with your broker, ensure there is full disclosure during the application process of the nature of the business, the cannabis related activities, and the risk management procedures in place. “It is important to make sure the insurance application is done correctly the first time. Measure twice, cut once,” said Michael Hennessey, assistant vice president at ABD Insurance and Financial Services. Companies are better off disclosing to insurers the potential risks of their operations and how they are protecting themselves against those risks. That way, insurance companies are aware of such risks at the outset and it may be harder for them to deny coverage in the event of a cannabis-related loss by arguing, for example, that the insurance is void as “against public policy.”
Once there is an offer to bind coverage, take the time to review the policy language, with particular attention to the exclusions, and ask specific questions about whether there would be coverage under a given scenario.
For example, some policies provide general liability coverage, but disavow product liability coverage for cannabis products—a significant exposure—or will extend coverage for medical marijuana, but not recreational use.
Other policy exclusions may not mention marijuana or cannabis specifically, but may exclude “schedule 1 substances,” “contraband,” “controlled substances” or other substances that pose a “health hazard.” Exclusions for enforcement actions for violations of federal law are also typical.
In addition, pay attention to valuation clauses, and audit and inspection requirements, and keep diligent financial records. Careful review of the policy language is important to ensure that the promised coverage is not illusory, and that the business owner and the end consumer are adequately protected.
Even as more carriers write cannabis coverage, there are still gaps in available coverage, most notably outdoor crop insurance. According to Camille Dixon, director at the California Department of Insurance, there is a great need for outdoor crop insurance, but any potential risk appetite to write outdoor crop insurance for the cannabis industry went away due to the recent wildfires in California. Indoor crop insurance is available, but it is limited, said Dixon. Even so, several cannabis businesses were able to recover from their carriers for indoor crop losses due to the Thomas fire, reports Dave Drumright of Brown & Brown Insurance Services of California, Inc.
As the cannabis industry matures on the regulated market, there will eventually be more insurers that choose to offer insurance products to the cannabis industry, which may include outdoor crop coverage. Due to the rapidly-changing market, cannabis businesses in the North Bay should remain informed and alert to the various options and developments and reevaluate their needs and the insurance products available regularly. “The market is always expanding and the increased admitted market will bring in more carriers, offer more choice, better terms and better pricing,” said Martin Fox-Foster of Emergent Risk.
Shanti Eagle is a senior associate and Jacqueline Menendez is a law clerk in Farella Braun + Martel’s insurance recovery practice in San Francisco. They can be reached at [email protected] and [email protected].