Focus on property, people and profits in developing your risk-management plan
Risk management is the process of anticipating losses and developing a plan to survive them. A solid risk management plan is an important part of any successful business, including your marijuana venture.
There are five primary steps in the risk-management process (see sidebar on the following page). I want to talk about the first step in the risk-management process: identifying loss exposures.
Identifying everything that can cause losses is, without a doubt, the most challenging and overwhelming step. Ask yourself, “What can go wrong?” Then start making a list. It won’t take long for you to go through the most obvious things: fires, floods, hurricanes, earthquakes, break-ins and armed robberies. But, have you considered the possibility of being sued? From someone slipping and falling on your property to someone getting a foodborne illness from an edible you made, lawsuits are quite serious and can be devastating in nature. How about an employee getting injured on the job? Or some of your processing equipment breaking down and interrupting your business continuity?
5 steps in the risk-management process
1. Identify loss exposures. These are things that can ultimately cause losses, including slips and falls on premises, getting sued for a faulty product or having an employee get injured on the job.
2. Evaluate each loss exposure in terms of frequency and severity. How often is something like that likely to happen? How severe will the financial consequences be if it does happen?
3. Select one or more techniques to manage each exposure. There are several tools available to you, and most exposures to loss are best managed by a combination of techniques. For instance, let’s take the example of a car crash. There are several things you can do to prevent collisions, such as paying attention on the road, avoiding the use of your cell phone while driving or taking a defensive driving class. But no matter how careful you are, sometimes collisions are inevitable. In that case, you rely on insurance to pay for the damages.
4. Implement your techniques. Buy that insurance, take that defensive driving class and put that cell phone down when you are on the road!
5. Review and evaluate the risk-management plan. How is your plan working? What do you need to improve?
It can be very easy to get overwhelmed, so breaking this down to just three things might be an easier approach: You simply need to be worried about the “three P’s”:
– People: your employees, owners, shareholders, customers, suppliers, etc.
– Property: your buildings, crops, inventory, equipment, automobiles, etc.
– Profits: a fancy word for “money” and you know you need to protect that! From continuing your sales after a fire to surviving a lawsuit, money is obviously critical to your operation and must be accounted for in the risk-management process.
How do you assess all these risks without being overwhelmed? In the December 2018 issue of Marijuana Venture, I addressed the topic of your risk-management dream team, which consists of your accountant, attorney and insurance agent. This team is invaluable in identifying loss exposures. A good insurance agent familiar with the cannabis industry should be ready, willing and able to help you with the entire risk-management process.
There are also a ton of checklists available online (just search for “risk management checklist” and you’ll find plenty) to help you identify all your loss exposures.
People are your most valuable and expensive asset. You really need to worry about all the people who interact with your business, but your employees and their welfare should be among your top concerns.
Job-related injuries happen to even the most safety-conscious businesses, so don’t think, “I just sell pot, how is anyone going to get hurt?” A slip and fall, a strained back or a broken bone can cost you thousands upon thousands of dollars in medical expenses and paid time off.
That’s why you carry workers’ compensation insurance. However, you also need a safety plan in place to minimize accident frequency and severity. Workers’ compensation insurance premiums are incredibly sensitive to accident frequency. In other words, even one accident can make your premiums go up, and they typically stay elevated for three years after the accident. It’s not enough to hope that your employees will conduct themselves in a safe manner. You must have rules in place to guide their behavior, and you need to train them on those rules.
One more point: Do not try to convince your employees who get hurt on the job not to file a workers’ compensation claim. That is highly illegal and can make the injury even worse from a cost standpoint. It is also illegal to retaliate against an employee who files a workers’ compensation claim.
You also need to worry about your business partners. Imagine this scenario: You are in business with Susan, who gets sick and dies. Her part of the business goes to her heirs, not to you. Do you want to be in business with them? Suppose her heir is her husband, with whom you don’t get along.
To avoid this problem, you and your business partners should create a buy-sell agreement. Any lawyer can draw one up for you, and it will basically say that if your business partner dies, their family has to sell you their part of the business (and the same goes for your family if the situation were reversed). These agreements are often funded with life insurance.
You probably have a ton of property. Buildings, contents, inventory, cash and cars are the major categories of property. Even if you don’t own your buildings, the lease agreement you signed very likely has insurance and risk-management requirements that you must comply with.
How are you going to repair or replace damaged or destroyed property? Can you afford to do that? If not, do you have proper insurance in place to take care of such losses? Again, your insurance agent can help you with this task, and you should take advantage of their services.
What can stop or slow your profits from flowing in to your business? The really big ones are lawsuits, business interruption and legal fines and penalties.
Lawsuits happen when someone alleges that you have wronged them in some way. Whether they slipped and fell on your premises or were harmed by your product, people will sue for just about anything if they smell a buck. You can take all the steps in the world to prevent lawsuits, but they sometimes happen anyway. In any case, you need liability insurance to protect yourself against such occurrences. And you need to rely heavily on your insurance agent and your attorney to advise you on minimizing the risk of a lawsuit.
Another big concern is what is called a business interruption loss. Let’s suppose you are a cannabis grower who grows three crops a year. Suppose one week before harvest time, your grow facility catches on fire and your crop is destroyed. You will not be able to start a new crop until the facility is repaired. Let’s say that takes six months. But once the repairs are made, you still have to get the grow cycle back up to where it was before the fire. So now it might be at least 10 months of not having income. Meanwhile, you still have bills to pay and valued employees to retain. Do you have enough cash in the bank to survive 10-plus months with no revenue? Most people don’t. Ask your insurance agent about insuring business interruption losses.
Finally, there are fines and penalties for violating the rules and regulations that apply to those in the cannabis industry. I know the rules are voluminous and cumbersome, but it is imperative that you follow them to the letter, even when you think no one is looking. It might be a little cheaper in the short run to cut corners and ignore the law, but if you get caught the financial penalties can be severe. Your attorney can help you to understand your legal obligations and comply with them.
Did I just completely ruin your day with all this gloom and doom? I didn’t mean to cause nightmares, but I want you to be smart about managing the risks you face with your marijuana business. If you take risk management seriously and get a solid plan in place to manage your risks, you will be able to sleep better at night, have fewer nightmares about “what if?” and spend more good days enjoying the fruits of your labor.
Brenda Wells, Ph.D. is the Robert F. Bird Distinguished Professor of Risk and Insurance at East Carolina University and the owner of Risk Education Strategies. She has published numerous articles on the risk management implications of cannabis legalization and is a sought-after expert in the risk management and insurance field. She has received the Chartered Property Casualty Underwriter (CPCU) and Accredited Advisor in Insurance (AAI) designations. She can be contacted at firstname.lastname@example.org.