Proper coverage is crucial to prevent unforeseen losses
It’s no secret that the legalization of marijuana in multiple states has led to a burgeoning, multi-billion dollar industry in the past few years. In California, which is scheduled to begin issuing licenses for legal recreational marijuana businesses on Jan. 1, 2018, the industry has a projected value of $7 billion. Even before California voters approved the legalization of marijuana last year, the legal cannabis markets in the United States were expected to grow 700% over the next five years.
However, a number of legal and regulatory issues still need to be resolved in terms of how growers, manufacturers and dispensaries obtain insurance coverage to protect against potential losses and claims facing these new businesses. Like many other businesses, companies operating in the cannabis space may see insurance as both a necessary evil and an essential part of running a successful enterprise. Yet, it is critical that companies understand the importance of obtaining proper coverage to protect against future risk. This is especially true for marijuana businesses that operate in states with mandatory insurance requirements for cannabis companies.
In a business as inherently risky as cannabis cultivation and sales, it is critical for businesses to understand that these minimum requirements often may not be sufficient to protect against potentially devastating losses. Even for businesses that are not required by state law to have insurance, obtaining coverage for certain events can be a worthwhile investment to ensure the business remains solvent when unforeseen losses and claims arise.
While marijuana businesses are subject to similar risks that many other businesses face, such as personal injury, property damage, employment and loss of business income, the nature of those risks is different than many other industries. For example, a number of insurance companies have tailored insurance coverage specifically to the marijuana industry to protect against certain losses, such as product liability and general liability coverage that could protect against personal injury claims for unintended side effects of marijuana use and premise liability claims. Other insurers may offer business income coverage to cover operating expenses if a catastrophic event disrupts the manufacture or sale of marijuana products, such as fire, theft, vandalism or weather-related perils.
Because insurance policies are available for a variety of marijuana businesses, obtaining the right coverage is critical to limiting future risk and protecting business assets and profits, regardless of whether you operate primarily as a grower, manufacturer and/or seller of marijuana products.
Although the perils potentially facing marijuana businesses may be similar to other industries, the process of obtaining the appropriate coverage is distinctly different. For example, the number of insurers offering coverage for the marijuana industry is extremely limited compared to other industries. Marijuana insurance coverage is considered a highly specialized form of insurance and because the legal sale of marijuana products has only arisen in the past few years, coverages offered by insurance companies in this industry can vary considerably, as can the price. Thus, it is important that businesses consult with insurance experts to make sure they are obtaining sufficient insurance that covers their risks and does not contain “gaps” in coverage that could leave the business open to significant losses following a catastrophic event.
On the flip side, insurers seeking to enter the marijuana industry should be mindful that policies traditionally offered to manufacturers and sellers of other products may not be appropriate for cannabis businesses. For example, potential losses from theft are greater for marijuana businesses than many other industries. Thus, the underwriting process must appropriately measure the potential risk, which can be mitigated by requiring the policyholder to take certain precautions to limit potential losses, such as comprehensive alarms and video cameras. Other requirements for marijuana sellers, such as keeping cash and property in locations other than the retail store, can limit potential exposure. And these are just some of the various requirements that both insurers and policyholders should be aware of before entering into an insurance contract.
As the marijuana industry expands in the coming years and more insurers enter the market of providing coverage for these businesses, significant changes are likely to occur both in terms of the scope and limits of available insurance coverage. It is critical for any business on either side of insuring the cannabis industry to pay attention to the changes in the market, which could be quick and continuous for the foreseeable future.
Eliot M. Harris is a member of the Seattle office of Williams Kastner (www.williamskastner.com). His practice focuses on commercial litigation with an emphasis on insurance coverage, including general liability coverage, construction defect coverage and professional liability coverage. He is licensed and practices in Oregon and Washington. Williams Kastner publications should not be construed as legal advice.