The legalization of cannabis in several states is helping the industry gain access to insurance products taken for granted in other economic sectors. But there is still a long way to go until the cannabis industry becomes completely normalized.
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.
The uncertainties and limitations of available coverage also impact cannabis-adjacent businesses, such as warehousing, transportation, security, packaging, marketing and many others.
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, this 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 industry is to thrive, business owners, workers, property owners and consumers alike must be able to rely on the protections available to other industries. As more carriers are admitted to provide cannabis insurance coverage, increased competition will allow businesses to shop for better protections and better prices.
Given that the cannabis insurance market is still developing, business operators should proceed with caution, but should not forgo 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 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, professional liability, employment practices liability and excess or umbrella insurance. And 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,” says Michael Hennessey, assistant vice president at ABD Insurance and Financial Services. “Measure twice, cut once.”
Companies are better off disclosing to insurers the potential risks of their operations and how they protect 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. 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. Other times, policy exclusions may not mention marijuana or cannabis specifically, but may exclude “Schedule I 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 audit and inspection requirements and valuation clauses, and keep diligent financial records. Carefully review the policy language 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. Camille Dixon, director at the California Department of Insurance, says there is a great need for outdoor crop insurance, but any appetite to write outdoor crop insurance for the cannabis industry went away due to the 2017 wildfires in California. Indoor crop insurance is available, but it is limited, Dixon says. 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 time goes on and the cannabis industry matures on the regulated market, there will eventually be more insurers that offer coverage to the cannabis industry and that may include outdoor crop coverage.
“The market is always expanding and the increased admitted market will bring in more carriers, offer more choice, better terms and better pricing,” says 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 by email at seagle@fbm.com and jmenendez@fbm.com or through the firm’s website, www.fbm.com.