There has never been a better time for cannabis businesses to evaluate insurance and to seek a clear understanding of available coverage.
At the start of the COVID-19 pandemic, cannabis businesses were deemed essential in virtually every state in which cannabis is legal, but many suffered tremendous losses in revenue, particularly in jurisdictions that rely on tourism, such as Las Vegas and Los Angeles.
While the country was largely on lockdown due to COVID-19, beginning in late May, protestors have been taking to the streets following the merciless killing of George Floyd by police officers. In the name of Black Lives Matter, protesters seek, among other things, an end to institutional racism, increased police accountability and transparency, decreased militarization of law enforcement agencies and the defunding of local police forces. While most protests have been peaceful, others, especially during the week immediately following Mr. Floyd’s death, provided cover for looting.
Cannabis businesses were immediately targeted by thieves, including in California, Illinois, Massachusetts and Oregon. Significantly, many owners of looted businesses value “justice over business,” support protestors’ constitutional rights to peacefully protest and understand that professional criminals — not protestors — were to blame for their losses (a critical distinction for purposes of insurance coverage).
And these losses are reportedly in the millions. For instance, as reported by MJBiz Daily, cannabis retailer Nug was targeted for days on end, with inventory losses alone (to date) around $2 million — not including property damage and lost sales hours. In Chicago, cannabis dispensaries are closed indefinitely. Elsewhere, cannabis businesses are shuttering voluntarily, to mitigate prospective losses and move inventory and cash to secure (state-sanctioned) locations. Although many of these businesses are insured, coverage for business interruptions and property damage in this pandemic and protest era is unclear.
According to Jeff Samuels, vice president of the cannabis practice for tech-based insurance platform Embroker and a member of the Risk Management and Insurance Committee for the National Cannabis Industry Association, there has been a substantial uptick over the past month in inquiries from cannabis businesses about existing coverage, coverage that has been delayed and the potential to submit claims for lost revenues. And those without insurance have been asking whether coverage is available, particularly if the business is located in or near one of the recently impacted protest areas.
In general, there are multiple types of insurance products available to properly licensed cannabis businesses that operate in strict compliance with state law. Business interruption insurance would typically enable cannabis businesses to collect on claims for disruptions in their supply chains due to government-forced store closures and slowdowns. And it is insurance for civil unrest that typically would enable them to recoup losses sustained due to criminal attacks.
But these coverages are likely to have exclusions that come into play with losses associated with COVID-19 and recent protest activity. According to Samuels, cannabis businesses are experiencing difficulty recovering insurance proceeds for civil unrest claims, noting “various governors declared a state of emergency, which triggers policy exclusions around civil unrest or civil commotion. … Riotous acts characterized as ‘domestic terrorism’ are similarly problematic.” He explained further that it is the federal government that has the financial wherewithal to cover pandemic-related losses — and since cannabis is federally illegal, tapping those federal funds may be difficult, if not impossible (as many cannabis businesses are learning with respect to their ineligibility for Paycheck Protection Program loans).
Any cannabis business that has endeavored to obtain business insurance has likely been discouraged by the lack of affordable insurance products and common exclusions from available coverage. The devil is in the details of these policies — fine print typically buried amid hundreds of (mind-numbing) pages of definitions and policy statements. Businesses must also properly characterize claims upon submission.
“Although both peaceful and more violent protests are taking place, much of the property damage looks to be professionally planned and executed theft. [The insurer’s] ability to make that distinction is critical to [coverage] under a normal claims scenario,” Samuels stated. Adding insult to injury, businesses that have been closed during the pandemic might not satisfy business continuity contingencies to qualify for coverage. The onus is thus on insurance brokers, attorneys and other service providers to provide carriers with adequate information to determine whether claims are properly covered.
While the scope of coverage for pandemic- and protest-related losses is “too new” to provide definitive answers, and it remains unclear whether insurance proceeds will enable affected businesses to stay viable, Samuels is optimistic that insurance in the cannabis industry is getting increasingly sophisticated and advanced in terms of available products, fewer exclusions, better pricing and more educated brokers.
The forced “pause” many cannabis businesses are taking to protect against further losses related to COVID and/or protests presents a unique opportunity for all cannabis businesses to evaluate (or create) contingency plans designed to protect assets and employees in the future.
In any case, dig into the fine print and be prepared to advocate for coverage.
Lauren Rudick represents investors and startup organizations in all aspects of business and intellectual property law, specializing in cannabis, media and technology. Her law firm, Hiller, PC (www.hillerpc.com), is a boutique, full-service firm with a track record for success in various practice areas including cannabis law, land use and zoning, disability insurance law and business and corporate law.