Cannabis Is a High-Risk Business — Specialty Insurance Is a Must
Changing public attitudes about marijuana, and its legalization for medical use by 36 states and the District of Columbia, have led to significant growth in the cannabis industry. In 18 of those states and the District of Columbia, it’s also legal to use marijuana recreationally. And cannabidiol (CBD), a non-psychoactive ingredient said to have health benefits, is now widely available in oils, creams and edibles.
However, cannabis remains a controlled substance at the federal level, and adding it to food or drink products is a violation of the Food, Drug and Cosmetic Act. Plus, banks have generally been afraid to accept deposits from cannabis-related businesses (CRBs) for fear of federal prosecution. This makes being in the cannabis business a highly risky operation.
Legal uncertainty means fewer insurance options
Legal uncertainty and a patchwork of regulation have largely discouraged insurers from entering the cannabis market. Yet, as the National Association of Insurance Commissioners (NAIC) notes, “CRBs face the same general liability and other risks [that] agricultural and manufacturing businesses face.”
Among the risks the NAIC identifies for CRBs are:
- Workplace accidents
- Damage to property
- Crop failure
- General liability and product liability
In particular, the NAIC says, “The popularity of cannabis-infused products, such as edibles, increases the risk of product liability and safety recalls. The psychoactive effects of cannabis raise the risk products may be deemed mislabeled, misrepresented or harmful.”
Only a handful of surplus lines carriers offer coverage for the cannabis industry, and, the NAIC warns, the policies being offered might not provide adequate coverage. There are, however, new options being rolled out periodically by specialists in the cannabis field. Your insurance professional will know how to tap into those.
These challenges aren’t keeping CRBs from growing
Despite these risks, many entrepreneurs are eager to enter the cannabis business because of the potential for high profits. Venture capitalists have been investing heavily, and there have been several favorable regulatory changes. For example, hemp-derived CBD is no longer classified as a controlled substance. Congress is also considering legislation to make it easier for CRBs to obtain financial services, including insurance.
Cannabis goes through a number of steps from cultivation to final sale. These include growing, extracting, manufacturing, transporting and dispensing (selling) cannabis. Which segment of the business you decide to enter will determine the type of insurance you need.
If you’re a cannabis grower, you’ll need the same type of insurance coverage farmers and agricultural companies purchase. Crop insurance, commercial property insurance and commercial general liability insurance are key coverages to consider. Keep in mind that cannabis doesn’t qualify for the Federal Crop Insurance Program, although the U.S. Department of Agriculture has started a pilot program to insure industrial hemp.
With private insurance hard to obtain, a new coverage known as parametric insurance has emerged. First used to cover natural disasters such as earthquakes, these policies pay out when an agreed-upon event occurs, regardless of the policyholder’s actual losses.
Outdoor cannabis crops can be lost due to adverse weather conditions, so a parametric policy would pay a set amount based on temperature changes, rainfall, wind, hail or drought. When a certain parameter or trigger is met, the policy begins its payout. Coverage continues until the limits of the policy have been exhausted.
While parametric policies aren’t designed to stand alone, they do offer some protection if a grower can’t obtain any or enough traditional crop insurance. Growers will also need equipment breakdown and business interruption insurance, along with liability insurance.
Extractors and manufacturers
Cannabis extraction refers to the process labs use to remove the active ingredients from the cannabis plant and create solid, semi-solid or liquid forms that can be turned into oils, edibles, drinks or topical creams.
Extraction presents its own set of risks for CRBs. The chemicals used for extraction can be hazardous. In addition, labs must take care to ensure consistent quality, uniform doses and the right potency. States that have legalized cannabis have regulatory standards that manufacturers must meet, such as proper safety and handling of ingredients and accurate labeling of products.
Significant insurance exposures for manufacturers include product recalls, theft and vandalism. Companies in this line of business should seek to obtain commercial general liability, product liability, professional liability, equipment breakdown, business interruption and property insurance.
In states where marijuana can be sold legally, dispensaries allow consumers to shop in a retail setting. These stores present risks in and of themselves. Because they handle a lot of cash, they are targets for theft. They also are frequently victims of cybercrime and data breaches. And landlords may be unwilling to renew their leases if there are complaints.
Dispensaries are also subject to product recalls and may be held liable for selling tainted products. To protect against losses and lawsuits, dispensaries should carry commercial general liability, product liability, commercial property, cybercrime and business income insurance.
Transportation of cannabis across state lines can result in federal fines and confiscation of products. There is also the risk of theft, vandalism and property damage from fires or severe weather.
Make sure your auto insurance covers you if you transport cannabis. For commercial trucking, you should at least have general liability, physical damage, truck cargo and mechanical breakdown insurance. Inland marine insurance also protects an insured’s property in transit.
All employers must purchase workers’ compensation insurance to cover job-related injuries and illnesses. This insurance is required in nearly every state, depending on how many employees you have.
Employment practices liability insurance is also highly recommended to protect against lawsuits alleging discrimination, sexual harassment, wrongful termination and other employment-related claims.
When cannabis is a side job
Because cannabis remains illegal at the federal level, you may find your existing insurance policies won’t cover you for cannabis-related activities. Some examples where this could occur:
- You own a farm and decide to grow cannabis on the side
- You lease space in your building to a CRB
- You operate a delivery service and take on a cannabis client
- You’re a consultant and provide services to a CRB
- You’re a doctor and prescribe medical marijuana
In each case, you may need to purchase separate CRB coverage to protect against liability and property damage. If coverage isn’t available or it’s too expensive, you’ll have to weigh the risk of pursuing these cannabis-related side opportunities.
While at one time cannabis insurance was nearly nonexistent, today CRBs are finding more options available in this emerging market. However, there are still a number of challenges to obtaining insurance. Premiums are higher than for comparable commercial enterprises, and many brokers and underwriters are unfamiliar with the risks involved in running and insuring a CRB.
Make sure you work with an insurance professional who is familiar with the cannabis industry, has access to the right specialty insurance and can put together a package that works for you.