Cannabis retail, cultivation, and processing businesses, like most others, face loss risks on a daily basis. Insurance is available to mitigate those risks, but a detailed assessment of the types of coverage offered and gaps in the policies is critical in this rapidly changing market.
First, one myth should be dispelled. Neither federal nor state laws prohibit or limit offers of insurance coverage to cannabis businesses, including retail, sales, cultivation, or processing of THC, CBD, or hemp products. If a particular insurance carrier is reluctant to offer coverage to your business, look elsewhere. Many reputable, indeed prominent, insurance carriers are currently writing insurance for cannabis-related businesses. As always, the devil is in the details and an evaluation of your insurance needs and policies offered, assisted by experienced insurance advisors such as brokers and attorneys, is the foundation for a comprehensive coverage package tailored to your needs.
Step One, the Coverage Assessment: The assessment begins with a fundamental question: What coverage do you need? You may be aware that cannabis businesses, like all businesses, at base should have Commercial General Liability (CGL) coverage, comprising personal injury, property damage, fire, and related protections. But your liability and loss exposures go well beyond property and personal injury, and CGL coverage usually excludes other business perils. These exclusions may include:
- Claims by employees
- Certain categories of crime
- Products liability (your products will be sold to other businesses or to members of the public who may claim injury arising from ingestion or use of them)
- Cybersecurity incidents stemming from cyberattacks that expose personal information you collect (e.g., employees’ Social Security Numbers, customers’ drivers’ license numbers, medical marijuana prescriptions, etc.)
These loss risks are covered by, respectively: 1) Employment Practices Liability, 2) Crime, 3) Product Liability, and 4) Cyber (privacy and security) Liability policies. If your organization is a corporation, as most cannabis business should be, you may also consider Directors and Officers coverage, as claims against directors and officers are also usually carved out of CGL policies. An insurance broker experienced in working with cannabis businesses can package many, if not most, of these coverages in a way that will make them more affordable. “Experienced” is the key word, though; many brokers shun cannabis businesses or know little about them. Ask the broker about their work with the cannabis industry.
Step Two, the Application Process: Insurance for cannabis businesses is not available just for the asking, like homeowners or automobile insurance. There is an application process, and the applications have grown longer and more complex. While many insurers will offer coverage, the nettlesome fact that cannabis remains a Schedule 1 drug causes these carriers to be perhaps more cautious, and therefore selective, in their choice of organizations to which they will offer coverage.
Armed with this knowledge, though, you can expedite the process by having the required financial and organizational information ready for the application and by having the cybersecurity controls carriers require already in place. These controls may include encryption of customers’ personal information, two-factor authentication, daily backups and off-site segregation of those backups, as well as a disaster recovery/business continuity plan for restoration of the information systems from backups in the event of a ransomware or other cyberattack. The insurance underwriters also require that these controls be written; verbal processes or a “culture of privacy and security” won’t suffice.
Step Three, the Policy Review: Okay, the insurance company has accepted your applications and offered you a coverage package with the coverage limits you requested. Done? Not quite. It’s time to review the policy with an advisor, preferably an insurance coverage attorney who will then speak with your broker. An insurance policy is a contract, and you only get the coverage stated in the contract (the policy). Many policies have gaps that reduce the scope of available coverage. These may include sub-limits, in which the available coverage for a particular category is lower than that stated in the overall package cover sheet; high deductibles or “self-insured retentions,” meaning the amount you have to pay out-of-pocket in the event of a claim; narrow definitions of events that will trigger coverage or types of claims covered; and exclusions, provisions stating that certain perils won’t be covered. These can include employee dishonesty, employee benefits claims, certain types of cyberattacks, or investigations and penalties by state agencies.
Insurance policies are dense, complicated documents and should be reviewed by a legal advisor experienced in working with them and advising you on the scope of coverage, any risks in the gaps in the policy, and the possibility of negotiating these gaps with the insurance company. (It is possible for gaps to be closed through a policy amendment called an “endorsement,” but this may make the total premium higher than originally quoted.)
Insurance is a necessary cost for any business and, given the tumultuous atmosphere of the cannabis industry, is especially crucial for your cannabis business. It’s an important part of your financial package, and with the right information, plan, and advisors your insurance picture can help your cannabis business grow and thrive.
If you have questions or are seeking counsel for insurance or other cannabis business law advice, please contact Kenneth N. Rashbaum.
