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Committee Blog: Navigating Cannabis Insurance – 10 Essential Insights for Buyers

Produced by: NCIA’s Risk Management & Insurance Committee

Contributing Authors: Stephanie Bozzuto, Cannabis Connect Insurance, Acrisure Partner | Merril Gilbert, Trace Trust | Shay Aaron Gilmore, The Law Office of Shay Aaron Gilmore | Matthew Johnson, AssuredPartners

Navigating the labyrinth of insurance coverage can be daunting for any business owner, especially within the emerging cannabis industry. Questions like “What coverage do I need?” and “How do I ensure my policy covers my exposures?” are common and crucial. The National Cannabis Industry Association’s Risk Management & Insurance Committee is here to guide cannabis business operators in protecting both personal and business assets.

Below are ten key insights and considerations to guide you when purchasing your next insurance policy. Whether you have a policy in place or are exploring multiple policies, it’s crucial to ensure they align with your intended coverage.

  1. Understanding Policy Forms, Endorsements, and Exclusions

Policy forms, endorsements, and exclusions are pivotal during a claim. For instance, some policies sold to cannabis companies in the US have outright ‘cannabis business exclusions’. It’s crucial to read and understand these documents to avoid jeopardizing your business.

  1. Compliance with Protective Safeguards

To ensure theft coverage response in a loss, understand and comply with the protective safeguards on your property insurance policy. For example, non-compliance with a Central Station Alarm Warranty can exclude coverage after a robbery.

  1. Landlord Insurance Requirements

Understand the insurance coverage required by your landlord before signing any contract. If a triple net lease is required, you, as the lessee, will need to insure not only your business but also the building, which can be costly.

  1. Local Insurance Requirements

Each city, state, and county permitting cannabis will have its own insurance requirements, often including general liability, product liability, commercial auto insurance, and workers’ compensation.

Some states have created specific requirements not present in other states (looking at you, Michigan!). Consult with an attorney to fully understand and meet these requirements.

  1. Facility Maintenance

Maintain and update your facilities, especially if they are older than 20 years, to avoid limited property coverage and being forced to buy an “actual cash value” policy versus “replacement cost.” Updates to your HVAC, plumbing, roofing, and electrical systems are well worth the investment.

  1. High-Risk Area Considerations

If your facility is in a high brush area, be prepared for limited property insurance options and a list of exclusions due to tighter wildfire insurance availability. Your insurer may offer expanded coverage if you’re willing to invest in wildfire defense systems.

  1. Evaluating Insurance Companies

Know the financial strength of your insurance company before purchasing. Consider whether the company is admitted or non-admitted and research their reputation and claims experience.

  1. Claims Experience

Inquire about the carrier’s claims handling experience, conditions of coverage, and the duration it takes to receive a payout from a covered loss. If your broker doesn’t have claims experience with a given carrier, feel free to ask someone on the NCIA’s Risk Management & Insurance Committee.

  1. Legal Concepts and Types of Insurance

Understand the legal concepts involved in property and liability insurance and familiarize yourself with the different types of property insurance policies available on the market. For instance – are you purchasing an admitted or a non-admitted insurance policy? Are you on an ‘all risk’ or a ‘named perils’ coverage form?

  1. Grasping Liability Insurance Distinctions

Liability insurance is crucial, acting as “third-party” coverage, contrasting with “first-party” coverage like property insurance, which protects against damage to one’s own assets.

  • Duty to Defend vs. Duty to Indemnify
    • Understanding the difference between the duty to defend and the duty to indemnify is vital. The former is broader, obligating the insurer to defend the insured in lawsuits, even if allegations are baseless. The latter only kicks in if the insured is found legally liable for damages.
  • Defense Inside/Outside the Limits
    • One should also inquire about defense inside versus defense outside the limits of a liability policy. A policy with ‘defense outside’ considers all legal costs separate from the total liability coverage, while legal fees will erode the total liability limit for a ‘defense inside’ policy.
  • Insurable Interest
    • An insured must have a direct financial interest in the preservation of the property and be exposed to monetary loss as an immediate and proximate result of its destruction. The interest must not be contingent or expectant. Interest in anything not founded on an actual right to the property is uninsurable.
  • Scope and Importance in Cannabis Industry
    • The scope of liability insurance, covering legal costs and payouts, is essential, especially in the cannabis industry, where legal landscapes and associated risks are continuously evolving. Adequate coverage is paramount to mitigate potential financial losses due to unique legal challenges and risks, such as product liability claims.

Conclusion

The world of business insurance, especially in the cannabis sector, can be quite complex. However, with the insights provided here, you can navigate your policy purchasing process with confidence and ensure your business is fortified against potential risks. By understanding policy forms, adhering to safeguards, and adapting to local regulations, you can lay a resilient foundation for your business’s growth and success.

The proactive approach advocated by the National Cannabis Industry Association’s Risk Management committee emphasizes the importance of informed decision-making. By evaluating an insurer’s claims experience, comprehending legal nuances, and staying attuned to industry developments, you can empower your business with robust protection, ensuring a resilient foundation for growth and success.

Member Blog: 5 Types of Business Insurance You Should Consider

As the cannabis industry continues to rapidly expand and evolve, entrepreneurs need to be proactive in safeguarding their businesses from potential risks. Insurance is crucial for any business, and the cannabis sector is no exception. In this article, we will explore five important types of business insurance specifically tailored to the needs of cannabis entrepreneurs. By understanding these essential policies, cannabis industry professionals can make informed decisions to protect their investments and future-proof their ventures.

General Liability Insurance

General liability insurance covers the cost of any injury or damage caused by your business. This includes injuries on your premises and injuries to someone while using your products or services. It also covers you if someone is injured while on your property, even if they’re not part of an organized event or program (like a birthday party). General liability insurance will also cover the cost of any lawsuits filed against you for negligence or breach of contract arising out of the above scenarios.

Professional Liability Insurance (Also Known As Errors And Omissions)

Professional liability insurance, also known as errors and omissions insurance, protects you from lawsuits if a client feels you have made an error in your work. This can be anything from a client claiming that you didn’t perform according to the contract terms or did not fulfill their expectations.

This coverage differs from general liability protection in that it only covers claims against professional services like accounting or legal services. If you own a business where your products or services could physically injure customers, you also need general liability coverage (more on this later).

The good news is that most businesses need both types of policies: professional liability for the expertise required for running their business and general liability for protecting themselves against bodily injury incurred by customers using their products/services.

Business Interruption Insurance

A business interruption policy provides coverage for losses that result from the sudden, unforeseen loss of use or operation of your business. For example, if you’re forced to close your doors because a fire destroyed your building, this policy will pay back some of the revenue you lost during that period. Business interruption insurance can be purchased as part of a multi-line or a stand-alone policy.

Workers’ Compensation

The next type of insurance to consider is workers’ compensation insurance. This form of insurance covers the cost of medical expenses and lost wages for an employee who has been injured on the job. In all states, workers’ compensation policies are required by law, but you may want to add additional coverage for your business if there is a high risk of injury among your employees. Your premiums will be higher if you have a larger number of workers or more dangerous jobs than others in your area, so it makes sense to review this kind of coverage before purchasing it.

Employment Practices Liability (EPL) Insurance

Employment Practices Liability (EPL) insurance can be a lifesaver for small businesses, especially when there are multiple employees.

EPL insurance protects your business from sexual harassment, discrimination, and wrongful termination claims. It also provides coverage for defending these types of claims against you.

If you’re doing business in certain industries, EPL policies are often required by law or rely on government contracts to run your business. A few examples include healthcare providers, educational institutions, restaurants, and hotels—though it varies by state, so check with your insurance agent before purchasing a policy.

Conclusion

The bottom line is that you should consider your business insurance needs carefully and ensure adequate coverage. If you’re unsure about what type of insurance to get or how much coverage is enough for your business, please speak with an agent or broker who can help guide you through these decisions.

Member Blog: Safeguarding Cannabis Businesses – Managing Product Liability and Ensuring Consumer Safety

The rapidly expanding cannabis industry presents unique challenges when it comes to managing product liability. As the sector continues to grow, businesses must prioritize quality control, labeling requirements, and consumer safety to protect their reputation and financial well-being. In this article, I will explore the various risks associated with product liability in the cannabis industry and discuss risk transfer strategies to safeguard businesses from claims related to cannabis products. One of the largest misconceptions I hear is that if a client is not making the product, they do not need product liability. Unfortunately, the reality in the industry is that in a product allegation, everyone through the entire supply chain could be named in a suit.

Quality Control and Labeling Requirements: 

One of the key challenges in the cannabis industry is maintaining consistent product quality and ensuring accurate labeling. Product liability claims can arise if a consumer experiences adverse effects due to contaminated or mislabeled products. To mitigate these risks, cannabis businesses must implement robust quality control measures specific to what part of the supply chain.

From cultivation to manufacturing and distribution, every stakeholder should prioritize quality assurance practices. This includes regular testing for potency, contaminants, and pesticides. By adhering to rigorous standards, businesses can minimize the chances of their products causing harm to consumers and reduce the likelihood of product liability claims.

Accurate and compliant labeling plays a critical role in managing product liability risks. It’s vital for cannabis businesses to stay informed about the specific labeling requirements in their market, as laws and regulations vary across jurisdictions. Take California, for instance, where non-manufactured products have their own set of requirements, distinct from those for manufactured products. Whether it’s raw flower or gummies, each product category has its own labeling specifications.

Sadly, there have been instances where products were packaged to attract children or imitate popular snack brands. These cases highlight the deceptive packaging that misleads consumers and targets underage individuals. By ensuring proper labeling, businesses can offer transparency to consumers, building trust in their brand. Furthermore, accurate labeling of THC content is crucial to avoid potential product liability and advertising claims. By providing clear and precise information about THC levels, businesses can protect themselves while also meeting consumer expectations.

Consumer Safety and Education: 

Cannabis businesses must prioritize consumer safety by providing clear instructions for product usage and appropriate warnings, especially for edibles and other products with specific dosage instructions. Consumers should be informed about potential risks, possible side effects, and any known allergens present in the product. Accessible information to consumers can help reduce the likelihood of product misuse and associated liability claims. 

Insurance Strategies for Product Liability: 

Product liability insurance is a critical component of risk management for cannabis businesses. The cost of insurance premiums is typically based on gross sales, meaning that the more products a company sells, the higher the associated risk. However, it is important to note that not all insurance policies cover product liability in the cannabis industry. Therefore, businesses should work with specialized brokers who understand the unique risks and challenges in this sector.

In addition to product liability insurance, implementing further risk transfer processes can play a significant role in reducing the likelihood of being involved in a lawsuit. Businesses should establish clear contracts and agreements between cultivators, manufacturers, and distributors, outlining each party’s responsibilities and liabilities. These agreements help allocate risks appropriately and provide a legal framework for dispute resolution.

Overall, managing product liability in the cannabis industry requires a proactive and comprehensive approach. By prioritizing quality control, adhering to labeling requirements, and ensuring consumer safety, businesses can minimize the risks associated with all aspects of the supply chain when it comes to product liability. Additionally, securing appropriate insurance coverage and implementing additional risk transfer processes can provide further protection and peace of mind. As the industry evolves, staying informed and proactive in risk management will be key to long-term success and sustainability in the cannabis market.

For more information, please reach out to Valerie Taylor, Vice President, Liberty Company Insurance Brokers. 

Member Blog: Transportation Woes – The Unique Risks Cannabis Businesses Face and the Need for Specialized Insurance

In recent years, the cannabis industry has continued to grow with the legalization movement gaining momentum across the globe. As the market expands, so do the unique risks that cannabis businesses face, particularly when it comes to transportation. From theft and accidents to regulatory compliance, navigating the road to success in the cannabis industry requires adequate insurance coverage. In this blog post, I will explore the specific risks cannabis businesses encounter during transportation and the increasing importance of insurance products tailored to these challenges.

  1. The Rising Threat of Theft

    Protecting your valuable cargo from theft is a constant concern for cannabis businesses, especially during transportation. The high value of cannabis products makes them an attractive target for criminals. With high value products and cash amounts involved, the consequences can be devastating. That’s why it’s crucial for cannabis businesses to invest in insurance policies that specifically address theft risks during transportation. These policies can provide coverage for stolen goods, ensuring that businesses can recover from such losses and continue to thrive.

  2. On the Road

    Whether a retail delivery or wholesale distributor, transporting cannabis comes with its own set of challenges, particularly when it comes to employee safety, accidents and liability. Cannabis businesses must comply with strict regulations regarding transportation, including proper labeling, packaging, storing, tracking and secure transport methods. Additionally, accidents involving cannabis delivery vehicles can result in property damage, bodily injury, or even fatalities. Insurance products tailored to cannabis transportation risks can provide coverage for these eventualities, protecting businesses from costly lawsuits and providing peace of mind.

  3. Staying Compliant

    Navigating regulatory compliance with ever-changing regulations is a top priority and can be a challenge for any cannabis business. When it comes to transportation, the rules can be even more complex. Each jurisdiction has its own set of regulations governing cannabis transportation, such as licensing requirements, transport manifest requirements, and restrictions on the quantity of cannabis allowed per shipment. Failure to comply with these regulations can lead to significant penalties or even the suspension or loss of a cannabis license. Insurance products designed for the cannabis industry can help businesses stay compliant by providing coverage for regulatory fines and legal expenses.

  4. Tailored Insurance

    Meeting the unique needs of the cannabis industry and recognizing the unique risks faced by cannabis businesses, insurance providers have developed specialized products to address these challenges. Cannabis transport insurance policies offer elements of risk transfer strategies by providing comprehensive coverages, including theft, auto damage, liability and employee injury, while simultaneously meeting regulatory compliance issues. These tailored insurance solutions are essential for cannabis businesses, providing financial protection and ensuring business continuity in the face of inherent risk.

In general, the transportation of cannabis presents unique risks for businesses operating in the industry. From the constant threat of theft to accidents and regulatory compliance challenges, cannabis businesses must be prepared to face these risks head-on. Insurance products tailored to the specific needs of the cannabis industry offer crucial protection, allowing businesses to navigate the road to success with confidence. Investing in this insurance is not just a wise business decision — it is an essential step towards safeguarding the future of your cannabis business.

Member Blog: Understanding D&O Coverage for the Cannabis Industry

by Jon Spratt, Greensite Insurance Services

Cannabis industry companies face more and sometimes greater threats than non-cannabis companies because of the emerging nature of the market, a complex regulatory landscape, and investor relations.

Because of the challenging landscape, cannabis organizations have some unique risks they may face while running their businesses including:

  • High investor expectations and limited access to capital
  • The federal status of cannabis
  • Varying trade practices from state to state
  • Lack of bankruptcy protections 
  • Increased merger & acquisition activity 
  • State-by-state licensing requirements
  • Cannabis-specific local, state, and federal tax laws

Private companies in the cannabis market face threats from many directions, business leaders need to protect their assets and be able to attract top potential directors and officers to their company. The increased exposure to litigation includes disputes such as shareholder disagreement, allegations of mismanagement, and actions by regulatory agencies. Lawsuits can be levied against a cannabis company’s directors and officers and create risk for these individuals and the cannabis company. One way to help mitigate the risk of future losses is by getting Directors & Officers (D&O) insurance. 

Directors & Officers Liability Insurance, or D&O, is a coverage designed to protect an organization and its directors and officers from being held financially responsible for legal action taken by an organization’s employees, vendors, customers, or shareholders. D&O insurance primarily covers the costs associated with an allegation and wrongful lawsuits including defense costs, legal fees, and settlements. D&O insurance does not cover illegal acts.

What is generally covered with D&O Insurance?

Coverage varies, but typically D&O policies encompass three main insuring agreements: Side A, Side B, and Side C. The structure of a policy depends on which of these three insuring agreements are included. Each insurance agreement can specify a distinct insured party. 

Side A

When indemnification is either barred by law or an organization is insolvent and unable to indemnify, the individual director and/or officer can be at risk and responsible for losses. Side A offers protection for an individual’s personal assets in case of a non-indemnifiable loss. 

This offers an extra layer of protection if a company is unable to pay for losses in cases like bankruptcy or regulatory investigations.

Side B

Side B provides reimbursement for the defense of a corporation for expenses incurred while defending its organization’s directors and officers. This protects a company’s corporate assets.

Side C 

Side C, also known as entity coverage, protects a corporation’s interests if a corporation is named in a suit alongside directors and officers. This coverage provides entity asset protection for legal fees, settlements, or other related costs for covered claims, subject to a policy’s terms and conditions. Side C has a broader implication for private and non-profit companies, as Side C typically only protects public companies from securities claims.

When should you have conversations with your broker? 

Buying the correct insurance coverage can be a confusing undertaking for Cannabis business owners. Insurance Agents/Brokers are critical in helping their clients navigate this process and serve as trusted advisors to find the best fit for their client’s businesses. This article aims to demonstrate the differences between admitted and non-admitted policies and their implication for your Cannabis clients.

Running a cannabis company can be challenging and often requires leveraging an insurance broker that understands the cannabis industry. Some questions to help decide when to have conversations about Directors’ & Officer’s coverage include: 

  • Are you planning on taking on new investors during the next 12 months? As you take on investors, it increases your risk profile as shareholders can sue on their own behalf or in the name of the corporation. These suits may allege a breach of a director’s or officer’s fiduciary duties of care and loyalty to the company. This type of litigation can result in issues of conflict between the shareholders, the company, and the individual director and officer defendants.

  • Are you hoping to hire an executive or team of executives within the next 6-12 months? As the cannabis market begins to expand, cannabis companies are looking to attract top talent and at the executive level, D&O coverage is an advantage to many candidates.

What is an example of a recent lawsuit within the cannabis industry? 

Private companies in the cannabis market face threats from many directions. Business leaders need to help protect their assets and be able to attract top potential directors and officers to their company. Below is a recent example of a lawsuit from the Cannabis industry:

  • PH Invesco LLC v. Pure Harvest Corporate Group Inc et al., case number 1:22-cv-00094, in the U.S. District Court for the District of Wyoming. Colorado-based cannabis farm Pure Harvest Corporate Group Inc. was hit with a suit by a lender that claims the farm and its CEO breached the terms of a $4,000,000 line of credit it took out. (2022)

This information is provided for general informational purposes only and is not intended to provide individualized business, insurance, or legal advice. All descriptions, summaries, or highlights of coverage are for general informational purposes only and do not amend, alter or modify the actual terms or conditions of any insurance policy. Coverage is governed only by the terms and conditions of the relevant policy.

Jon Spratt leads Greensite Insurance, a specialty MGU providing boutique insurance coverage to the rapidly expanding Cannabis industry. Greensite launched in 2021 and is partnering with agents/brokers to help better protect their clients. Jon also runs a business accelerator that develops and launches new programs on behalf of Aon programs.

Greensite Insurance Services is the brand name for the brokerage and program administration operations of Affinity Insurance Services, Inc. a licensed producer in all states (TX 13695); (AR 100106022); in CA & MN, AIS Affinity Insurance Agency, Inc. (CA 0795465); in OK, AIS Affinity Insurance Services Inc.; in CA, Aon Affinity Insurance Services, Inc., (CA 0G94493), Aon Direct Insurance Administrators and Berkely Insurance Agency and in NY, AIS Affinity Insurance Agency

 

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