By Richard Malowney
A big risk for businesses in the fast-growing cannabis industry is that very few understand the risks, meaning your insurance coverage is probably woefully inadequate. Are you prepared to see all your hard work go up in smoke?
Here’s a case in point. Our first order of business with one new client – a major cannabis grower and producer in Washington state – was to fix all of the shortfalls in its policies for general and product liability, equipment and D&O. One finding? It had no property insurance for its large, leased indoor growing facility. The owners weren’t aware of the lease clause making them, not the landlord, responsible for necessary building improvements. That created significant exposure.
With California’s legalization of marijuana which should boost the market by $3.7 billion this year, to a total in the U.S of $14.5 billion, the legal cannabis industry isn’t acting like a “real” business. One way to nip big problems in the bud is to learn the realities behind some common insurance myths that in other industries are standard and viewed as the “cost of doing business.”
Myth #1: But I heard that no one will insure a business like legal cannabis that people still think is sketchy.
Not even close. Depending on your role in the industry -- producer or retailer -- you can and should get the same standard coverage as any other business – from property and casualty, product liability, EPLI and directors & officers, to employee benefits and workers’ comp. And, you can and should even consider getting crop insurance (even if a farm agent said you couldn’t). And depending on your cannabis business’ role in the production and distribution, you might even need to think about kidnap and ransom, crime and cyber coverage – after all, it’s a high cash-based business.
Myth #2: I’m not selling cannabis-infused brownies, so I don’t have to worry about product liability insurance.
Wrong again. It doesn’t matter where you are in the supply chain, it’s the biggest risk the cannabis industry faces. Think about the liability “trickle down” effect – encompassing everything from production, distribution and sales to aspects you may not even think about, like labeling and marketing representations. When so many are involved in a product – particularly an edible, inhalable or ingestible one – it’s important to be aware of the contractual risk transfer of product liability. The liability is pushed to all those actually responsible for it. That could be you as a producer or as a retailer or an extractor. All your vendors need to show their certificates of insurance and in adequate coverage amounts.
Myth #3: If my operation has a loss, my landlord has insurance that will cover it.
Don’t count on it. Your landlord’s policies most likely won’t cover your loss and in fact, your loss might even cause your landlord’s insurance to be nullified for having rented to a cannabis business. It pays to go over your lease agreement very carefully. It’s not just a matter of being in compliance with the landlord’s requirements, but knowing if there are potential liabilities that you assumed were covered. And even if you have some protection under your landlord’s policy, a stand-alone policy will ensure it’s adequate.
At this stage of the evolution of the cannabis industry, it makes a lot of sense to ensure you have the right insurance protection and in the right amount to make sure your cannabis business doesn’t go up in smoke. It also makes you a better risk to investors and lenders. For example, a credit union will be more favorably inclined toward your $4 million loan application to build out a grow facility if you show a policy that would enable you to rebuild fast in case of fire.
We all know that cannabis is a “real” business. So let’s treat it like one, and put the best coverage in place to protect your hard work and investment.
HUB International’s consultants are available to work with you in trends and developments that may impact your risk posture today and in the future.