By Evan Stait

Just a year ago, the insurance industry for cannabis entities was still very much in its infancy and, in many ways still is. Companies are having to navigate new coverage needs as the cannabis industry continues to evolve at light speed. The good news is the Cannabis Act’s regulatory landscape in Canada has provided a foundation for insurance companies to evolve and respond to new and emerging risks more rapidly than in prior years.

Since the passage of the Cannabis Act and the legalization of recreational cannabis use last fall, cannabis companies today are asking more complicated, more nuanced questions, and brokers aren’t always knowledgeable about the risks. Protect yourself and your business by learning about different types of coverage and how they can protect you in case of a disaster.

Myth #1: We are just doing one small part of the supply chain; we don’t need product liability insurance.

No matter what you’re producing, selling or reselling, product liability insurance may be the most critical coverage to obtain. What’s more, everyone along the supply chain needs it – from cultivators to processors to sellers. Most businesses don’t have adequate limits. If you’re putting a lot of product on the market, you have higher risks for liability, and you start to become more exposed. It’s always better to have more product liability insurance than you think you need because of the unknown, unforeseeable future. Many companies, big and small, still have between $2 million and $5 million worth of coverage, but they should consider doubling that – or even tripling it – to adequately protect themselves. We don’t yet fully know what the litigious landscape is going to look like as the market evolves. Any company who’s ever dealt with an expensive liability claim did not complain about the premium it cost for adequate coverage when they truly needed it.

Myth #2: We’re just a small startup operation; we don’t need directors and officers insurance.

On the contrary, D&O insurance is another critically important coverage to invest in whether for public or private companies. D&O is an important safety net for directors, officers, and the company itself. It’s especially important for companies ramping up in scale quickly like many startups strive to do. In the early stages of a cannabis startups things are very busy with multiple contracts being signed with strategic partners of all kinds. There are investors involved who buy in on the basis of the company’s forecast and strategy for an expected return on investment. Many companies, amidst the business, don’t realize or underestimate the level of risk involved at this stage. For example, what happens if investors take legal action if they feel they were misled when they bought in? A good D&O policy would likely respond to legal actions of this kind. It’s important to note, however, that it’s common for D&O policies to contain a “prior acts” exclusion, meaning coverage will not be afforded for any conduct related to a legal action if that conduct occurred prior to the effective date of the D&O policy, which can become a vital factor in determining coverage. Make sure you have D&O coverage right from the start, and protect yourself from making a costly error down the road. If you have coverage, it’s important to have your existing coverage reviewed by an expert to ensure it addresses the needs of your business adequately.

Myth #3: We already have property insurance; we don’t need equipment breakdown insurance.

These two policies are essential for many businesses, including the cannabis industry. Property coverage and equipment breakdown insurance covers different issues. For example, your property policy will respond to replace or repair equipment when damage is caused by water from a pipe that bursts, a sprinkler system goes off for no known reason, a fire in your building destroys it, or a flood occurs. It covers contents typical to your business, stock, finished product, product in process and the building itself if you own it. Equipment breakdown insurance, on the other hand, covers the equipment when it unexpectedly breaks down through its normal use. It covers the costs of fixing or replacing the equipment, and importantly, a good equipment breakdown policy will cover the loss of profits during the downtime and other related issues. Equipment breakdown is not just limited to equipment in the broad sense, it also covers arching, power surges and electrical apparatuses. It could even respond to your heating and cooling systems if they breakdown. Critically, an equipment breakdown policy will cover damage to your growing plants or stock if they’re spoiled by the breakdown. All in all, in the cannabis sector, a good equipment breakdown policy is a key component of your risk management portfolio.

Additionally it’s common in the cannabis industry to change the equipment to your own specifications. This can change the value of the equipment and the manner in which the equipment was designed to run. Arranging for a policy that allows for operating the equipment under a new specification is a necessity in this case, and this is something you’ll only get with an insurance broker who knows the industry.

Make sure you have the right insurance protection for peace of mind, and your business can fully thrive.

Contact a HUB cannabis industry specialist to determine whether your business has the right kind of coverage.