In the previous post we looked historically at the US cannabis trade. Now, let’s talk coverages and exposures.
While the cannabis industry requires the same types of coverage as retail (think jewelers and crop enterprises), it presents some unique risks. Between the higher liability exposures, the cash-on-hand and the specialized property risks, the retail agent must understand all the unique exposures of growing, testing and dispensing.
On the liability side, forms are not standard ISO forms in many cases. Reading and analyzing the coverage forms is imperative. Agents should pay special attention to all policy exclusions. Missing one important liability coverage can lay the groundwork for an E&O claim.
Auto liability coverage is available for the cannabis market, including hired and non-owned auto coverage.
Failure-to-warn claims similar to those faced by the tobacco industry may emerge. Most CGL policies have a health-hazards exclusion that eliminates coverage for these claims. The cannabis industry expects the Federal Trade (FTC) Commission to weigh in at some point on failure-to-warn issues if the FTC perceives anti-trust violations or if consumers complain.
With the tremendous amount of cash on hand in dispensaries and other facilities, employee and customer safety remains a mounting security concern. Workers compensation coverage is available. A California State Insurance Fund report found that of the 200 cannabis retail dispensaries they insured, slips, trips and falls were the primary source of workers compensation losses. This loss history was similar to other retail operations it insures.
A customer who is injured on-premises will trigger the CGL policy, which is readily available for this market.
With cannabis exposures, the CGL and any commercial umbrella policy may exclude product liability coverage. In some cases, the carrier writes the CGL policy and excludes product and other carriers write the CGL on a claims-made basis and includes product liability. In most cases, carriers write products liability on a claims-made basis. Licensing requirements will vary by state as to which coverage lines are required to obtain cannabis licensing. Retail agents should ensure they offer both lines of coverage, the CGL and product liability, to their clients.
Because the CGL has a pollution exclusion, agents should recommend a standalone pollution policy if the insured’s operations include that exposure. Cannabis growers are beginning to see lawsuits from consumers over the use of pesticides in growing crops.
Agents should recommend requests for additional insured status from manufacturers, processors and suppliers when servicing downstream accounts. Coverage is available for property owners who rent to dispensaries and other cannabis businesses.
Professional liability for lawyers, doctors, chemists and other professionals is a consideration. Producers should ensure that policy language does not disclaim coverage for malpractice simply due to providing advice to the cannabis industry. Directors and officers (D&O) coverage is available, and whether the cannabis owners decide to purchase D&O remains an internal corporate decision. Rates run higher than normal rates for cannabis businesses because of the uncertainty surrounding claims and the lack of claims experience.
Those involved in the cannabis business are accustomed to risk and seem more willing to embrace greater uncertainty than other retail or crop operations.
For first-party coverages, forms are similar to other industries; however, coverage is not normally as broad. Stock is valued at actual cash value and theft sublimits normally apply. Growers may be unable to find stock coverage. Many cannabis businesses now use mobile units with refrigeration units for labs, testing and storage. Additionally, business owners can readily move mobile units from one jurisdiction to another if local laws change.
Cooking facilities use Ansel systems for fire prevention. The drying process requires highly specialized ventilation for mold inhibition. Business income losses can be high because of the tremendous profitability of these operations, so determining adequate coverage limits can be problematic. Given the banking industry’s reluctance to do business with this industry, cash on hand presents a high risk of robbery, kidnap and embezzlement.
Inland marine coverages present unique form language requiring the use of armored vehicles and other safety precautions. Many insurers require separate safes for product and cash. Transport is highly regulated, and cargo risks such as hijacking and theft increase with the cargo’s appeal. While in transit or at covered locations, motor truck cargo is a much-needed coverage for manufacturers and others involved in processing and distributing cannabis.
Cannabis cultivation operations coverage for crop insurance is available only on a limited basis and is generally available only on indoor grow operations. Live plant crop coverage is available, as is equipment breakdown coverage. Recall coverage is unavailable at this time.
It seems likely that insurers committed to this market will begin to provide specialized loss control and claims teams to assist in preventing and investigating losses.
In the next article, we’ll discover some pricing jurisdictional challenges, and discuss ways to grow your cannabis acumen.
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