Property and Casualty

Cannabis Insurance: Growing Pains in a Growth Industry

April 20, 2021

Image of cannibis joints, gummies, and flower.

In announcing a licensing agreement with retailers in Illinois and Massachusetts earlier this month, California-based Lowell Farms, Inc. touted itself as a “vertically-integrated cannabis company with advanced production capabilities including cultivation, extraction, manufacturing, brand sales, marketing and distribution.”

A head shop it is not.

Lowell Herb’s media release describes a complex operation, yet it only hints at the risks and exposures such businesses face, all amid an evolving and often conflicting legislative landscape. This makes providing insurance for the cannabis-related businesses (CRBs) a major challenge.

Though legal for medical use in 35 states, including 16 where recreational use is legal as well, cannabis remains an illegal substance under the federal Controlled Substances Act. That’s problem No. 1; insurers generally don’t have a big appetite for industries operating in hazy legal territory.

The federal classification of cannabis (other than hemp) as a Schedule I controlled substance also imposes severe banking restrictions on CRBs, leading most – about 70 percent, according to the National Association of Insurance Commissioners (NAIC) – to operate on a cash-only basis. With that comes greater susceptibility to theft, particularly for CRBs in risky locations.

Product liability and product recalls, particularly for manufacturers and distributors of edibles and other cannabis-infused products, are additional CRB concerns, while businesses in the industry also are subject to heightened underwriter scrutiny and higher premiums for common coverages such as Auto, Workers’ Compensation and Employment Practices Liability (EPL) insurance.

Yet another challenge: underwriters’ inclusion of insurance policy riders that require certain conditions for coverage to be in effect. Writing in PropertyCasualty360, Jonathan Bench, chair of the corporate practice group at the law firm Harris Bricken, cites examples including:

  • All finished marijuana stock being kept in a vault or safe
  • A burglar alarm linked to a central response center
  • Motion detectors
  • Sign-off from a licensed electrician certifying that the business’ circuits are adequate to meet its power demands.

Keep an eye out for those riders, lest you only discover them when your insurance carrier denies a claim.

Keeping Up with Demand

Since reopening thanks to “essential business” classification early in the COVID-19 pandemic, CRBs have thrived in the U.S., with an on-edge nation seeking stress relief and more states legalizing marijuana. Illinois’ Department of Revenue recently reported more tax revenue from sales of marijuana than alcohol during the first quarter of 2021, with sales of more than $109 million in recreational cannabis products in March alone. North of the border, cannabis sales in Canada doubled in 2020, to a reported $2.6 billion.

To keep up with demand and grow their companies, CRBs increasingly are turning to sophisticated equipment and materials, and that requires specialized coverage. What kind of equipment? Take a look at the catalog offered by Canapa, a Canadian manufacturer of machines that weigh, roll, sort, package, label and more. According to the legal-cannabis trade publication MG Magazine, equipment such as Canapa’s JuanaRoll can range in price from tens of thousands of dollars to several million dollars.

Coverage for manufacturers of such equipment and for the equipment itself is more available than it was in 2012, when the state of Washington became the first to legalize marijuana for recreational use. Nevertheless, coverage is still limited, with excess lines typically necessary to provide adequate coverage.

What’s Ahead

Within the legal cannabis industry, the hope is that cannabis will move more rapidly toward federal legalization during the Biden administration, opening and softening insurance markets along the way. Mergers and acquisitions that bring greater uniformity to the industry, similar to what took place in the auto industry a century earlier, would also be welcome developments among insurers, allowing for greater financial stability and more uniform coverage.

What You Can Do

Marijuana growers and cannabis distributors take pride in their knowledge of the science that goes into cultivating their products, the rapid development of their industry and the diversity of their offerings. They should have similar attitudes regarding the insurance available to protect their businesses.

Start by working with an agent or broker who knows the industry and understands your business, and be consultative. Provide as much information about your business as you can, and ask questions – for example: “Does the policy include any riders I need to address?”

There’s much to know in the cannabis industry, and that includes being informed about the insurance necessary to protect your cannabis-related business. A CRB is no place for a cookie-cutter BOP.

One form of protection recommended for most businesses in today’s hyper-connected world is Cyber Insurance. You’re invited to join Alera Group for an April 28 webinar, Cyber Security: What to Do Before and After a Breach. You’ll learn how to build a cyber-security strategy that will help you manage the risk of attack and respond if a breach occurs.


About the Author                             

Anne Wayman
Executive Vice President
Alera Group Las Vegas

Anne Wayman has 31 years of insurance industry experience, with primary focus on the healthcare, gaming, technology, construction and cannabis industries.

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