Up in Smoke: Insuring Cannabis-Related Businesses

The sale of legal cannabis is projected to reach $20 billion within three years. With 33 states passing laws to legalize medical cannabis and 11 allowing recreational marijuana, the insurance industry is beginning to take notice.

California blazed trails by announcing the first Cannabis Business Owners Policy in June of 2017. The initial policy included property and liability coverage for dispensaries, distributors, manufacturers, and processors. The first lessor’s risk policy arrived in the state in May of 2019. It provides property insurance and liability for landlords who lease facilities for dispensaries, cultivation, and manufacturing of cannabis products.

At the moment, Federal legal status still creates obstacles for entrepreneurs, bankers, and insurance brokers when it comes to the cannabis industry. At issue are conflicting state and federal laws, quickly evolving regulations, and a lack of standardization in cannabis business practices.

In addition to regulatory concerns, cannabis-related business owners face unprecedented financial risks best mitigated by appropriate insurance coverage. Currently, a limited number of insurance brokers have entered the market due to inherent risks.

What are the commercial insurance needs your cannabis-related clients may have?

Worker’s Compensation Coverage: Like any other business, cannabis-related businesses face threats of employee accidents while on the job. The cultivation process runs risks similar to any other agriculture endeavor. Processing, drying, curing, and packaging incur the same perils as other manufacturing lines. A threat fairly unique to this industry is the process of extracting CBD oil which involves flammable solvents and dangerous chemicals.

Property Insurance:  Physical property losses such as fire, theft, and weather are a risk, much like any other commercial business. Volatile chemicals used in manufacturing may increase the risks of fire. Storm losses on crops may require specific crop coverage in addition to general property insurance. Unlike many other companies, cannabis-related organizations face an increased risk of theft because federally regulated banks are reluctant to accept deposits, creating a cash-heavy environment for owners.

Product Liability: Medical cannabis-related businesses face the same product liability as any other pharmaceutical business except the products are so new the regulations are still being written. Consistency among strains of plants may create liability issues. Cannabis-infused edibles will carry similar risks to other manufactured food products.

Cyber Threat Protection: Medical marijuana businesses often store patient medical records which may make them targets for cybercrime. Additionally, most states require very stringent record-keeping.

Surety Bond Programs:  California requires proof of a $5,000 surety bond to guarantee the compliance of licensees. The bond design guarantees available money for the destruction of cannabis products in the event of violations.

The speed of changing regulations, the lack of underwriting data, and the inconsistency between state and federal law create barriers to adding these lines for many brokers. One regulation to watch in this evolving market is the Marijuana Opportunity Reinvestment and Expungement Act (MORE Act) introduced in Congress in July 2019. The MORE Act proposes to remove cannabis from the controlled substance list, decriminalizing it at the federal level and allowing states to set their own policies. If passed this Act could quickly expand the cannabis industry and create more opportunities in the insurance market.

Always on the cutting-edge, Jencap offers Worker’s Compensation coverage for cannabis-related businesses. Be sure to take advantage of this unique underwriting expertise and market access for your new and renewal business.

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