The legalization of cannabis in the United States has unleashed a unique economic opportunity, not only for budding entrepreneurs, but also for insurance professionals seeking to cater to this emerging market. Insurance has long been a trusted mechanism for business risk management, and the legal cannabis industry is no exception. However, the insurance landscape for cannabis businesses presents distinctive challenges, distinct policy types and alternative purchasing methods compared to more conventional industries. In this article, we delve into the intricacies of how cannabis businesses navigate the insurance realm, highlighting the common policy types that are sought atier, as well as the disparities that set them apart from traditional marketplace offerings. One key aspect to note is that insurance premiums for cannabis business owners tend to be on the higher side, mainly due to the limited participation of admited carriers. These carriers are entities officially approved by the state in which they operate, with their rates, underwriting rules and coverage forms regulated and standardized. This regulatory framework aims to maintain uniform rates and ensure effective risk management. Unfortunately, the ongoing federal illegality of cannabis has deterred many carriers from entering this market, leading to a reliance on non-admited carriers operating in the excess and surplus lines space.
The scarcity of available coverage options for cannabis operators remains a prominent challenge, prompting the intervention of the National Association of Insurance Commissioners (NAIC), which has established a working group to encourage greater participation of admited carriers. Distinctive Challenges in Cannabis Insurance Typically, cannabis business owners acquire a range of policies to safeguard their interests, including commercial general liability, commercial property, workers’ compensation and commercial auto. Unlike similar policies for industries outside cannabis, these policies do not always adhere to the standardized coverage forms developed by industry bodies like the Insurance Services Office (ISO) or the American Association of Insurance Services (AAIS). Standardization benefits both insurance carriers and the public, as it fosters consistency in coverage forms, rates and loss costs. This uniformity allows agents and brokers to offer consumers similar products from different carriers, minimizing gaps in coverage and adverse selection. However, the landscape in the cannabis insurance market differs significantly, with many carriers offering proprietary coverage forms. Consequently, each policy is unique, placing a heightened responsibility on agents and brokers to possess a comprehensive understanding of the coverage they are offering. In the insurance realm, commercial general liability (CGL) policies play a pivotal role, typically adhering to the ISO CG 00 01 coverage form. These policies, following an occurrence-based model, provide comprehensive protection encompassing bodily injury, property damage, personal advertising injury, and a broad spectrum of liabilities related to premises ownership, maintenance, operations on or off the premises, and product manufacturing, sales or distribution.
Moreover, they extend coverage to completed operations, personal injury, advertising injury and medical payments. For most cannabis businesses, obtaining the robust CG 00 01 coverage form is a challenge. Many insurers provide modified versions or proprietary forms that otien lack product liability coverage. Additionally, they restrict coverage to the insured premises, and do not address liability that arises off-premises or away from the insured location. This limitation was acceptable in the past, but the emergence of the COVID-19 pandemic saw cannabis deemed essential. Consequently, cannabis businesses nationwide began delivering products to patients, revealing the shortcomings of the modified CGL coverage form in addressing product and exposure risks beyond the insured premises. Given the exclusion of product liability coverage in the cannabis CGL policy, business owners must secure a separate, standalone product liability policy to effectively mitigate the risks associated with products they manufacture, sell or distribute. While these product liability policies typically come in a claims-made and reported format, there are also occurrence-based options available, though they come at a higher premium cost. Therefore, claims-made policies remain the preferred choice for most cannabis business owners. Learning from Losses: Insights from the Cannabis Industry Obtaining sufficient property insurance for cannabis business owners is equally challenging. Numerous policies necessitate the presence of a safe or vault, in addition to standard protective measures such as central station alarms. Property underwriters pay close atention to evaluating the electrical circuits and loads within the cultivation facilities where cannabis is grown. This scrutiny of underwriting related to electrical wiring and the use of high-pressure sodium bulbs with incompatible ballasts became more stringent following instances in which insurance carriers had to pay out millions of dollars in fire damage claims. Commercial auto and workers’ compensation coverages are generally more accessible for cannabis businesses, primarily because they are mandated by statute in most jurisdictions.
However, these operations are still considered higher-hazard activities, leading to increased underwriting scrutiny. As the cannabis industry matures, both business owners and insurers gain valuable insights from loss experiences. An unfortunate example is the tragic occupational asthma-related death in Holyoke, Massachusets. This incident serves as a poignant lesson learned. The employee involved in this case was not equipped with proper personal protective equipment and inadvertently inhaled ground cannabis dust during the course of her employment. Consequently, her employer faced fines for failing to conduct a hazard assessment to protect its employees. This incident underscores the critical importance of safety protocols and compliance within the cannabis industry. In conclusion, insurance professionals and business owners operating in the cannabis industry must move beyond a cursory review of insurance policy contracts. It is imperative to prioritize a thorough comprehension of the coverage conditions, exclusions, and the unique workplace conditions within which employees operate. The distinctive features of each policy in this specialized market underscore the crucial role of agents and brokers in mastering the intricacies of policy contracts. This knowledge is pivotal in ensuring that each business is well-protected against the multifaceted array of potential risks and liabilities, ultimately paving the way for a secure and thriving cannabis industry.