Risk Managers’ Forum
By Reed Rhoden, CIC, CRIS
CANNABIS INSURANCE: EVALUATING RISKS AND REWARDS
It’s a new industry, so we need all the market intel we can get
Cannabis insurance for growers, manufacturers, and dispensaries is one of the most dynamic emerging areas in the insurance marketplace. The rush to legalize marijuana at the state level is affecting every line of insurance. Offering coverage for cannabis operations can provide a new business opportunity for agents, but it also raises challenges and questions as these businesses navigate the conflicts between federal and state regulations. Many wonder where this segment of the industry is headed in the next few years.
Just a few years ago, marijuana entrepreneurs were left wondering whether an offered insurance program would still be there in six months. Today cannabis coverage is available on ISO forms—something previously unimaginable. The insurance industry is evolving rapidly in an effort to keep pace with the burgeoning cannabis marketplace.
Federal vs. state laws
Federal illegality of marijuana remains the main barrier to entry for insurers that want to move into the cannabis market. That said, cannabis is highly regulated in states like California where marijuana is legal for both medicinal and adult recreational use. The state mandates compliance with specific risk management protocols.
The best education is to get to know a grower and manufacturer and someone who runs a dispensary.
No one wants to dabble in a market without first understanding it and its risks, and the cannabis market is no different. Knowledge is critical in the cannabis industry for several reasons. First, the regulatory scene is extremely dynamic. New state regulations are being put into place to police the industry as it is growing. Insurance professionals must keep up with these regulations and requirements. Is the insured appropriately registered and licensed in its state and municipality? Is its application with the state in a grace period? Knowing how to find out whether a business is appropriately licensed is vital to addressing its risks and securing coverage. Agents should know state cannabis regulations, including requirements that deal with the chain of distribution, transportation, quality control, testing, reporting, record keeping, and other areas of the business.
Another reason for conducting in-depth due diligence is that cannabis businesses historically have operated underground. As a result, many prospects are reluctant to fully disclose all the information you need about their operations. The best education is to get to know a grower and manufacturer and someone who runs a dispensary. Ask for a site inspection and a tour. You need to understand how the product is grown and how it is monitored through its life cycle with track and trace software. You must know how it is harvested, by whom, and under what conditions. When the cannabis crop has been harvested, you need to know how it is manufactured, the equipment used, the products produced, and the ingredients and possible additives in the product.
Cannabis is essentially an agriculture exposure. It is also a liquor liability exposure and can be a nutraceutical exposure. A nutraceutical is a food or fortified food product that supplements the diet and is intended to assist in treating or preventing disease.
You can attend cannabis “universities” where classes are taught by chemistry professors. You must know all the applicable laws; read everything you can get your hands on and attend conferences. Strive to reach a high level of competency so you can help your clients protect themselves.
Banking and federal law
Because cannabis is still illegal at the federal level, federally guaranteed financial institutions are not an option for businesses that manufacture or market cannabis. Agents tell me that their insureds are buying 20 to 40 money orders at a time to pay bills, rent, utilities, and other expenses.
Cannabis operations are more vulnerable to theft and violence because they keep large sums of cash on their premises, and they carry an inventory of a target-rich product.
Understandably, it is dangerous to transport large amounts of cash and product, especially when everyone knows you are doing it. Savvy clients mitigate exposures that currently can’t be covered, such as the in-transit motor truck cargo exposure. I have one insured who employs the “hide in plain sight” technique, using a decommissioned ambulance to transport cash and cargo. Cannabis operations are sometimes exposed to less sophisticated robberies, which can cause more extensive damage. A small-time robber may drive a truck through a front wall instead of removing a single pane of glass as a professional might.
Also, because they cannot bank at federal institutions, cannabis businesses don’t have access to Small Business Administration loans. A new marijuana business might go to multiple investors, who will need to have liability coverage. Being very clear on who your named insureds are is important to avoid an E&O claim.
Communication is key
What I look for in a client is someone who communicates well. As a broker, I look for the same quality in my agents. I look for people who appreciate the importance of honest, straightforward feedback. Cannabis is a new industry, and we need all the market intel we can get. I need agents who are not afraid to tell me that we are too expensive on one coverage and too cheap on another. I want someone who can help us keep up with the competition and discover coverage gaps as soon as possible; that way, we can take care of the gaps in our coverage forms.
An agent who asks a lot of questions and a client who is open to answering are both desirable. We need to thoroughly investigate a business to understand the risk and correctly price and underwrite it. A good agent is someone who can relate to his or her clients and educate them so that they understand why we must know their business inside and out.
My agents in the field conduct a site inspection after coverage is placed. Generally we rely on the prospect’s application, other documents, and Google photography of the buildings and premises. Sometimes an agent must clarify responses on an application that need further explanation. Some prospects are in the process of signing leases, and some are still preparing to open for business. We may find on inspection that renovations and improvements are in process. That can be problematic because we may not be able to address deficiencies that are subject to warranties, limitations, or exclusions in our policy forms. Ideally we would perform inspections prior to policy issuance, but in many situations that is not realistic.
If construction is complete, we look for any kind of risk mitigation that makes the business more attractive, such as security measures and a loss control program. Find out if a risk management protocol is in place. Does the business have alarms, sprinkler systems, and security guards? We look closely at security because, as noted above, cannabis is a cash-heavy business and a target for theft. Security is crucial both internally and externally. Many cannabis operations have electronic security, armed guards, and sophisticated 360-degree cameras.
Does the prospect conduct license verifications, annual inspections, and audits? Are employees carefully vetted and appropriately trained? As noted earlier, cannabis operations are highly regulated by the states, and one reason is to ensure the safety of employees and patrons. Laws also are in place to keep black market operations at bay.
Building the insurance package
A cannabis insurance package usually includes premises liability, general liability, and all property—whether it is buildings, greenhouses, or cannabis stock. A separate policy is written for product liability and completed operations. We can include excess liability for both the products and premises liability, and we can cover the cannabis stock on an admitted basis.
For testing labs, professional liability is covered on a non-admitted basis. Before they can go to market, cannabis products are tested for THC levels, pesticides, contaminants, mold, mildew, and so on.
Product liability is the most frequently overlooked coverage unless it is a property-driven exposure. Most of the premium is in the product liability coverage. When cannabis operations are just getting started, they might choose the minimum property and liability limits to satisfy a landlord’s requirement. After revenue starts to come in, the operators may add product liability.
Many different insurance packages are available depending on the prospect’s particular operation. Is it a grower, a manufacturer, a dispenser, or all three? Does it want to insure the crop or the product? Time determines whether cannabis is a crop or a product. The coverage form addresses that situation with valuation. Track and trace software monitors the life cycle of the cannabis plant from seed to sale. At any given point, a cannabis grower can prove what number of plants it has or had, and at what stage of the life cycle the plant was. When a loss occurs, this program can tell us how many plants were at the seed stage, the flowering stage, and the vegetative stage. The plants have a different value based on the stage they are in at any given time. We endorse the valuation of the plants from germination through flowering and vegetative stage. The mother plants are valued differently from the clones or offshoots. An endorsement clears up any confusion about the definition of stock. A personal property form provides a coverage grant for growing plants if a loss occurs at some point in the life cycle, subject to the policy’s terms and conditions.
Many common misconceptions exist about the kind of people who work in the cannabis space. It‘s sometimes assumed that they are the stereotypical potheads cutting up buds in a smoky back room. Most people in the cannabis industry today are technically educated and skilled, and cultivation operations are highly sophisticated nurseries. The operations are usually managed by organic chemists who also are experienced businesspeople. They are carefully and responsibly monitoring their staff, their inventory, and their bottom line. They are building new paradigms in manufacturing and product development. The leaders in the cannabis industry are innovative, compassionate, and shrewd. They know how to run a profitable operation, and they are in business to help people who want and may medically need the product and to make a profit. Overcoming the stigma is part of normalizing business and insurance provisions for this rapidly growing market segment.
Reed Rhoden, CIC, CRIS, is assistant vice president and senior broker at M.J. Hall and Company. He partners with Golden Bear Insurance, an admitted carrier that provides insurance for cannabis operations in California. He has expertise in monoline motor truck cargo, auto physical damage, excess auto, transportation, and all facets of the medical and recreational cannabis industry.