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The Rough Notes Company Inc.



May 27
12:48 2020


How to help cannabis and hemp companies manage risk and plan for continuity

By Summer Jenkins, CLCS

The coronavirus pandemic is having a startling impact on global economies. Medical equipment shortages, empty supermarket shelves and oscillating stock prices are all indicative of two glaring truths: America was not prepared for an event of this scope, and business owners must employ risk management and continuity planning measures to ensure a tenable future.

Planning is of paramount importance for operators in the billion-dollar cannabis and hemp industries.

Insurable risk vs. business risk

Insurability is determined by the type of policy purchased. Property and casualty insurance is one of the first business expenditures for many hemp and cannabis businesses and is often required before licensure. Property and casualty policies insure against loss or damage to owned property as well as bodily injury or property damage to others. Monetary loss due to conditions that do not include direct physical damage or injury to a person are business risks and not typically considered insurable.

The existence of coverage for losses resulting from coronavirus is a subject under scrutiny. Legal professionals and agency insiders are unsure of the long-term outcome due to differing interpretations of coverage contracts. Cannabis and hemp business owners, investors and service providers are looking to recover revenue lost as a result of coronavirus-related closures.

Workflow efficiency, staff cross training, and employee safety concerns quickly emerged as challenges asCOVID-I9 lockdown orders were issued.

In several instances, insurance carriers quickly adopted the position that virus-related damages do not constitute “physical loss of or damage to covered property.” Proponents of the opposing position refer to case law like Gregory Packaging, Inc. v. Travelers Property and Casualty Company of America. The insurance company’s decision to decline coverage was overturned by the U.S. District court of New Jersey, which ruled that the ammonia release, which rendered the covered property uninhabitable, constituted a direct physical loss. The court redefined “physical damage” as “a distinct, demonstrable, and physical alteration” of the property.

In the wake of the avian flu (H5N1) in 2006, Insurance Services Office (ISO) filed form CP 01 40 07 06, an exclusion for “Loss Due to Virus or Bacteria,” to remove perceived ambiguity surrounding exclusions for contaminants and disease. ISO’s intent is further clarified in CF-2006-OVBEF. The existence of bacteria, viruses or contaminants that multiply due to inherent qualities of a product or property are not insurable risks. In spite of ISO’s intent, the courts will be the determining factor for many claimants.

Ways to prepare

Business continuity planning is a key component employed by long-standing successful businesses. Cannabis and hemp business owners who plan to stay the course should also use this practice. Analyze, plan and test, or A.P.T., is a simple acronym we can share to help customers remember the key continuity planning steps.

First, they need to analyze the impact a catastrophic event could have on their business. This involves considering the supply chain, equipment and other resources relied upon each day. Next, it’s important that they develop a plan for secondary options for suppliers, financial needs, information technology and standard operating procedures. Finally, they should test the solutions. Encourage clients to create a training exercise to see if the plan works.

Businesses should ensure there are no delays in the supply chain. Product packaging, sorting equipment and vape cartridges frequently are manufactured in China and other locations abroad. Securing domestic sources to fulfill supply chain needs is important. Operators should have backups of vital equipment in case the supply chain is disrupted or something breaks down. Your clients also should diversify their supply chain and refrain from depending too heavily on one region or organization for key components or ingredients. While the needs of every organization are different, proper planning and identifying alternate sources for services and products will aid in business continuity.

Workflow efficiency, staff cross-training, and employee safety concerns quickly emerged as challenges as COVID-19 lockdown orders were issued. Many organizations were forced to lay off staff and operate with minimal personnel. Dennis Hunter, co-founder of CannaCraft in Santa Rosa, California, had to reconfigure his staff so they’d be safe distances from each other. He describes it like this: “I’ve taken my staff down from 210 employees on site to just 80 who are working on production, packaging, and distribution. Marketing, sales, and admin are all working from home.” Because of this flexibility, CannaCraft has had minimal layoffs.

Normalization of insurance

The pandemic has brought the benefit of insurance into sharp focus for cannabis and hemp businesses, and insureds may be more interested in engaging with brokers in the future. Patrick Pooler, owner of Heroes of the Farm in Oregon, says many in the industry have been skeptical of cannabis insurance, but views have been slowly changing. “At the end of the day, my insurance does protect me against wildfires and other natural disasters,” he says. “It gives me some reassurance that I will receive some sort of help and benefit.”

There is a possibility that insurers may develop policies designed to absorb pandemic-related business income losses. However, the products would likely be cost prohibitive. In 2018, the World Bank launched their “pandemic bond” to provide funds to low-income countries facing a large-scale disease outbreak, which shifts the pandemic response focus from reactive to proactive. It is likely that cannabis would have to be federally legal to benefit from this type of product.

In spite of the assertions made by news outlets, cannabis business owners have been heavily impacted by the virus-related closures. The lack of government assistance, a heavy tax burden and poor capitalization threaten the solvency of the billion-dollar industry.

The industry, however, continues to be hopeful. The proposed “Emergency Cannabis Small Business Health and Safety Act,” if passed, offers some relief, but the overall sustainability is left to the ownership of each entity. The conclusion is clear: Proper planning and risk management are the pinnacles of a lasting and successful business.

The author

Summer Jenkins, CLCS, is senior product development manager for Cannasure Insurance Services. For more information, visit

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