The growth of the cannabis industry has been exponential, and the insurance market is trying to keep up. Thirty-three states have legalized marijuana for medicinal use, and 11 states have legalized it for both medicinal and recreational purposes. Experts estimate that more than 43 million Americans use cannabis regularly. It is a $70 billion a year industry.
There are more restrictions placed on cannabis businesses than on businesses operating in more traditional industries. To protect themselves, owners of cannabis businesses need robust insurance coverage. However, since there is no standard insurance coverage for a cannabis business, owners must rely on insurance agents and brokers to advise them on the appropriate types and amounts of coverage.
Underserved by the insurance industry
Despite its size and popularity, businesses that produce and sell marijuana are notoriously underserved by the insurance industry. They face difficulty securing insurance policies that meet all of their needs. Cannabis businesses face internal risks — those associated with more traditional companies — but they also face unique, external risks to the cannabis industry.
External risks include prejudice against people who work in the cannabis industry, complications posed by the fact that marijuana remains illegal at the federal level, and caution by other sectors — including the insurance industry — about how to work with cannabis companies.
Entrepreneurs operating in this space are often not typical business owners. Many owners purchase insurance without giving serious thought what claims might look like and if an insurance policy will cover them. Cannabis business owners may purchase insurance coverage, only to realize later that their policy contains exclusions that specifically target their type of business. When facing a claim, cannabis businesses should have meaningful insurance coverage.
7 insurance risks facing cannabis companies
Owners must proactively protect themselves by using a combination of sound business practices and well-thought insurance coverage options. There are different types of risks that cannabis businesses can and should insure themselves against, including:
1. Premises Liability
Just like any business that allows customers onto its premises, cannabis distributors need to insure against premises liability claims, including injuries due to trip, slip, and fall incidents.
2. Theft
Cannabis growers are likely to experience equipment theft. Sellers, like any other retailer, must protect themselves against product theft, shoplifting, robberies, and break-ins. Because many cannabis businesses are cash-based, they are prime targets for theft. Cannabis businesses can reduce the risk of being targeted for these sorts of crimes through well-thought-out floor plans, appropriate employee training, and basic security protocols.
3. Property Damage
Cannabis businesses are likely to have property damage claims due to fires related to electrical issues and from crop damage. But because cannabis is a living thing, it may not be covered under a traditional property damage policy. Growers should consider purchasing additional crop insurance.
4. Cybersecurity / Hacking
Because these industries are focused on getting businesses up and running, business owners may not take appropriate precautions when it comes to cybersecurity. This makes them vulnerable to attack. And because medical marijuana involves healthcare, information held by cannabis businesses can be particularly sensitive.
5. Product Tampering / Defective Product Claims
Product liability claims can be expensive. Unfortunately, the $250,000 to $300,000 coverage limits offered by most insurance companies will be woefully inadequate in the event a cannabis business owner is hit with a claim for a defective product. Consumers injured while using a cannabis product will target every supplier associated with the product chain. This is particularly concerning for the cannabis industry, as producers often source material from multiple producers to create cannabis products.
6. Compliance Issues
Cannabis regulations vary by location, and regulators will take a close look at cannabis businesses. Growers and sellers must take care to ensure that their products are produced and distributed in strict compliance with all applicable laws and that appropriate records are maintained.
7. Financial Risks
Cannabis businesses that run afoul of state regulations can face significant fines and may even suffer the suspension or loss of their license.
Cannabis businesses need unique coverages
While every business is unique, there are certain types of core insurance coverage that every cannabis business should carry. These include:
- Commercial General Liability
- Premises Liability Coverage (Occurrence or Claims Made)
- Product Liability (Occurrence or Claims Made)
- Hired and Non-Owned Auto Liability
- Employee Benefits Liability
- Stop Gap Employer Liability
- Building
- Business Personal Property
- Business Income
- Equipment Breakdown
McGowan Excess & Casualty (MEC) provides retail and wholesale brokerage partners with cannabis product solutions for commercial risks. Learn more about our Cannabis Program and contact us today to speak with one of our brokers and to learn how we can help.
