All businesses, including those in the cannabis industry, need some form of insurance, but choosing the right provider and coverage can be overwhelming, and mistakes are bound to be made.
Here, Mike Bush, partner at National Cannabis Insurance Services, outlines common mistakes cannabis business owners make when choosing an insurance policy—and how to avoid them.
1. They don’t purchase a policy that’s cannabis-specific.
“Your policy should be cannabis-specific,” Bush says. “Typical policies are not tailored for the cannabis industry, even if they have similar coverages.” Policies all start out the same; however, each industry requires specific endorsements and enhancements to ensure adequate coverage.
Policies not specific to the industry may have exclusions for Schedule I or banned substances, he says, and can include wording that indicates that the policy does not apply to cannabis or hemp.
2. They don’t ask their insurance provider enough questions.
“Your insurance provider should be able to guide you through the coverages necessary to protect your business,” Bush says. “They should point out how they are covering your exposures and provide options that are tailored to your business while guiding you through the best options.”
Business owners should ask their insurance providers plenty of questions during this process, he says, particularly about the exclusions and coverages included in the policy. Operators should also understand their biggest exposures and how they are covered.
3. They don’t purchase crop insurance.
Cannabis is a high-value crop, and it is important to insure this value, Bush says, especially since a cultivator’s crop is his or her source of income.
“If you lose your crop and don’t have the full value of your crop covered, you lose your income,” he says. “If you look to California, there are wildfires—federally declared a disaster—that have destroyed many of the cannabis operations. Cannabis businesses are not able to apply to federal aid because of the illegality of the industry on the federal level.”
Recent wildfires in California posed threats to cannabis cultivators.
National Cannabis Insurance Services has seen several claims involving fires in indoor grow facilities, Bush says. “Portland and Oakland have both seen fires to marijuana facilities resulting in damage,” he says. “Fire is a common covered cause of loss for both crop and property policies. We’ve seen some people go without coverage for their crop with the thought that it’s not going to happen to them or it’s not a real exposure, especially because grow facilities are extremely controlled environments. We know that it is a real exposure and can happen to anyone, so it’s important to protect your assets with crop coverage.”
In other recent news, Bush adds, a dozen greenhouses at Loudpack Farms in California were destroyed by a rapidly spreading fire. These sorts of damages would typically be covered under a crop insurance policy.
4. They don’t purchase product liability insurance.
Product liability insurance helps protect cannabis businesses against claims resulting from improper labeling or impairment, as well as product recalls, Bush says. It can also cover defense costs in the event of a product liability lawsuit, which average $876,000, he adds.
“Higher product liability limits or having defense costs outside the limits is important,” Bush says.
One of the biggest product liability concerns in the cannabis industry is impairment, he adds. “Impairment is when a customer is physically or mentally diminished. Cannabis businesses have an exposure similar to liquor liability/dram shop liability which holds the retailer strictly liable.”
Strict liability does not depend on actual negligence or intent to harm and can thus involve anyone who was part of producing the product in the claim, Bush adds.
“One of the well-known product liability cases is the Richard Kirk case,” he says. “After consuming a THC-containing edible, Richard Kirk shot and killed his wife. The children filed a suit claiming that the cannabis product was mislabeled, or not labeled at all regarding the potential for adverse side effects that had caused Kirk to kill his wife. It is essential for cannabis business owners to protect themselves from claims like these with product liability coverage.”
Product liability coverage can protect the company in the event of a product liability claim due to improper labeling or warnings on a product, which can result in misrepresentation or failure to warn the customer of potential effects, Bush adds.
In the event of a product withdrawal or recall, product liability insurance can also provide product withdrawal expense coverage to cover the cost of notifying the business’s customers, which can be expensive, Bush says.
“We’ve seen two product recalls in recent news, both from California companies,” Bush says. “The first occurred when a vape cartridge manufacturer recalled its product because it was contaminated. Shortly after this recall, the second was issued after a testing lab reversed its results. Both of these incidents were voluntary recalls by the companies. Issues like these are expected to increase as states work through their regulations and more states get on board.”
Product recalls can have less of an impact on the company if it has proper business insurance, he adds. “Coverage is available to cover expenses related to that recall, whether it’s cost of notification [or] overtime workers.”
5. They don’t know what’s covered and what’s excluded in the policy.
Business owners should pay close attention to what is covered and what is excluded in their insurance policy, Bush says, as some will have cannabis-related exclusions including impairment and health hazards.
“If impairment is excluded from your policy, you could be on the hook for the entire claim,” he says. “Some policies are sold with this exclusion. Not ours.”
Top Image: © Gajus | Adobe Stock
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