Key Insurance Considerations For Different Types Of Cannabis Businesses

The US cannabis industry is growing at an unprecedented rate and is projected to reach $146.4 billion by 2025. While this incredible success has been a great boon for the businesses serving the marketplace and for the U.S. economy overall, it has also brought with it a plethora of new challenges to overcome.

As the user base and profits of legal cannabis businesses continue to soar and as the industry becomes more regulated, it will invariably become increasingly more difficult for businesses to avoid risk exposure.

Staying in compliance to maintain your license to operate, mitigating claims from customers who use your products, and the potential financial risk of theft or natural perils are just a handful of issues cannabis businesses face.

All of these various risks can be financially crippling if your company isn’t properly protected when something goes wrong. This is why no industry and no business can expect long-term success without having access to robust and effective risk management solutions.

Given that the legal cannabis industry faces a unique set of challenges and risks, it’s crucial for cannabis businesses to create tailored risk management plans for themselves. This means understanding what the unique insurance needs of the industry as a whole are, as well as understanding the specific needs of your company.

However, this is easier said than done. A real problem that legal cannabis pioneers have faced and are still facing is the reluctance of traditional insurers to enter the marketplace and offer effective policies and tailored cannabis insurance programs.

While this is slowly changing with the industry’s continued success, cannabis insurance expertise and offerings remain limited. Cannabis entrepreneurs are often forced to settle for generic, ineffective policies that don’t adequately address their needs. This leaves them seriously exposed and often with no choice but to overpay for coverage they don’t necessarily need.

The Importance of Technology in the Cannabis Industry

No matter what license type you hold, technology is a critical part of any scaling cannabis or hemp business. Seed-to-sale technology is required by every state, with both medical and recreational products being traced back to the state regulatory divisions.

Wholesale platforms, loyalty programs, advertising, point-of-sale (POS) systems, and even employee training all require some form of technology, usually software. Putting in place a proper technology errors & omissions and cyber liability insurance program will cover a wide array of issues tied to the critical nature of software and its use.

Venture Capital Firms and Cannabis

Many cannabis businesses have raised angel rounds of funding, eventually growing into venture capital as they continue to expand. Having a strong directors & officers policy will protect the company against lawsuits filed against members of the board, individual investors, or executives. As companies grow past ten employees, adding an employment practices liability insurance (EPLI) policy is needed to protect both executives and the company in general from employment-related lawsuits of harassment and various types of claims commonly related to discrimination in the workplace.

The rapid evolution of the cannabis and hemp industry is largely driven by investors who see opportunities to get in early. Any company that becomes a fiduciary by managing investments on behalf of other people assumes a large amount of risk.

Providing upside protection by marrying directors & officers coverage with errors & omissions, EPLI, and fiduciary liability insurance creates a policy often referred to as VCAP, short for Venture Capital Asset Protection. This type of policy ensures that the decisions made on behalf of investors are protected, as are the individuals making the management calls.

Types of Cannabis Businesses

To help cannabis entrepreneurs overcome this issue, let’s break down what challenges various types of cannabis businesses face and how they can address them with the right cannabis insurance products.

Cannabis Dispensaries

Having robust coverage that can help you withstand the evolving legal climate, regulation changes, and general business risks is crucial to running a successful dispensary operation.

In addition to basic coverage such as general liability insurance and workers comp, which are typically required, several other insurance policies can help protect your business from loss.

A property insurance policy will protect your business’s commercial property, including inventory, from the perils of fire, theft, and natural disasters.

The right product liability coverage is also critical for dispensaries and is often something that will be paired with a strong commercial general liability policy. If a product results in harm, illness, or unwanted side effects, the customer may hold you liable.

The point of sale is typically the first point of litigation, even if you weren’t at fault for the incident. Utilizing risk transfer tools such as requesting an additional insured endorsement from your partners is critical in the cannabis supply chain. Depending on the state you are operating in, seed-to-sale tracking technology will be required for your dispensary to operate.

Running a POS, inventory management, customer loyalty, or delivery service through technology is critical to keeping up with demand and staying in compliance. Strong technology errors & omissions and cyber insurance policies will protect against a plethora of claims related to the use of technology that could cripple any dispensary.

You can read our complete coverage guide on dispensary insurance for more information.

Suggested Coverage:

General Liability

Product Liability

Commercial Property

Workers Compensation

Business Income Coverage

Cyber Liability

Technology Errors & Omissions

Cannabis Cultivators

Cultivators face a wide variety of risks and perils to their operations, including but not limited to fire, equipment breakdown, theft, and vandalism. Cannabis and hemp cultivation requires a tremendous investment in infrastructure. This includes equipment, lighting, seeds, security, and the crop growing at various stages of value, all of which can be points of vulnerability.

Fortunately, the right cannabis insurance program can protect your investment.

Crop and property insurance are two of the most important insurance solutions for cultivators. When grows are in controlled environments such as greenhouses or warehouses, crop insurance is more readily available. With the boom in hemp cultivators and the Farm Bill, outdoor crops are becoming more of a need that underwriters are currently warming up to.

An inland marine or cargo policy would be a good addition to protect inventory in transit as businesses interact with wholesalers and dispensaries.

Suggested Coverage:

General Liability

Product Liability

Commercial Property

Workers Compensation

Business Income Coverage

Crop Coverage

Commercial Auto

Cargo / Inland Marine

Cannabis Manufacturers

Cannabis and hemp manufacturers face significant regulatory requirements around licenses based on the inherent risks that are byproducts of the license-type.

Processing cannabis flower or hemp biomass often can change (typically increase) the value of the product and mistakes can lead to significant losses if the entire plant is not utilized to its full potential. Additionally, manufacturing plants and equipment are expensive investments and should be protected by a good commercial property policy.

Depending on the equipment that a business uses, they can specifically list valuable pieces on the equipment policy for their full retail value. Equipment breakdown language can be added to further strengthen the value of the policy. A product liability policy can protect you in the case of a customer getting sick and will typically be required to sell products wholesale to dispensaries.

Suggested Coverage:

General Liability

Product Liability

Commercial Property

Workers Compensation

Business Income Coverage

Cargo / Inland Marine

Landlords

Landlords in the cannabis industry face a unique set of risks and challenges even when compared to colleagues in the real estate industry. Many insurance carriers may refuse to cover claims from landlords who rent to cannabis businesses if this is not discussed upfront with the yearly insurance renewal.

This is why working with a broker who has a dedicated cannabis practice can help you avoid unpaid claims for fire, vandalism, and other damages. Being as transparent as possible with your broker on who you are renting to can drastically change your experience and ability to recoup claims.

When establishing a growing real estate portfolio of cannabis businesses, there are ways to consolidate coverage with common ownership and assets in the same state.

Suggested Coverage:

General Liability

Commercial Property

Loss of Income

Business Income Coverage

Testing Laboratories

Testing labs are a key component for ensuring the health of the cannabis ecosystem. However, evolving state and federal regulations create a minefield of potential lawsuits that the right cannabis insurance program can help you traverse, insuring you against potential errors or mistakes made in your operations.

Professional liability, also known as errors & omissions, is key for laboratories reporting to the state on data points that impact public safety. Once again, property coverage is critical with the amount of equipment required to operate a high-volume cannabis lab.

Suggested Coverage:

General Liability

Commercial Property

Product Liability

Errors & Omissions

Business Income Coverage

Delivery Businesses

Delivery is one of the most exciting areas of the cannabis industry. Whether you are a delivery-only dispensary or strictly a distribution company in this area, you can face a complicated set of risks. An employee’s personal auto insurance will not provide coverage in the event of an accident or robbery, as this policy usually excludes business use.

That means that your business can be held liable for damage to vehicles, injuries, and medical bills. Leveraging a hired owned and non-owned policy can improve your risk management program. Additionally, leveraging a cargo policy for your products once they leave your premises is a best practice.

If a license holder is establishing a fleet of cars, commercial auto insurance coverage is required. Obviously, the more vehicles your business owns, rents, and operates, the more your auto insurance will cost.

Suggested Coverage:

Commercial Auto

Hired Owned & Non-Owned Auto

General Liability

Business Income Coverage

Product Liability

Commercial Property

Cargo / Inland Marine

Workers Compensation

Medical Cannabis Physicians

Most insurance providers refuse to provide coverage for physicians that offer non-FDA medications. Embroker’s cannabis practice offers tailor-made coverage that will protect medical cannabis physicians from malpractice and professional negligence lawsuits.

Suggested Coverage:

General Liability

Errors & Omissions

Hydroponic Shops

Hydroponic shops that work with cannabis businesses have access to a variety of coverages to ensure that they are protected from claims or damages. Commercial property coverage will protect your shop from the perils of fire, theft, and vandalism, for example.

Additionally, product liability will protect you from claims that could arise from the equipment you sell malfunctioning and causing losses to your customers.

Suggested Coverage:

General Liability

Product Liability

Commercial Property

Business Income Coverage

Cargo / Inland Marine

Conclusion

It’s clear that legal cannabis companies face a unique set of risks and require specific cannabis insurance expertise, which is not easy to find in the current marketplace, especially when working with legacy brokers.

However, the situation is slowly improving, and today it’s easier than ever to create an effective risk management system by working with the right insurance provider that understands the specific needs of your cannabis business.

If you want to make sure that your cannabis business has the exact coverage it needs without any potentially costly gaps in coverage, feel free to reach out to our expert brokers for a free, no-strings-attached consultation at any time.