The cannabis industry has been evolving for over a decade. The process of professionalizing marijuana sales was slow to start, but sped up over the last few years as more states have legalized it for medicinal and recreational purposes (the count stands at 37 for medical use and 16 for recreational so far). As the legal landscape shifts, more businesses are popping up to support the skyrocketing industry – and quickly discovering the manifold exposures involved.
Insurers for the cannabis industry work with companies at all stages of the supply chain – from the cultivators and manufacturers to the distributors and transporters, and all the testing and processing organizations in between. All companies involved require protection for the same exposures and insurance policy considerations found in other industries, including Property, General Liability and Directors & Officers (D&O). Regulatory concerns involved with the cannabis industry, however, heighten these exposures making it more difficult to secure coverage.
Despite various state-level legalizations, cannabis is still an illegal substance on the federal level. That puts insurers in a difficult spot where business involves a conflict between state and federal laws. This tension explains why – despite the rising numbers of cannabis-related businesses – there are few insurers offering cannabis coverage at all. Where policies are available, they are likely to have high premiums, low limits and restrictive coverage and exclusions.
Banks, being federally regulated, are not allowed to do business with cannabis companies. This means that Cannabis industry companies can’t secure a bank loan to finance operations, or even deposit their money at a bank in most cases. (Some financial institutions are beginning to allow them to open savings accounts, but it’s slow-going.) The SAFE Banking Act proposes to change this, but in the meantime, cannabis remains very much a cash-based business, dependent on private capital, which puts it at a higher risk of bankruptcy.
Given these many potential exposures, it can be hard to decide what line of insurance is most important – especially when options are heavily curtailed by regulations. Property insurance is crucial (what happens if a building catches on fire and you lose all your product?), as is cyber liability (dispensaries, which provide access to personal health information, are particular targets).
When considering a focus product, however, a smart decision would be to start with D&O. This product protects company management if sued by regulators. Without it, companies may find themselves struggling to recruit experienced executives to lead their business. The legal and financial challenges facing the industry greatly increase the risk of liability, but by investing in protection for executives, businesses are more likely to attract the experienced leadership that will help them succeed and avoid lawsuits. In turn, having experienced people on your board or otherwise involved in the company makes you more appealing to insurers for the other lines of insurance you will need.
The cannabis insurance market is extremely hard at the moment. The industry’s continued growth, however, is likely to change that over time. It is not every day that we see a whole new industry springing to life, with so many opportunities for all manner of businesses to open in its ecosystem. This promises to be an extremely lucrative industry, and over the next couple of years we can expect to see more insurers figuring out ways to get involved with this space, like Risk Strategies has done.
In the meantime, companies need to think hard about how they’re setting up their business for success – Are they able to secure capital from private lenders? Do they have the right leadership in place? – and find a broker that can work with them to create the tailored solution that will protect their businesses against its unique risks.
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Connect with the Risk Strategies Executive Liability team at MLPG@risk-strategies.com.