Owners of cannabis and hemp businesses need insurance to protect their interests, just as business owners in all other industries do. The legal status of cannabis operations makes acquiring insurance complicated, however. Federal law still makes growing and selling cannabis and hemp illegal, no matter what its purpose. A number of states now have laws on the books that makes medical cannabis legal. Others, like Colorado, also allow cannabis for recreational use. Still others have decriminalized marijuana, making enforcement of the laws less likely. Under the Obama administration, the federal government had a “hands off” policy toward cannabis and did not enforce federal law in states that made cannabis legal. Although AG Jeff Sessions had expressed a desire to change this policy, the current administration is still following Obama era guidelines. Unfortunately, the legal situation understandably makes most insurance companies leery of industry involvement. Cannabis is still not a “safe” product to cover.
Cannabis and Hemp Business Risks
In addition to the state and federal legal issues, the industry poses additional challenges. Producers and retailers must meet strict guidelines and safety regulations to meet state requirements. Also, some in the business are attempting to shift from illegal to legal production, which makes attaining insurance even more difficult. Traditional insurance providers have little interest in assuming these risks. Also, since these products are ingested, business owners are at risk for various consumer complaints. Inevitably, someone will claim that the cannabis made them ill in some way. Purchasers may also claim financial losses that can leave these cannabis operations vulnerable. Operating without insurance means that even one claim could place the business under extreme financial pressure or even cause it to fail. Recent severe weather events have proven how vulnerable cannabis and hemp operations are without coverage. Many producers in Florida and Puerto Rico lost their crops to hurricanes, while California producers suffered huge losses from wildfires. Without insurance, they were forced to absorb all of the financial liability themselves.
Types of Coverage
Expert opinion is that those in the cannabis business need the full spectrum of business insurance coverage, including general liability to protect against slip and fall accidents, advertising issues and other problems that every company faces. In addition, these businesses need product liability and workers compensation coverage. Cannabis company owners also need business personal property coverage and possibly commercial auto coverage, product recall coverage, etc. To be properly protected, cannabis entrepreneurs need comprehensive insurance policies. Otherwise, they could easily be responsible for millions in consumer claims.
Some solutions do exist for those in the cannabis industry. For instance, captive insurance companies (CICs) are legally licensed insurers who sell insurance to affiliated businesses. They are not allowed to sell coverage to the public, however. Because their focus is narrow, they are more efficient to organize and run, which allows them to take on cannabis risk and still be profitable. These companies, which are also used to cover auto manufacturers, workers compensation, landlord’s property, armored cars, etc., can even cover product recalls, employee theft and legal defenses. They are a proven way to provide niche coverage to non-standard businesses, so they are an excellent fit for the cannabis industry. California is making the biggest effort to provide insurance to the industry. The state has established Cannabis Business Owners Policy (CannaBOP). The brainchild of the American Association of Insurance Services, CannaBOP offers property and liability coverage for manufacturers, processors, distributors, and other members of the cannabis industry. While this program helps address the insurance gap, many in the industry still operate without enough coverage or any coverage at all. Recently, a major company began providing insurance for California property owners who lease to tenants in the cannabis industry, another step toward making cannabis and hemp an accepted business. Landlords will be much more inclined to lease their properties to producers and retailers if they can maintain proper insurance coverage and minimize their risk. In 2018, the NAIC ( National Association of Insurance Commissioners) noted the difficulties in providing cannabis and hemp business coverage and acknowledged that California was leading the way in this type of insurance. The NAIC is still formulating ways to meet the needs of the industry without exposing themselves to federal legal issues.At present, finding a major “name” company to cover a cannabis/hemp business is difficult if not impossible in some areas. Much depends on the moves the federal government makes in the coming years. Currently, the administration has backed off federal enforcement of marijuana laws in states that have legalized the substance. If this policy continues or the government decides to legalize cannabis, then, of course, insurance coverage will be far easier to get. At this juncture, captive insurance is the best bet for many in the industry. This type of insurance will provide owners with at least some of the coverage they need. Those companies in California have a distinct advantage, because the state is working with cannabis businesses to provide insurance coverage, primarily from CannaBOP. Currently, there is no easy solution for other cannabis companies in the United States, although progress is continuing to be made.