Cannabis Insurance Presents Tough Choices

[This article was originally published in Wendel’s California Cannabis Law blog on March 28, 2017]

The unique financial headaches of running a cannabis business are well known.  My colleague recently posted a terrific piece here regarding some of the banking-related pitfalls facing cannabis businesses and some of the possible fixes. Equally problematic are the challenges that cannabis cultivators, manufacturers, and dispensers face in obtaining appropriate insurance coverage.  Not only is it much more expensive to purchase insurance for a cannabis business than it is for a similarly sized business in other industries, but the dearth of carriers willing to brave the market and standardized terms that don’t cleanly fit the cannabis industry, make it difficult to obtain coverage that is actually worth the paper the policies are written on.

Despite the billions of dollars the industry pours into the California and national economies each year, insurance carriers have been slow to come around to the cannabis industry. Uncertainty makes insurers skittish, and the cannabis industry offers a great deal of it.  A long list of issues includes federal illegality and the prospect of untested products liability claims in an industry marketing an inebriant without the FDA blessing carriers can usually rely on.  The absence of regulations around potency and dosage means that carries have to concern themselves with whether a business sells a product with extremely high THC-potency (shown to cause hallucinations and delusions in some cases).  The result is that only one major underwriter is currently issuing liability policies for the cannabis industry.  Another major carrier had been underwriting policies as of just last year, but they then abruptly began to clear all cannabis risk.

While insurance supply has turned monopolistic, demand for coverage in California’s cannabis industry has rapidly expanded and will only grow in the wake of recreational legalization.  Unlike in Colorado, California imposes no legal requirement on cannabis businesses to maintain specific types and amounts of coverage.  Nonetheless, many businesses are obligated by contract to maintain insurance.  Dispensaries and manufacturers, for instance, will generally be contractually required by their landlords to carry liability insurance. In addition, much of the industry’s business is still transacted in cash and involves regular transportation of a high-value product for which there is a massive illegal market.  Thus, the desire for various elective forms of insurance, such as coverage in the event of robberies, makes good sense.

Few coverage options coupled with massive demand has resulted in exactly what you might expect: Sky-high rates and poor policy terms.  Brokers I work with tell me that cannabis companies are paying three to five times the premiums of non-cannabis companies with comparable financial demographics.  And the policy forms that I have reviewed practically invite the carrier to use federal illegality as a basis for denying coverage for a major loss.

Given current market conditions, cannabis businesses that want or need coverage face a Hobson’s  choice: Go without insurance and leave their businesses unprotected (and, in many cases, in direct violation of their contractual obligations), or pay exorbitant premiums to purchase highly flawed insurance policies that carriers may not live up to in the face of a substantial loss.

For the reasons above, cannabis companies trying to decide whether to purchase coverage–and anyone implicated by this decision–should seriously consider consulting with a knowledgeable attorney, so that they fully understand the risks involved.  Cannabis companies with sufficient market power may be able to negotiate more favorable terms, but many will not, as long as the cannabis insurance market remains a virtual monopoly. This fact does, indeed, impact more players than just those deciding whether to buy insurance. Landlords relying on insurance requirements in commercial leases should be careful to require that their cannabis tenants’ coverage is not illusory. And the businesses subject to such requirements must consider whether they meet these requirements by purchasing a particular policy.

The more commonplace legal marijuana becomes, the more underwriters will begin tapping the industry and competing for accounts, and the better and cheaper the products available on the market will be. There are already signals that this process is beginning.  For now, however, those purchasing insurance for cannabis businesses in California face tough choices.