Cannabis businesses need to carry the proper insurance to transfer the inherent risk that comes with operating in this industry, as well as engage in adequate risk mitigation techniques. But it can be harder for cannabis entrepreneurs to acquire insurance than it is for business owners in mainstream industries, which is why working with a broker or consultant is usually necessary. Still, failing to carry the right types of insurance could result in big expenses should the worst come to pass.
To learn more about how the cannabis industry is insured, CWCBExpo sat down with Nichelle Santos, founder and CEO of CannaCoverage Insurance Services.
How does insurance work for cannabis businesses?
The ongoing federal prohibition on cannabis means there are no standardized national rules around insurance requirements for cannabis businesses. Every state has its own set of regulations governing which insurance cannabis businesses must carry, Santos said.
“The cannabis market is complex due to federal prohibition, leaving states to go it alone,” Santos said. “It’s very inconsistent when it comes to insurance requirements.”
For example, Santos added, Oklahoma doesn’t require any insurance coverage for cultivation facilities, dispensaries, or testing laboratories. In New Jersey, though, the Cannabis Regulatory Commission (CRC) requires a minimum of general liability insurance to cover things like on-site slip-and-fall accidents or bodily injury.
Even if states don’t require insurance, though, it’s generally a good idea to at least carry general liability insurance, Santos said. In many cases, cannabis businesses should consider going beyond this baseline, depending on their operations and the sorts of risks they might face.
It can be difficult to find an insurance partner for cannabis businesses, Santos said. Similar to cannabis banking, many insurers view the industry as highly risky, and some have avoided entering the space altogether. Those that have can be few and far between, difficult for a business to find if they’re not in the know.
“Traditional carriers are not in the cannabis insurance business since it is federally illegal,” she said. “Cannabis insurance is a highly specialized market of carriers that provide insurance specifically for cannabis businesses.”
CannaCoverage not only connects cannabis businesses with these insurance providers, but also helps optimize their operations to reduce risk and establish clear standard operating procedures (SOPs) so claims are more likely to be accepted should something go wrong.
“We go through 300 different SOP and risk management checkpoints to ensure your programs are up to snuff and ready for inspection from the [cannabis regulators] in your state,” Santos said. “We also offer claims advocacy, so we’re your partner when things do happen. We already know you’re in compliance so we can walk you through filing a claim and advocate on your behalf to an insurance carrier.”
Why is cannabis insurance important?
Some cannabis operators might think they can forego insurance, especially if they live in a state with few or no insurance requirements. Unfortunately, Santos said, that means they could be paying out of pocket should anything go wrong — and that’s enough to shut many businesses for good.
“For what you can’t control there is ‘risk transfer,’ and that’s insurance,” Santos said. “We want to see a safe and sustainable cannabis industry.”
Additionally, Santos said that some states require insurance – or at least documentation that shows an applicant would acquire insurance if licensed – even before awarding licenses. For those cannabis businesses, there’s no getting around the need for at least basic coverage; it’s a prerequisite to legally operating in the cannabis industry.
“In New Jersey and New York, when you submit an application [for a cannabis license] you have to provide documentation that shows you have a relationship with a cannabis insurance agency or consultant,” Santos said, adding this usually takes the form of a letter of intent to activate an insurance policy should you be awarded a license.
However, Santos warned that meeting state requirements doesn’t mean businesses are suitably covered from a financial standpoint.
What types of cannabis insurance are available?
There are many types of insurance available to cannabis businesses that offer supplementary coverage that could prove useful. These include, but are not limited to:
- Product liability insurance: General liability insurance typically doesn’t cover the actual inventory a business keeps on hand. For example, a retail operation that carries products recalled due to contamination cannot recoup those losses without product liability insurance. To protect the products on your shelves or in storage, product liability insurance is a must.
- Property insurance: Property coverage may protect everything from the building itself to the equipment and inventory inside. For example, a cultivation facility that catches fire would use property insurance to recover costs related to the facility, the growing plants inside, and equipment like lights, ventilation, fans, and grow tents. Santos called property insurance “critically important” for cannabis businesses.
- Directors and Officers insurance: Directors and Officers (D&O) insurance covers ancillary businesses like accountants and attorneys that offer advice and guidance to cannabis businesses. This insurance covers costs related to lawsuits should they arise.
Brokers and consultants like CannaCoverage are able to link cannabis businesses to these types of insurance and the carriers that are willing to work with the industry.
Choosing insurance for a cannabis business
The first step in choosing insurance for a cannabis business is to hire a knowledgeable broker and consultant. There are many unscrupulous actors on the market, however, so Santos recommended businesses approach this stage of the journey with a “trust but verify” mentality.
Many consultants will then support a company in developing comprehensive SOPs and a training program for their personnel. For CannaCoverage, this takes the form of a thorough risk management assessment, which analyzes everything from a business’s security arrangements to how products and services are delivered to bookkeeping practices.
“The risk assessment is a way for folks to be proactive in protecting their business so it’s safe, public health and safety is protected, and the business is sustainable,” Santos said.
Following a risk assessment, businesses should develop clear and effective SOPs and documented processes for all facets of the operation. Staff should also be trained on these SOPs and given access to the documentation for reference at any time. This step serves to proactively mitigate risk, Santos said.
In addition, businesses should build forward-thinking incident response plans in the event something does go wrong. Establishing and documenting a plan to contain any incidents before they become more severe goes a long way toward reducing an organization’s risk footprint, making them more attractive to insurance carriers and potentially reducing coverage costs in the long run.
Once all this is done, it’s time to actually select insurance policies and choose a carrier. For Santos, this step means considering which policies your business actually requires — and it may mean choosing more than one.
“You need cannabis-specific insurance,” Santos said, “and you don’t know what you don’t know, so you need the right partner.”
At a minimum, Santos recommends selecting general liability insurance, property insurance, and product insurance for most cannabis businesses. Additionally, businesses may need workers’ compensation insurance, which is also subject to a variety of state laws. Ultimately, though, every business’s risk profile is a little bit different, which is why taking a tailored approach with a consultant is usually the best option.
Protect your business with cannabis insurance
Whether it’s a requirement in your state or just a way to protect your assets, cannabis insurance is a must-have for anyone operating a business in the space. Given the unique legal position of the cannabis industry, this can sometimes be easier said than done. However, with the right brokerage and consultant partner, as well as considerable effort to mitigate risks on the front-end, your business can obtain the coverage it needs to ensure doors stay open even should an incident occur. Despite the challenges, cannabis insurance is an essential part of the long term resilience and sustainability of any cannabis business.