Cannabis Business Insurance: the Core and the Caveats

By Michael Giusti

Legal marijuana and cannabis sales have only been around for a few years, making them one of the newest businesses around. Meanwhile, insurance as an industry tends to be very conservative, hesitant to take on new risks until the long-term outlook is clear.

Even still, with 18 states legalizing marijuana for adult recreational use, and 38 legalizing it for medical use, there is a business need for insurance. Cannabis-related sales are predicted to exceed $30 billion in 2022, meaning there is a lot of money involved, and a lot of risk that needs to be insured.

“Anyone who is in the cannabis busines — be they a grower, manufacturer, or a dispensary —requires the same commercial insurance coverage any other business entity would require,” said Patricia Harman, editor in chief of the PC360 Group, whose parent company ALM is developing an insurance certification designation for cannabis-related insurance professionals.

Luckily for those businesses, insurance is available for marijuana-related businesses — with a few caveats.

“The core of a decent insurance policy is available to just about everyone,” said Kieran J. O’Rourke, CPCU, CRM, CIC, who is an underwriting manager for Cannasure, one of the nation’s largest providers of marijuana-related commercial insurance policies.

But while policies are available, they tend to be from the less-regulated “non-admitted” market, meaning they are from insurers who operate largely outside the scope of most state insurance regulators.

“There just is not much insurance availability on the admitted market, and  what is out there is extremely expensive,” said Chantal Roberts, president, CMR Consulting who helps businesses work through their marijuana commercial insurance needs.

The polices that are available tend to focus on three main areas, O’Rourke said.

“The product has to be grown by cultivators. It has to be sold by dispensaries. And in between, a manufacturer has to get it prepped for sale,” O’Rourke said. “And at each step, they can get some insurance.”

“But for Cannabis”

O’Rourke said the main reason cannabis insurance costs more than comparable business lines is that there is still not a whole lot of data about what the long-term claims outlook will be for businesses that touch marijuana.

“We just haven’t been doing it that long,” O’Rourke said.

O’Rourke said he likes to tell his clients “but for the cannabis,” their insurance issues would be easy.

“What I mean is you have a retail store on Elm and Main streets, and but for cannabis, they would pay a fraction of what they have to pay now,” O’Rourke said.

He likes to point out that the insurance issues aren’t unique.

“What is difference between dispensaries and Walgreens? Nothing. You walk in, buy a product, and you walk out,” O’Rourke said.

But until there is a claims history, the premiums will remain high because of the uncertainty.

Aside from the pricing, the other issue facing cannabis businesses is that insurers tend to be writing policies with liability limits that are way too small for their needs.

“Some of the properties and assets they own is absolutely enormous, but the industry doesn’t have capacity to write it all,” O’Rourke said.

He said he doubts there is much more than $100 million of total premium capacity across the industry, so each policy is being written with much lower limits than they typically need.

“Alot of these states are requiring you have liability up to the amount of $1 million or $2 million range, which would be normal for other businesses – but the issue is carriers will only provide say $200,000 worth of coverage,” O’Rourke said. “So, you are short — by a lot.”

What is available

The largest lines of insurance available to cannabis businesses are premises liability and general liability. But that typically excludes the all-important product liability category.

“Product liability is what the companies mostly need,” Roberts said. “The concern is what happens if this product creates some kind of damages and someone files a claim? Without product liability, there would not be any kind of coverage.”

Harman points out that the product liability is especially important for non-smokable forms.

“Things like beverages with cannabis or edibles – all of those are going to be regulated by the state and have liability exposure,” Harman said.

But smokable products aren’t immune, either. Roberts pointed to a recent case in Michigan where hundreds of millions of dollars of marijuana buds were pulled from the shelves because of production concerns.

“They wouldn’t have coverage for that,” Roberts said.

As the companies get larger and begin to eye things like public stock offerings or mergers and acquisitions, policies like directors’ and officers’ coverage and errors and omissions insurance also becomes an issue. Those policies are available, but Roberts points out, they come at a steep premium.

Other policies that are available include commercial property/business interruption/crime; crop; cyber; workers compensation; and in rare cases, on-premises consumption.

Managing risk

To help clarify some of the issues surrounding the marijuana insurance industry ALM business, has launched its cannabis insurance coverage specialist designation.

This is targeted at insurance professionals and encompasses six courses.

“Once you go through the modules, you get the designation, and as you complete each module you get a certificate of completion and then have access to the continuing education,” Harman said.

And there are a lot of risks to understand when it comes to marijuana-facing businesses, not the least of which revolve around the fact that the federal prohibition makes electronic transactions prohibitively difficult.

Some efforts, such as the SAFE banking act, which is lingering in Congress, aim to address that, but it is still largely cash-based.

And when it comes to protecting that currency, cash insurance is hard to find. O’Rourke said there is some crime coverage to be found, but money coverage is hard to get in the quantities most businesses need.

So, many insurers tell their clients to shift instead to a risk-management strategy.

For their part, the National Association of Insurance Commissioners has a cannabis insurance working group charged with helping develop best practices and resources for state regulators surrounding cannabis. Roberts is on that team and working to update their white paper laying out the do’s and don’ts for marijuana-facing businesses.

Those can include things like “mouse traps” that are a pair of doors with bullet proof glass, where someone has to enter one door and let it lock behind them before the other door is unlocked by an operator inside. Other best practices can include centrally monitored alarms, and 300-pound safes bolted to the floor.

Even still, when it comes to actual claims the insurers are facing, the top three biggest claims are all fires, O’Rourke said.

He said lighting in some of the grow facilities is causing problems, especially in facilities that haven’t upgraded to LED fixtures.

Other claims include attempted break-ins.

But much of the rest tend to run along the normal lines of business claims — business interruption during COVID, sewer backups, and the like.

Looking ahead

O’Rourke said he sees some improvements to the marijuana insurance marketplace on the horizon.

One area he could foresee would be non-LED lighting getting a surcharge.

He also suggests businesses adopt best practices from other industries – such as looking to the food packaging industry to drive standards surrounding products such as edibles.

He also said that as the market matures, more entrants will likely jump in.

“The other insurers have seen the world didn’t end, and there is money to be made in the cannabis space,” O’Rourke said.

Roberts said she could foresee some policies beginning to offer modest “government seizure” clauses to protect businesses if a local sheriff confiscates cash, for example.

O’Rourke also said it is likely more reinsurance companies and surplus lines will likely get involved, potentially further opening up how much coverage is available.

But until marijuana is federally de-listed, much of these changes are likely to be incremental, and on a state-by-state basis.

The question of legalization is the “big Kahuna” O’Rourke said.

“This is not an industry that is going to go away,” Harman said.

And in the meantime, O’Rourke said he is ready to serve any business looking to get insured.

“We are sitting here dying for people to buy a policy,” O’Rourke said.

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