The State of Cannabis Business Insurance from Seed to Sale

By Michael Giusti

With the cannabis market maturing in many states, the insurance industry is beginning to have access to more data upon which they can set their rates. But it’s still difficult to keep up, as there are a lot of moving parts when it comes to cannabis businesses and insurance.

Every line of business dealing with cannabis – whether it is plant touching or not – needs to be considering business insurance to protect them from risks. Whether it is a grow operation, a dispensary, or even an accounting providing an ancillary service, getting insured appropriately is key to not being left exposed after a loss.

The state of cannabis insurance

The biggest issue facing cannabis businesses is the same tune that has been sung since the first states began legalizing — federal prohibition.

Because so much of the insurance industry is intertwined with the federally regulated banking industry, the major carriers are still steering clear of any cannabis exposure, lest they put their entire book of business at risk in case of a federal crackdown.

That said, policies are available for just about every type of cannabis business insurance imaginable. Those policies just typically need to be purchased on the non-admitted, or surplus line markets.

Because the typical policies can only be purchased on the surplus market, coverage tends to be a lot more expensive – even for non-plant-touching businesses.

The good news is that since the insurers now have decades of loss history to go by, thanks to the early-legalizing states, underwriting has become more predictable.

Because cannabis insurance has a whole minefield of quirks, the best practice for cannabis businesses is to purchase their policies through brokers who specialize in the cannabis market.

Specialized brokers are more likely to understand the coverage limitations and exclusions typical in cannabis business insurance. They also tend to be in a better position to explain complex concepts to the cannabis business owners, such as co-insurance, which could otherwise leave the cannabis business more exposed to risk than they had bargained for.

And even though non-plant-touching businesses could theoretically slip under the radar and purchase their policy from a traditional insurer, many have found that as soon as the underwriters learn that the business deals in the cannabis market, the policies get non-renewed, or even canceled.

Types of coverage needed:

On the surface, the coverages needed for cannabis businesses mirror those policies needed for every other kind of business, according to Valerie Taylor, vice president and national cannabis practice leader for The Liberty Company Insurance Brokers.

The typical book of cannabis business insurance includes:

General liability is the foundational policy. It covers third-party claims for bodily injury or property damage arising from daily operations.

“This is essential for any business, but even more so in cannabis where it is required for license holders and is monitored and required by regulators,” Taylor said.

Product liability is especially crucial because cannabis is still a new and evolving industry. It protects against claims of harm caused by a business’s product.

“This is critical regardless of where you fall on the supply chain,” Taylor said. “All levels from cultivation through to retail can be named in a suit.”

Property and crime coverage protects physical assets like inventory, equipment, and buildings from theft, fire, and other covered perils. The cannabis industry often deals with high-value inventory and cash, making strong protection crucial.

Crop insurance is important for grow operations. It is especially important to include smoke damage coverage.

Errors and omissions policies protect professionals, such as consultants or labs from claims of negligence in their services. Employment practices liability covers lawsuits alleging discrimination, wrongful termination, or other workplace issues.

“These protect your business from professional mistakes or employee disputes,” Taylor said.

Workers’ compensation is legally mandated and protects both the employees and the business in the event of a work-related injury or illness. “It is absolutely essential. It provides medical benefits and lost wages to employees injured on the job,” Taylor said.

Cyber liability is also important as cyber threats rise. These policies protect against data breaches, business interruption, and associated costs.

“A data breach can cripple any business, and cyber insurance helps mitigate the financial blow,” Taylor said.

The National Cannabis Industry Association wrote an excellent and comprehensive Risk Management and Insurance Manual that details all these coverages and more.

What to prioritize

Taylor said that while there is no one-size-fits-all hierarchy for which policies are most important for different businesses, each business should evaluate their operations with a risk-based approach.

Dispensaries and retail operations should be looking first at general liability and product liability policies due to customer traffic and potential product-related issues. Taylor also points out that workers’ compensation is required by law and is a critical coverage.

Property coverage is also key to protecting the income and assets of the company in a theft or fire.

Businesses involved in cultivation should prioritize crop insurance, which protects valuable harvests from unforeseen events. Property coverage safeguards grow facilities and equipment.

Product manufacturers should prioritize product liability, especially for processors and product packagers. Property coverage covers equipment and production facilities.

Distribution companies need to first look into auto coverage to cover all owned autos. Property coverage protects all of the company-owned stock in the warehouse and inventory in transit. Distributors should also look into including cargo coverage, which might not be included in other lines.

General liability policies cover the warehouse from third party claims.

Ancillary businesses, such as lawyers and labs should be thinking about errors and omissions policies, which safeguard against professional negligence claims.

Again, it is important for ancillary business to not get cute and conveniently omit the fact that they deal with cannabis. While that could land a less expensive policy, the best case would be a non-renewal, while a worst case would be if a claim is denied because the insurer determined the business wasn’t being truthful in its application.

Industry headwinds and the future

Taylor said there are several areas pushing back against the industry’s growth. The first of which is the limited carrier pool. While an increasing number of new non-standard carriers are entering the market, many traditional insurers remain hesitant due to federal regulations.

At the federal level, Taylor said rescheduling cannabis from Schedule I to Schedule III would be a game-changer, but that remains ever elusive.

“It would eliminate 280E, a tax code provision that currently prohibits cannabis businesses from deducting normal business expenses, including insurance,” Taylor said. “This financial burden makes it harder for businesses to operate and afford adequate insurance.”

And since banking remains difficult for cannabis businesses to access, this increases their vulnerability to theft, leading to higher insurance needs and potentially impacting premium costs.

“This cash-intensive nature also presents a public safety hazard,” Taylor said.

Looking forward, the rising number of states legalizing cannabis offers a cautiously optimistic outlook for the insurance industry, Taylor said.

The expanding market seems to be attracting more insurers as cannabis businesses begin to appear less risky in the eyes of insurers.

“We’re seeing more non-traditional insurers entering the cannabis space. These carriers often have more flexibility in tailoring coverage options to the unique needs of the cannabis industry, potentially leading to more competition and lower costs for cannabis businesses,” Taylor said.

Another promising trend is that industry standardization efforts are emerging. While regulations vary by state, the industry is making strides towards offering standardized insurance products.

“This simplifies the process for businesses operating in multiple states and could lead to greater accessibility of coverage options,” Taylor said.

The rising number of states legalizing cannabis offers a cautiously optimistic outlook for the insurance industry.

“While challenges remain, the future appears brighter with the prospect of increased accessibility and affordability of insurance solutions,” Taylor said.