Cannabis Business Insurance 101

Show Notes

***Please note that the information provided in this episode and the show notes that follow is just enough to get you in trouble. Each policy has different coverage and you need to be educated on all of the options that apply to your business type. Please find an insurance broker that you trust to help find solutions that are specifically tailored to your business.***

Types of Insurance Available

• If you are renting, you'll need tenant coverage. If you own real estate, you'll need property coverage. 
• Builder's Risk Policy
• Short term coverage for the build-out or retrofit of a facility is often required and necessary. 
• Carriers offer different terms depending on if you're a tenant or the building owner. 
• Owners need to determine how much money you're spending on your build-out.
• If you're a tenant, you're going to want coverage for the build-out costs and the product you're going to have in your facility. 
• If you're a building owner, you’ll add the cost to rebuild your structure in the case of a fire, etc.
• Errors and Omissions
• Consider claims that arise from errors made by employees, independent contractors, or temporary staff. For example, if your staff provides a recommendation that leads to an unforeseen mishap and your company is sued for faulty advice or negligence. The cost of the lawsuit is covered by your errors and omissions policy.
• Directors and Officers Liability (D&O)
• I own parts of hundreds of cannabis companies and non-cannabis companies through our venture capital funds or our strategic engagements. I won't take a board or an executive position if they don't have directors and officers coverage because I'm exposing myself to considerable liability to be on their board to help them raise capital, win licenses, or run the companies. 
• When I'm looking at investing in a company, if they don't have errors and omissions or other essential business coverage, I will not be interested. 
• When you're working to secure funding, investors will likely require you to have a directors and officers liability policy. D&O insurance ensures that these individuals' assets are protected against claims while they're acting as a director or officer. 
• The coverage will also extend if an investor alleges you've made fraudulent claims in your investment deck. If you do not achieve the return you've projected in your pitch deck, investors may sue to reclaim whatever they can from their investment. A D&O policy protects the company and the company's directors and officers' personal assets from these types of lawsuits. 
• General Liability 
• General liability covers bodily injury caused by your operation, your equipment, and your staff. Think of things such as falls, slips, etc.
• People automatically assume that if you have General Liability, then product liability is a piece of that, but this isn't always the case. Always review the policies, as some carriers combine the two while others separate them into two policies.
• Product Liability 
• Product liability protects you from damage resulting from the goods a company produces. 
• Local municipalities or the state may require product liability coverage. 
• Product liability represents a large percentage of the claims and losses. 
• Example:
• In Colorado's early market, we had a client that ran out of packaging and had a backlog of orders to fulfill. They received their packaging from FedEx on a cold day in the winter. The company then used the cold packaging off the truck package warm brownies. The temperature difference between the packaging and the brownies was over 90 degrees Fahrenheit. As the packaging warmed, it reached dew point and formed condensation. This excessive condensation created a mold issue. The products were distributed to dispensaries to fulfill highly anticipated backorders and sold to customers. People eventually got sick from these products. The company was facing massive class-action lawsuits from consumers, and they did not have any insurance coverage. The company had to take the settlement route paying millions in damages out of pocket. In the long term, the company lost revenue due to the brand damage of having a product recall.
• Employment Practices Liability Insurance (EPLI)
• EPLI is an often overlooked but critical type of coverage. It protects an owner or a manager from any employee accusations, such as wrongful termination, discrimination, or harassment.
• Example:
• A California dispensary client of ours fired a staff member after they caught them stealing from the till on-camera. A week later, the company was sued for wrongful termination. Even with evidence to protect them, the company likely paid around $150,000 to defend their case. EPLI covers legal fees and settlements in situations like this. 
• Roughly 62% of claims come from inside of the business, just like the example provided above. 
• Crime Coverage
• Crime coverage protects a business from theft or fraud; this includes employees unknowingly accepting counterfeit money or check.
• Business Interruption Insurance
• Think of Business Interruption insurance as business income. Physical damage to your property, your products, or their contents. The most common example of what business interruption insurance covers in a fire. 
• Business interruption insurance does not cover situations where you shut down production, and there is no damage to your facility or your products and their contents.
• In most instances, business interruptions caused by COVID-19 are not covered by this type of insurance policy. This applies to all businesses, not just cannabis. COVID-19 and pandemic-related situations are typically exclusions on all business policies.
• Many carriers are looking into providing business interruption insurance to the cannabis industry, but it is challenging to place currently. 
• Product Recall
• Think of product recall coverage as the backside of product liability. 
• Example:
• A manufacturer sold a batch of edibles to 20 different local dispensaries. A customer bought one of the edibles and had an allergic reaction that landed them in the hospital. They then sued the dispensary because every party involved gets pulled into litigation until they determine who is responsible. It was found that the manufacturer was at fault because the ingredient that caused the reaction was unintentionally omitted from the label. The manufacturer then had to pay a settlement, recall all of the products, and pay to destroy the product according to state regulations. 
• To mitigate the risk of situations like the example above, we recommend not using common allergens. Additionally, you need to develop comprehensive procedures for proper labeling, safe food handling, and manufacturing.
• Equipment Breakdown
• Crop Insurance
• Outdoor crop insurance is challenging to place right now. 
• Property in Transit Coverage
• Property in transit. That means you're transporting your product to your facilities.
• Cargo Coverage
• Cargo means you're transporting somebody else's product from facility to facility.
• By default, products are not covered during the transportation process defined as cargo. So be sure to speak with your broker about what is and isn't covered. 
• Misc. Coverage (e.g., facility, equipment)
• Four-season hybrid greenhouses are covered under the indoor facility insurance type, unlike outdoor grow operations.
• When getting an insurance indication or quote, be sure to look at policies that will cover the largest amount of product you will have at any one time. 
• Plant material has a set value based on its maturity, and the coverage extends from seed through harvest. 
• You'll also want to consider insuring your equipment. 
• Hoop houses or other more flimsy types of greenhouses are not covered under this indoor policy designation. We strongly encourage four-season greenhouses because they provide greater control of the growing environment and better insurance coverage options. 

IRC-280E and Cannabis Real Estate

• First of all, on all tax items, always have a good CPA competent in navigating cannabis tax law. 
• Due to IRC-280E, we recommend that a property management company control the real estate and provide a triple-net lease to the plant-touching company. 
• We see Real Estate Investment Trusts making investments into the property management companies, further insulating them from the risks associated with hands-on operations. 
• Cannabis real estate deals can get complicated, and you'll need different policies if you own or lease the building. Talk with a qualified broker to determine the right coverage for your operation.

How to Get Proper Insurance Coverage

• Brokers can provide you with an indication, similar to a quote, that's specific to your business. To get an indication, you'll sit down with a broker for about an hour and gather information about your potential business.
• Start by finding a broker that you trust to help educate you on all available coverage types. Once you understand the different coverage types and each policy's cost, you can make informed decisions on the policies that match your risk tolerance and your business. 
• It isn't easy to put a figure on a ballpark price for insurance policies as they vary broadly based on the state and the size and type of business. 
• Get this process started as soon as you win a license. Lawyers, consultants, CPAs, insurance brokers, and agents are the most important calls to make right away.
• Once you've narrowed it down to the policies you need, your broker can go through the documents line-by-line with you to fully show you what is and is not covered. 
• The cannabis industry is full of risks. You need to protect your business, its owners, its staff, and your clients. To do this, you need to develop great products, have good quality assurance procedures, and the right insurance. 

Delivery Services

• In almost all instances, delivery is excluded from insurance policies. These policies vary depending upon whether the delivery vehicles are owned or rented. 
• We encourage delivery business owners to ensure that they have liability coverage for employees in case of an accident with a company vehicle. Ask your broker if you don’t know. 
• Ignorance is not a good excuse when it comes to insurance audits and claims. 
• We fully anticipate delivery, even post-COVID-19, to take 20-25% of the market share in the future, like Uber Eats, GrubHub, or Postmates. I think this is a massive opportunity for insurance providers to look at, as there's more and more of these delivery opportunities and states allowing these licenses.

Tips for Cannabis Entrepreneurs and Business Owners

• If you ever have changes in your business, always consult your broker immediately.
• Regardless of what sort of business you’re in, be it packaging or marketing, there’s always exposure. 
• Understand your risk, and cover your downside.
• Be humble and look for advisors and brokers with more experience than you to give your business the best shot at success. 
• Work with brokers that have access to more than one carrier for more policy options and better prices. You can even piecemeal multiple policies together to get the best terms. 
• Similar to the license application process, provide your broker with information about you and your team’s qualifications, education, and work experience. If you can demonstrate that you are incredibly qualified to operate your business, carriers will provide better terms and prices. 
• If you've ever read Upton Sinclair's The Jungle, we’ve got to protect workers from "The Man." We need to allow unionization and create safe working environments for our employees. That said, you also need to protect your business.
• I think many cannabis business owners just didn’t know that there were insurance options available. But there are many options right now, and as demand grows, there will be more policy types and better prices across the board. 
• You can start a business in this industry with the best intentions like providing medicine to patients or correcting the wrongs of the drug war but if you don’t protect your business and get sued and go bankrupt, that’s it. And remember bankruptcy protection is federal and doesn’t apply to the cannabis industry, so you will be liable. 

Resources Mentioned

Pachis & Associates

Evanston, Illinois

Office - 1-847-905-1905

tpachis@amfam.com