The Business of Cannabis: Cannabis Insurance - From Seed to Sale

The level of complexity to operate a cannabis business and the myriad of federal, state and local requirements businesses face requires a diligent and thoughtful approach to bring “out of the box” results, and deliver on relevant solutions. The cannabis industry is operating in an environment where limited insurance options and solutions exist and where few insurance companies will underwrite this coverage. The current environment requires cannabis growers, operators, manufacturers, delivery services and all supporting affiliates select a broker that has an articulated path forward and the market strength and knowledge to help cannabis businesses reach their goals.

In the U.S., insurance companies have been steadily creating products to help cannabis companies mitigate risks. Below are the essential insurance coverages to consider.

CROP COVERAGE

INDOOR RISK

The good news is that the cost of coverage for growing in a controlled environment has reduced over the past couple of years. Understanding how to cover the business translates to really knowing the costs to grow and how to get the crop to each stage. These risks are broken down to living plant material, harvested plant material and finished stock. Documenting costs at each stage will need to be recorded if a claim is made.

OUTDOOR RISK

Opportunities for outdoor coverage exist for cannabis, but it is important to understand what is being asked, what is needed, and finding coverage that can truly provide the adequate protection. Growing cannabis is a major investment and covering that investment properly is good financial strategy.

PRODUCT LIABILITY INSURANCE

All companies operating in the cannabis industry regardless of being plant touching or non-plant touching face risk with regard to the products they are selling. Coverage is intended to protect the business owner against claims of property damage or personal injury caused by products sold or supplied by the business. As businesses continue to grow and expand the network of suppliers, it is important to get added as an Additional Named Insured on suppliers’ policies, and collect full copies of their insurance policies to determine “IF” they have coverage for what they’re supplying to the business. There are many opportunities within these policies that may list an exclusion or gap in coverage that may leave companies exposed.

MANAGEMENT LIABILITY INSURANCE

All cannabis companies should consider having Management Liability insurance due to the many unique challenges they face-- a hostile regulatory environment, limited access to bank services and a large influx of money from sophisticated investors.

The following coverages are often included in the Management Liability package.

Directors and Officers (D&O): D&O insurance is a great tool to protect a company in the event of regulatory action. Even though federal enforcement of the Controlled Substance Act cannot be covered because you cannot insure against illegal activities, coverage for state and local enforcement issues is provided.

Ignorance is not bliss! Claims may arise when a company is non-compliant with state regulations, even if a company believed they were strictly adhering to regulations. For example, California recently introduced a legislative bill, AB 1356, which if passed could require cities to permit one dispensary for every four liquor stores. Should a company not adhere to this, they and their officers would be severely fined.

Limited banking options have created unique challenges to companies in the cannabis space. Access to checking accounts is often expensive or hard to come by, which created a cash intensive environment. It’s imperative to keep good records as these are needed for payroll documentation and showing investors and the IRS company profits and expenses.

Lack of traditional funding has created a number of issues and exposures from private lenders or selling shares to fund growth. The largest claims in this instance are for not returning the loan or mismanagement of funds.

In addition, D&O insurance is becoming a requirement to hire experienced executives as this industry grows. These executives want to ensure they have coverage in the event of a claim.

Employment Practices Liability Insurance (EPLI): All companies with employees should consider EPLI coverage. Improper termination and discrimination claims can be costly. Although cannabis companies face the same risks as other companies, retail stores and grow facilities are at a heightened risk for third party claims, due to the nature of the business.

ALLIANT ALTERNATIVE RISK FINANCING/CAPTIVE FORMATION

As with most emerging industries, the availability of insurance coverage and the cost of coverage is an issue for cannabis companies. A captive insurance company could provide a cannabis business the ability to create its own insurance risk financing solution by offering customized coverage, a vehicle to share risk on difficult-to-insure cannabis related exposures and cost savings. We understand the challenges in the current regulatory environment on captive formation, and our team is on the leading edge in working with insurance markets and regulators to find captive solutions.

Our history as a Specialist insurance brokerage has allowed us to strategically support and advise our clients’ business operations regardless of their involvement in the marijuana and hemp industry. We work with various segments of this business including:

• Multi-state operators

• Grow/Cultivation operations

• Manufacturing and processing facilities

• Retail/Medical dispensaries

• Delivery services

• Cannabis lounges

• Ancillary/Support services

Alliant has solutions for your cannabis business. From seed to sale.

At Alliant, we understand the potential risks facing cannabis businesses every day, from seed to sale. We take a long-term, all-inclusive approach to the business, with a focus on understanding every touchpoint, so we can help anticipate what lies ahead. We’re not in the business of selling a product or program. We’re in the business of empowering clients to deliver the highest quality products to the market and drive the outcomes that matter to their business. Our creative solutions are structured specifically for cannabis businesses, leveraging long-term relationships with key industry specific markets to manage the risk, and protect business assets. Call us!

Greg Winter is a Producer with Alliant Insurance Services, Inc. He can be reached at (301) 909-1719 or greg.winter@alliant.com.

Trey Busch is Managing Director at Alliant Insurance Services, Inc. He can be reached at (831) 789-8561 or tbusch@alliant.com.

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