Anatomy of a Cannabis Insurance Policy, Part 1: The Basics
Insurance in the cannabis industry is big business, and business owners need to know what policies are available and what those policies cover. Why? Because in insurance policies, like all other business contracts (e.g. leases), the risk of a business venture is divided between the contracting parties. Your insurance policies are contracts where you pay your insurer to take some of the risk of your business venture away from you – for a fee, of course. (Some insurance companies are better than others at gauging risk and investing their premium funds. Check out some of their ratings here.) Companies that insure cannabis ventures charge an above-average premium to take on above-average risk, though they may be covering less of your business risk than you think is covered.
I know, I know, no one wants to talk, think, or read about insurance, and that includes most lawyers. (I almost fell asleep several times while writing this post, and my brother-in-law who does insurance defense legal work has been asleep at his desk for years.) Insurance agencies and agents tend to get excited about insurance because of the passive income they receive based on their share of premiums you pay month after month, and insurance companies get very excited when they make profitable investments with your premium dollars and pay out as little as possible to insurance claimants as claims. (It’s not personal; it’s business.)
As any seasoned marijuana business owner can tell you, this industry tends to be riskier than most due to some of these concerns, all of which your insurance company is aware of, charges you handsomely for, and (most likely) intends to deny you coverage based on:
- potential asset seizure and forfeiture of real estate, business accounts, and other tangible business assets by a state or federal governmental entity;
- violation of any federal, state, or municipal law or regulation;
- heightened crime in or near your business;
- the presence of fungi (mold) and other biological substances like viruses and bacteria;
- the transmission of communicable diseases (real or perceived possibility); and
- your incorporation of nuclear energy into the business (No joke. Every cannabis insurance policy I have read includes this, so don’t get too creative with the source of power for your grow lights, ok?)
Broadly speaking, insurance is broken down into general categories based on risk: (1) employee-related liabilities (covered by worker’s compensation coverage and employment practices insurance); (2) injury to people and tangible business assets (covered by commercial general liability insurance); and (3) damage to physical buildings and fixtures (covered by real property casualty insurance). I will only briefly mention: (a) key person insurance, which can be very important in buy-sell agreements among business partners; (b) directors and officers (D&O) insurance, which can be very important to non-employee board members (often called outside directors); and (c) business interruption insurance, which can be very important for any business that needs a regular income stream to remain viable.
Reading and comprehending an insurance policy is extremely taxing. Depending on your initial scope of coverage and the applicable insurance riders (amendments), each contract will be tens or hundreds of pages long. Determining what coverage you have is like starting with a handful of delicious Halloween candy and then watching your kids sneak away one piece at a time until you are left with Mary Janes. Your insurance company will probably include a marijuana risk rider and many other types of riders, each of which omit a part of the business risk you thought your insurance company would cover (in a perfect world if they had your best interests at heart). Generally, you will not discover the impact of these riders until you have an event that you think should be covered by your claim and you start fighting with your insurance company over whether they are obligated to cover your event.
A typical marijuana risk rider will require you to take affirmative steps like:
- Keep all of your finished marijuana stock in a vault or locked safe (this often includes the type of safe, how it is installed, and the minimum weight);
- Install a burglar alarm that is linked to a central response center;
- Install motion detectors; and
- Have a licensed electrician perform or sign off on your electrical work, certifying that you have adequate circuits to handle your business’ gargantuan power needs.
In a future post I will discuss more items that are not covered under a typical cannabis insurance policy, and I will include some provisions that caused me to raise my eyebrows more than once. But remember that any insurance is better than no insurance, and there are well-established companies that offer policies in many U.S. states (not just Lloyd’s of London, though they are back in the cannabis insurance business after taking a hiatus).