The cannabis business is a frontier industry that continues to offer no shortage of unique challenges to regulators, as well as boundless questions for industry watchers and ancillary businesses like insurance.
Key questions may include: What insurance coverage is most often shunned by cannabis companies? Which coverage is most costly to cannabis businesses? What’s the most requested coverage?
Few if any may be better to give answers to such questions as insurance brokers.
Insurance Journal sought answers to a handful of questions from a half-dozen well-established brokers (retail and wholesale) who focus on the cannabis space to find out what trends they are seeing so far in the first two months of the year.
What coverage do cannabis companies seem to be doing without the most?
The answer is cyber, according to Norman Ives, a broker and cannabis practice leader for wholesaler Worldwide Facilities LLC.
“Within the cannabis business community there still is very little going on in the way of cyber liability coverage placements,” Ives said. “Given that many dispensaries collect patient/client personal information, this is a very real exposure that is largely going unaddressed within the cannabis community.”
He referred to a 2018 article in Inc. Magazine, which reported that 60% of small businesses fold within six months of a cyber-attack.
“The risks are real, the impact can be devastating on any business, much less one involved in cannabis, which will not receive the same federal bankruptcy protections that are available to traditional business ventures,” Ives said.
Matt Porter, vice president of retailer Brown & Brown Insurance Services of California Inc., has seen clients pass all too often on employment practices and crop insurance.
“The biggest threat that most operators go without is employment practices and crop insurance,” Porter said. “More are starting to buy this. However, due to the cost and the deductibles associated with each of the coverages, these are the most declined coverages.”
Tony Carastro is president of Cannabis Insurance Consultants, a retailer that has also been noticing clients decline employment practices coverage, as well as a few other coverages that many businesses see as key protections.
“Most cannabis companies are going without directors and officers insurance, employment practices liability insurance and crime coverage,” he said. “Largely in part it’s due to the cost of premium.”
John L. Balian, director of the cannabis industry practice for retailer Wood Guttman & Bogart Insurance Brokers, has seen clients go without an insurance product that most would think would be among the most important for a cannabis company.
“Products liability – even though it’s probably the coverage they most need,” he answered. “The vaping crisis has the potential to result in significant liability to cannabis operators. That said, the cost is relatively high and the coverage is not legally required, as is general liability and workers’ compensation.”
Like Porter, he’s also seen clients opt against purchasing crop insurance.
“We also see many cultivators deciding against crop insurance, which is also relatively expensive,” Balian said.
Chris Boden, cannabis and life sciences practice group team leader with wholesaler Crouse & Associates, has seen a variety of coverages declined across the board, and he said which coverage gets declined depends on the business.
“It really depends on and is operation specific,” Boden said. “I see many distributors not have cargo coverage because they thought the property coverage they had on their premises covers the property anywhere.”
He added: “Manufacturers without product withdrawal coverage. Cultivators without living plan coverage. Retailers without cyber coverage, etc.”
Jeffrey Samuels, vice president of the cannabis practice for retailer Embroker, believes limits could be one reason why certain coverages are declined.
“I don’t necessarily think the insureds are avoiding coverage, but we see them discouraged around purchasing higher limits due to cost restrictions,” Samuels said.
What insurance product for cannabis businesses is priced similarly to other sectors?
Boden, Balian and Porter agreed that workers’ compensation for cannabis businesses is priced most similarly to other businesses, with Boden observing that workers’ comp “for dispensaries and retailers is priced very similar to traditional retailers, and Balian noting that rates “are relatively low and comparable to the regular insurance marketplace.”
“Workers’ compensation continues to come down in terms of rate given the continuity of the class codes being used across multiple industries,” Porter said. “Also, now that the businesses have been in operation for a few years, we are working closely with our clients to manage and control their claims so experience mods under 100 are starting to be issued and beginning to help save significant premium costs.”
Ives said he’s seeing liability and casualty placements in the CBD space similar to comparable nutraceutical products in the health and wellness space.
“While it can be challenging to build a liability tower greater than $25 million for a CBD-based risk, the premium paid for the coverage available is on par with similar health and wellness products,” Ives said.
Which coverage is most expensive?
Directors and officers was listed by most brokers interviewed as the most expensive coverage overall for cannabis businesses.
“D&O continues to be one of the more expenses insurance products driven by the volatility in leadership, revenue misses and C-suite breakups that have inundated the media,” Samuels said.
Ives, Carastro and Balian agreed.
“Professional liability coverage – D&O, E&O – and commercial auto coverage options continue to be extremely expensive with only a limited number of carriers participating in the market,” Ives said.
Carastro called D&O for the cannabis industry “grossly overpriced.”
“The companies know they must have this coverage, and I feel the market is taking advantage of the consumers,” Carastro said.
“Management liability coverage is only offered by a handful of carriers and is both expensive and restrictive in coverage,” Balian said.
Most requested coverage?
Crop insurance was the coverage requested most often requested, according to Ives, Porter and Boden.
“Crop coverage for outdoor hemp/CBD and Marijuana crops continue to be at the top of the list for most requested coverage,” Ives said. “Traditional crop coverage is still not available to hemp/CBD and marijuana farmers producing their products in open air/outdoor environments.”
Ives said the limited crop options available require the product to be produced indoors and it often excludes things like pests, diseases, human error, off-site power disruption and other common risks the cannabis producer is hoping to find insurance options to address.
Porter said crop insurance is always requested, and usually declined once “we put the pen to paper and explain exactly how expensive the coverage is and how the valuation works.”
Boden also answered that crop insurance was the most requested, but timing could be partly the reason behind that.
“At the current time we’re getting a ton of requests for outdoor crop coverage because the season is coming up and now there’re viable options in the market that weren’t around last year at this time,” Boden said.
Carastro said he’s received numerous requests from clients for product liability coverage.
“The coverage being most requested is product liability,” Carastro said. “The coverage is very hard to find without exclusions that strip the coverage out of the policy. One hundred percent of the policies we review have exclusions on the product liability that make the policies worthless.”
Both and Samuels answered general liability, because the coverage is mandatory.
The top concern from cannabis operators so far?
Obtaining property coverage was the top concern Ives has been so far hearing most about.
“Availability of property coverage for cannabis risks in outlying or rural areas and overall premium paid,” Ives answered. “The hardening of the overall property market and recent claim activity around cannabis extraction – marijuana and hemp – operations has continued to complicate many cannabis-related property placements.”
Because hemp-grow and extraction operations are often relegated to outlying areas with limited fire service, many large cannabis exposures are largely uninsurable or the amount of insurance available is limited, according to Ives.
“With the tightening we are seeing in the financial markets serving the cannabis community many operators are looking get a better handle on their insurance costs, which is proving very difficult with the limited number of carriers providing cannabis friendly policies wanting to make a fair return for providing insurance products to businesses that are still deemed federally illegal and therefore in their eyes more risky to insure,” Ives added.
Porter said crop insurance was among the top concern he’s hearing about.
“Outdoor crop insurance is a huge deal, unfortunately there has been significant misinformation out there because the federally backed crop product is available in certain areas – however, that is for hemp-related operations only, not THC full cannabis operations,” Porter said.
Cost and coverage were the biggest concerns Boden has heard about.
“There’s usually in one of two scenarios: new-in-business or in-rapid-expansion,” Boden said. “The new-in-business needs to keep the premium low, but fulfill the obligations of the state, landlord, etc. The second is the business is growing so fast it’s hard to make sure the insured is keeping the coverage up to date to match their growth. The insureds will also need to full fil any investors coverage requirements which can cause issues due to the limits being requested.”
Vaping liability concerns was high on the list for people who Samuels deals with.
“Product recalls towards the end of ’19 for vape-related businesses,” he said.
Balian has also seen vaping become a big worry, followed by two other emerging concerns.
“No. 1: The potentially catastrophic liability caused by vaping,” Balian answered. “No. 2: Overregulation and the resulting economic advantage to the black market. No. 3: Increased difficulty in raising capital and pressure on operators to prove a sustainable business plan and strategy in order to attract investors.”
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