Why is Cannabis Insurance So Difficult and Expensive?

Cannabis insurance is no easy task, as any operator will tell you. Most insurance decision makers in the space have heard the reasoning behind inflated premiums, limited coverage terms and difficulty finding options. 

Cannabis is an emerging industry operating in a legal gray area without the historical data and federal backing insurers require to confidently price and compete in the marketplace. While the redundant message has become cliché, operators must be deliberate in their efforts of obtaining proper insurance and risk management, which in turn drives the industry forward in many ways. 

How does a cannabis business owner secure proper coverage?

The first and perhaps most important step is for operators to align with an insurance professional that specializes in insuring the cannabis industry. Ideally, this insurance professional will have the experience and education to guide them in navigating the insurance process and making smart insurance and risk management decisions. 

The cannabis industry is flush with seasoned entrepreneurs and executives with backgrounds from across the board, yet many are accustomed to a similar commoditized, transactional insurance process from their prior experience in more accessible industries.

While a transactional approach may work in an industry where insurers must compete with aggressive pricing and policy coverage terms, it leaves cannabis organizations exposed to adverse financial events that could be detrimental to the profit and long-term viability of the business and its stakeholders.

Aligning yourself with a true cannabis insurance professional may seem obvious and easy, but similarly to the limitation on insurance carriers, there are few insurance agents that dedicate most of their time toward insuring cannabis operators.

As a result, many agents claim to have the ability to help, but they may not have the actual knowledge and experience to make sure the cannabis operation is properly covered. Here are a few questions I would recommend asking an insurance professional to gauge their level of expertise:

• Is your agency a member of any cannabis trade or support organizations? 
• What cannabis-specific insurance carriers do you represent? Are any of these direct appointments or are they all accessed through an intermediary?
• How are you addressing the common limited policy terms in the policies such as product liability, property, and directors and officers liability?

Courtesy POWERS Insurance & Risk Management

How can an agent give wrong advice or leave me uncovered?

It’s financially unrealistic for most cannabis operators to purchase all lines of insurance coverage that “should” be in place to cover all business exposures, so sacrifices to coverage and overall insurance product quality must be made carefully. Choosing the right areas to cover with your insurance program vs. self-insuring exposures is paramount and a risk advisor that specializes in the cannabis space can help an operator navigate those difficult decisions.

An inexperienced advisor will focus on saving cost, which is much less complicated compared to securing a complex and robust cannabis insurance and risk management program. It’s easy to save money, but you are almost guaranteed to have significant gaps in coverage if not thoroughly understood. For example: 

• A Product Liability policy that saves 10 percent or more in cost will typically come with significant drawbacks, such as a Health Hazard or Cannabis Impairment exclusion. That exclusion essentially makes the policy only worth the paper it’s written on, and self-insuring would be the better option to save money.
• Property insurance, which covers everything from the physical facility, contents, equipment, cannabis crop, inventory and loss of business income, is one of the most nuanced insurance products a cannabis operator will purchase. When coverage falls short (whether it’s from the carrier’s limited coverage or co-insurance penalties for having insufficient limits), operators must resort to financial reserves, an untimely cash call, or even folding the company. Property insurance is not immune to exclusion-heavy policy terms, just like General and Product Liability. 
  • If an organization’s Property policy excludes butane extraction but this wasn’t explained or vetted in the data collection and policy placement process, a cannabis processing and manufacturing operator is spending tens or even hundreds of thousands in insurance premium but have no coverage if there were a butane extraction-related explosion and fire. 
  • Business Interruption coverage, a key component to a Property Insurance policy, must be carefully designed and understood otherwise the ongoing expenses after a covered loss can keep an operation from reopening its doors. 
• Directors & Officers liability is one of the costliest insurance policies for a cannabis company and is often overlooked or forgone, or the lowest cost option is purchased. The purpose of a D&O policy is to protect the directors, officers (and typically the company), from claims made against them while serving in their capacity for the company. Exposures include claims by investors, customers, competitors or vendors for mismanagement, misrepresentation or breach of duties that cause financial consequence. 

Unless the insurance decision makers are familiar with reading the policy form fine print, a transactional approach to insurance will result in purchasing policy contracts with significant coverage shortfalls or missing key coverage altogether. Insurance decisions makers must be weary when solicited with insurance expense savings as the leading reason to engage. 

Why are the insurance applications so important?

Each carrier has their own underwriting appetite, unique conditions and subjectivities that serve as contract and coverage warranties. The policy contract will frequently cite information disclosed on the original application as a condition or limitation of coverage. If the application states no in-house security but the operation, after submitting the application and binding coverage, decides to hire armed security, you can count on the policy’s “armed security exclusion” being cited for the declination of an assault and battery lawsuit.

If at the time of construction planning, a fire sprinkler system was intended but later forgone, a cannabis facility operator must be aware there are many cannabis property policies that require active, functioning fire sprinkler systems for coverage to extend in the event of a fire.

Safe and vault construction specifications are another example where the policy will have set requirements for theft or fire coverage. Typically, a safe must be a certain weight or be bolted to the ground, feature a certain fire rating such as one- or two-hour, and a vault must have a certain fire rating, video surveillance with a specific period of recorded history and certain construction specifications to deter forced entry. 

Proper documentation is even more important when it comes to contract alignment with business-to-business relationships. Read more about the importance of contract alignment for cannabis operators.

All too often, cannabis operators are learning these insurance lessons the hard way. Fortunately, there are a few experienced insurance and risk management professionals who specialize in insuring cannabis operations. A great place to find a cannabis insurance expert is a cannabis trade association, such as Missouri Medical Cannabis Trade Association (MoCannTrade) or National Cannabis Risk Management Association (NCRMA).

By taking a big picture approach, a proper insurance and risk management program not only ensures the long-term viability of the organization, but also encourages competition from insurers which drives the industry forward through safety, profitability and sustainability.

Members of both MoCann Trade and NCRMA, POWERS Insurance & Risk Management specialize in Cannabis Insurance. Call (314) 725-1414 or visit POWERSInsurance/ChrisSullivan.com.

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