The vaping industry is under fire after an increasing number of injuries and deaths have been linked to the use of vaping products. The growing crisis has major implications for the cannabis industry from both a regulatory and risk management perspective.
Breakdown of the Vaping Crisis
The crisis comes in the wake of an ongoing health scare linked to more than 2,650 pulmonary (EVALI) injuries and 60 deaths across the country. Initial investigation by the Centers for Disease Control and Prevention (CDC) into the cause of these lung injuries found vitamin E acetate of concern for those with e-cigarette or vaping product use associated lung injury. However, the CDC cautioned that “evidence is not yet sufficient to rule out contribution of other chemicals of concern to EVALI.”
In the heightened alarm for consumer safety, the American Medical Association also called for a total ban on e-cigarette and vaping products that do not meet Food and Drug Administration (FDA) requirements for approved smoking cessations tools.
Fallout from this crisis has resulted in renewed industry calls for federal regulation. In a letter to House Speaker Nancy Pelosi (D-Calif.) and House Minority Leader Kevin McCarthy (R-Calif.), the National Cannabis Industry Association outlined the need for “comprehensive federal cannabis reform that will allow the regulated, tested cannabis industry to displace illicit market actors.” The group stated, “The current patchwork of state regulations highlights the need for uniformity. And uniformity comes with descheduling and federal regulation.”
The vaping crisis shines a spotlight on a thriving black market that has been linked to many of the reported lung injury cases in which substances and product sources are unknown. Black market counterfeiters mimic legitimate vape products near perfectly but with undisclosed and potentially toxic ingredients, including vitamin E acetate – the additive health officials have linked to the outbreak of lung injuries. But it is also clear that cases include consumers that purchased THC vape products from regulated dispensaries.
Federal vs. State Legislation, the Black Market and Risk Control
State efforts to stem the tide of the crisis and protect consumers have focused on product bans, which may have the unintended consequence of fueling black market purchases of vaping products. Massachusetts imposed a four-month ban on the sale of all vaping products, while Michigan, New York, Oregon, Rhode Island, and Washington have banned all fruit and candy-flavored vape juice (the liquid used in electronic cigarettes and personal vaporizers).
Advocates for federal marijuana regulation argue that regulation at the national level is more effective in keeping the public safe from vaping-related illnesses. “The black market can only be addressed by a viable legal market that’s regulated and can promise safety and security for consumers,” said Terry Holt, spokesman for the National Cannabis Roundtable.
A Closer Look: Black Market Vape Purchases
According to a Jan. 2020 Centers for Disease Control and Prevention (CDC) report, 84% of patients with vaping-related lung injuries said they obtained the vapes from “informal sources.” And some of these patients may be hesitant to reveal their source if it was from a black market dealer. Even in states where cannabis is legalized, it’s still possible for vape pens to come from unlicensed retailers. In just a two-day span in Dec. 2019, the Bureau of Cannabis Control seized 10,000 illegal pens from unlicensed retailers in California.
With increased black market purchases comes increased risk for the industry. Beyond galvanizing the debate around federal regulation of cannabis, the vaping crisis also points to major risk management implications for the marijuana industry. It’s a strong reminder for cannabis companies to take the right internal risk control measures. Business owners should assess whether they have transferred risk appropriately, their vendors carry the proper insurance, and they have insurance without harmful exclusions that could negatively impact their business.
Product Liability in the Cannabis Industry
Product liability lawsuits also are following the vaping crisis. This is a wake-up call for cannabis companies to review their product liability risk exposure and secure the proper insurance coverage for their protection. Cannabis business owners should analyze their liability exposure, the potential associated health hazards of their products for long-term use, and review if existing policies exclude coverage for any type of specified ingredients that they may be using. Many health hazard exclusions will not cover health impacts from long-term use of a product. Additionally, insurance carriers are now looking to add more exclusions for vape products where the vitamin E acetate is present. Product recall coverage is also likely to be impacted – whether it’s implicated or excluded for vitamin E acetate.
Example: Vape Pen Explosion
Businesses all along the cannabis product supply chain face product liability risk exposure. For example, plastic vape pen explosions have led to lawsuits surrounding fires, broken bones, lost teeth and even death. These lawsuits could have repercussions for many touch points across the supply chain beyond the manufacturer of the pen, including ingredient manufacturers, delivery companies, distributors and retailers.
Seed-to-sale tracking systems also make it convenient to find incident-related parties to potentially be named in a lawsuit. This makes it particularly important to ensure appropriate vendors are properly listed as additional insureds to help reduce claims exposure.
Carriers are becoming even more strict in providing product liability coverage for vaping products without proper risk management protocols in place to transfer risk to vaping product manufacturers. If product liability coverage is included, cannabis operations will notice an increase in their premium rates.
Cannabis business owners should consider taking steps to shift the risk exposure associated with product liability. One method for doing this is to include liability-shifting verbiage in purchase agreements or contracts to transfer risk to the buyer if he or she alters the product in any way.
Risk Management Protocols
The vaping crisis also should spur cannabis business owners to implement risk management protocols to protect them from other exposures that are unique to the industry. For example, risk exposure related to the use of paper currency is a significant concern. Federal banking regulations have limited these businesses to dealing mostly in cash, which makes them prime targets for crime and fraud.
There are several risk insurance policies in which cannabis companies should consider investing: general liability, product liability, property insurance, crop and finished stock, workers’ compensation, crime/employee theft, directors and officers, cyber liability and employment practices liability. Depending on the type of cannabis operation, all or some of these should be included as part of a complete commercial insurance program.
With all the question marks surrounding the cannabis industry and insurance premiums, it’s important companies seek out professional assistance from insurance brokers when deciding on the best coverage for their particular business.
The Uncertain Future of the Cannabis Industry
In states with legislation legalizing cannabis, the cannabis sector will be able to move away from operating in cash if Congress passes the Secure and Fair Enforcement (SAFE) Banking Act. The act would protect financial institutions from liability for federal prosecution that could arise from servicing cannabis-related businesses authorized under state law. It recently passed with significant bipartisan support in the U.S. House of Representatives and is now awaiting consideration by the U.S. Senate.
Until regulations allow banking institutions to provide services to the cannabis industry, legitimate businesses do not have the ability to operate with the stability and safety that deters criminal activity. While the industry waits for a remedy, some degree of crime and theft coverage is needed for these enterprises to help manage the risks associated with a cash-based business.
Balancing Regulation and Risk Management in the Wake of High Premiums
The vaping crisis has forced to the surface two significant issues for the cannabis industry—regulation and risk management—and they are both intertwined. Uniform regulation will remove some of the unknowns that have slowed insurance carrier entry into the cannabis sector, which is key to opening up the cannabis insurance market all along the supply chain for growers, retail dispensaries, processors, and distributors.
However, proper federal regulation is not yet a reality for the cannabis industry. That’s where risk management plays a key role. Cannabis business owners should take note of the risk exposures highlighted by the vaping crisis, examine their risk management protocols, align with an expert risk advisor to keep a watchful eye on emerging risks, and review carefully their insurance coverages and all exclusions to make sure they are protected.
Vaping Crisis Implications for Cannabis Industry Regulation and Risk Management
While insurance rates are typically consistent from year to year on existing cannabis operations, insurance carriers are beginning to add exclusions pertaining to claims arising out of “Specified Ingredients.” These ingredients are sometimes part of vaping exposures, e.g., Vitamin E Acetate. On new cannabis operations, many are subject to more scrutiny from insurance carriers offering insurance coverage, and if vaping products are part of the operation, the number of insurance offers are shrinking. With fewer options, rates may rise for those who can offer the coverage. As the vaping crisis works its way through, cannabis operators should consider Directors & Officers Liability Insurance in the event any type of class-action suit is filed against the Board of Directors. Some insurance carriers are simply not offering any coverage if vaping products are part of the operation.
Matt Engle is a commercial property and casualty insurance broker with Insurance Office of America. With over 15 years of insurance experience, Matt has a broad background working in the cannabis, technology, gaming, healthcare, nonprofit and construction industries. His primary responsibility is to consult with profit and nonprofit businesses to create action plans to lower their total cost of risk and keep their employees safe through a customized insurance and risk management program. Matt can be contacted at [email protected]
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