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Getting Cannabis Business Insurance Right Amidst Tough Market Conditions

By Michael Giusti, senior writer and analyst for InsuranceQuotes.com

As cannabis businesses scrap for market share, insurance may not be their top concern, but neglecting to think about risk may leave business owners exposed when they are least able to take a hit to their bottom line.

In many markets, increased competition due to an overabundance of dispensary licenses has driven down the cost of product to the point that many retail operations are struggling to stay afloat, and many wholesalers are struggling to profit. And at the same time, the industry’s ongoing banking woes mean that access to capital and credit make the up-front cost of business insurance an easy expense to overlook.

But every point in the cannabis value chain has risk exposures, and there are insurers writing policies to help mitigate those risks.

At the same time, business owners should tread carefully and know what they are buying before they sign on the bottom line for a new policy.

The first thing to keep in mind about cannabis insurance is that many of the lines are expensive right now. That cost is being driven by scarcity. By and large, there is not enough capacity in the market to write enough policies to cover every business out there if everyone stepped up and wanted a policy today.

There just isn’t enough underwriting and reinsurance capacity and enough insurers offering policies.

But there are policies to be had.

The other thing to keep in mind is that buying a cannabis policy isn’t like buying an auto policy that you can put on automatic monthly payment from your checking account for the year. Most cannabis insurance policies need to be prepaid in full, or else they need to be financed through costly premium financing, putting the already costly policy out of reach of many business owners.

Once business owners figure out how to pay for the policy, figuring out what is in the policy is the next challenge. And every policy is different, especially because each state has such unique laws
regulating their cannabis industry.

“Instead of having a standard code across states, each state comes up with its own crazy formula,” said Eric Rahn, chair of the National Cannabis Industry Association Risk Management and Insurance Committee, and owner of S2S Insurance Specialists. “Some are better. Some are worse. But what we need is standardization.”

That variation also means that large operations with multistate insurance policies have pages upon pages of exceptions and exclusions written into each policy, all detailing the differences and variances of each state’s laws.

To further confuse matters, these policies are typically written on the state surplus or non-admitted markets, which mean they are not overseen to the same extent by the state insurance commissioners.

To help combat that uncertainty, Eric Morrison, senior vice president and cannabis lead for Aura Risk Management and Insurance Services said the key is to work with a knowledgeable and trustworthy insurance team.

“The most important thing is to have an agent who specializes in cannabis insurance,” Morrison said.

He said that since there is a wide variety of policies and a wide variety of exclusions and hidden clauses written into those policies, it is all too easy to think you are buying coverage for something, only to find out that it was excluded once it comes time to file a claim.

When it comes to typical policies that are available to cannabis businesses, commercial general liability, commercial property, business interruption, and workers compensation tend to be the most
common policies for growers, shippers, manufacturers, and retailers.

Fire claims tend to represent the most common claim — often from overloaded circuits or faulty grow lights. But one common claim this past year was damage from smoke — especially from wildfires. Even when the products didn’t burn in the wildfires, the smoke from nearby fires contaminated the products and made them unsellable.

For growers, crop insurance is available, as it is for most agriculture businesses. But crop insurance does tend to be costly.

Product liability is an essential line both for product manufacturers, and for growers, because growers are the first step in the value chain. The same goes for recall protection coverage, which would step in if something were to go wrong with the product and it had to be pulled from the shelves.

Auto and cargo coverage is a tricky line to secure any time cannabis has to be moved from place to place. Not many carriers want to write policies to cover the product, and many have specialized regulations for how carriers need to protect and transport the product enroute to minimize risk of
theft and damage.

One particularly difficult area of coverage to secure right now is errors and omissions and directors and officers insurance. These policies seem to be tough to secure, and expensive when they can be secured, because underwriters don’t seem to be clear on what risks cannabis businesses present and what exposures the businesses might be facing.

In the face of expensive and hard-to-secure coverage, risk mitigation becomes equally important
as insurance.

“This space needs to get to the point where best practices are shared across the industry,” Morrison said.

Mitigating risks can help avoid the need for insurance to some extent if losses can be avoided to begin with. Plus, if best practices can be documented and presented to underwriters, insurance companies will see that business as a better risk and be more likely to offer a policy and potentially offer a better rate.

Along those same lines, businesses should look for as many professional certifications and documentable training programs they can pursue for their work force to show they are the best possible risk.

“The more you can show that your employees are educated in their particular space, that is a great way to bring something different to an underwriter and show you are a better risk,” Morrison said.

Competition is tight. Insurance is expensive. Cash is hard to come by. But risk is ever present. Business owners should do everything they can to avoid that risk. And for those risks that are inevitable and unavoidable, partnering with the right insurance professional can help keep an unfortunate situation from turning into a business disaster.

Michael Giusti

Michael Giusti

Michael Giusti, MBA, is a senior writer and analyst for InsuranceQuotes.com. He has worked as a journalist for more than 20 years, including as a reporter at a daily newspaper in Florida, as an editor at a regional business journal, and as a writer for national and international publications. He specializes in business, technology, finance, insurance, automotive and industry-focused writing.

 

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