Purchasing insurance for a cannabusiness can feel like a daunting task, but it does not have to be one.
In addition to grappling with many of the same issues and questions that any business confronts when seeking insurance, a cannabusiness encounters certain additional, unique challenges due to the industry in which it operates. That is no reason to panic, however. And, it is certainly no reason to avoid purchasing insurance.
There are a number of steps that a cannabusiness – or, really, any business – can take to maximize the likelihood that the insurance-procurement process will be smooth and successful. In particular, when purchasing insurance, a cannabusiness should consider the following 10 steps:
- Engage an insurance broker who is familiar with the cannabis industry. While knowledge of the cannabis industry need not be a litmus test for selecting an insurance broker, engaging a broker who does have experience placing coverage for businesses in the industry, and who can draw upon that experience to provide real-world advice, can help flatten an otherwise potentially steep learning curve.
- Involve experienced insurance-coverage counsel. Similarly, knowledgeable insurance-coverage counsel can be an invaluable asset to a cannabusiness. Counsel can help identify applicable regulations and potential business risks, provide insights on various insurers and their responsiveness in the event of claims and review proposed policy language. Even if certain policy terms are ambiguous and/or cannot be altered, it is important to at least understand upfront how they could be interpreted or applied in the event of a claim or a loss.
- Review all applicable regulations. Certain states require, for example, that a marijuana dispensary, grower or processor obtain certain types of insurance in specified amounts. For instance, a cannabusiness may be required to obtain commercial general liability (CGL) or workers' compensation insurance. Every cannabusiness should make sure it knows exactly what insurance (and in what amount) is required by applicable state regulations.
- Identify risks and potential liabilities. To facilitate the purchase of coverage, it is necessary to understand – in addition to applicable state-mandated insurance requirements – what liabilities could develop and what risks need to be insured. For example, does the cannabusiness have directors and/or officers? Does it own property? Is it at risk of a cyberattack? Keep in mind that such risks and potential liabilities may change over time.
- Determine the coverages needed. Consider any applicable regulations the starting point for identifying the insurance types and limits to purchase. While state regulations provide a floor, they do not necessarily provide a ceiling. Knowing its risks and liabilities enables a cannabusiness to determine what other coverages, and what limits of liability, it needs. For example, if it does have directors and officers, it may want to consider directors and officers (D&O) insurance.
- Explore the market. Take the time to learn what insurance companies are selling what policies at what cost. Some insurers will write one type of coverage but not another for the cannabis industry – for example, an insurer may be willing to write property insurance but not CGL or D&O coverage for a cannabusiness. The insurers willing to write coverage for cannabusinesses may change over time. New insurers may enter the market while other may leave it. Make sure to really understand the entire market and to identify all potential insurers.
- Be honest and transparent. When filling out an insurance application or any insurance-related paperwork, be honest. If a business makes a misrepresentation on its insurance application, an insurance company may be able to void the policy in its entirety and/or avoid providing coverage in certain instances. Moreover, cannabusinesses should be transparent about their business purpose. Do not try to hide the fact that it is cannabis-related. To the contrary, be upfront and disclose the nature of the business. Full disclosure – and the resulting meeting of the minds – at the time of contracting can be an important defense to any contrived attempt by an insurance company to avoid providing coverage on the basis that marijuana remains illegal under federal law.
- Review proposed policy language carefully. Before choosing an insurance policy, read it – or, at least, the insurer's specimen policy – carefully. Currently, certain insurers are still trying to take form policies "off the shelf" and make them fit the cannabis industry. That one-size-fits-all approach, however, does not always work. Therefore, make sure to read the entire policy, including endorsements. Understand what the policy does and does not cover. Consider, for example, whether there are exclusions in the policy that would render any or all the coverage illusory.
- Ask questions. If something does not make sense, ask questions. Make sure to understand what the insurer is selling and what the cannabusiness would be buying. For example if the meaning of a policy provision is unclear, inquire further. While any answer or explanation may not be determinative in the event of a coverage dispute, it may still be informative when making a business decision about what insurance to purchase.
- Negotiate. A potential policyholder can always ask an insurer if it is willing to change certain terms and/or conditions in its policy. Of course, to obtain more favorable policy terms, the policyholder may have to pay a higher premium. Some insurers may refuse to make any changes – or the additional premium charged for any such change(s) may prove cost-prohibitive – but there is no harm in asking. The worse that can happen is the insurer says "no."
There are certainly many other steps a cannabusiness – or any business – should consider when purchasing insurance. These 10 steps are not intended to be an exhaustive list of best practices. However, following these 10 steps should put cannabusinesses far down a smooth and hopefully successful path toward obtaining insurance coverage.
This article is presented for informational purposes only and is not intended to constitute legal advice.