A lack of consistent industry regulations surrounding vaporizers has left cannabis businesses more vulnerable than ever. As of January 2020, the Centers for Disease Control and Prevention confirmed over 2,600 cases of vaping-related illnesses in all 50 states—including 59 fatalities. The outbreak has pushed the issue of product liability to the forefront of the cannabis industry.
“In 2019, we saw a dramatic influx of product liability claims associated with exploding vaporizer batteries, vaping lung injuries, CBD and THC testing, labeling, and compliance issues,” said Jodi S. Green, partner at Nicolaides Fink Thorpe Michaelides Sullivan LLP, a law firm serving the insurance industry.
Product liability claims are especially burdensome, but fortunately cannabis businesses now have the ability to protect against the catastrophic losses associated with these lawsuits. It is important to note, however, that not all standard product liability insurance policies provide this coverage.
“Most cannabis businesses are not only unaware of what they need, but also of what they actually have after they buy it,” Phillip Skaggs, assistant counsel of the American Association of Insurance services, said. “There is definitely a tendency for wishful thinking—younger companies buying whatever policy or package is available and within budget, and then just hoping it stands up when they need it to later. This results in most businesses being underinsured, or even completely uninsured, for a potentially ruinous loss or claim for liability.”
Business owners need to understand that in regards to products sold, the legal theory of “strict liability” may apply—meaning that everyone in the chain of distribution is considered liable, and thus if named in a suit, all parties have to lawyer up and show up in court. The first step in managing this exposure is to obtain a solid policy providing the carrier’s Duty to Defend. Such a policy must also be free from exclusions that would strip out this very necessary coverage.
Not all product liability policies provide the same level of coverage, even among those marketed specifically to the cannabis industry. Let’s take a closer look at what constitutes the right coverage for this main pillar of a proactive risk management plan.
Product Liability Insurance: The Basics
Product liability insurance, offered either as part of a commercial general liability (CGL) policy or as a standalone (monoline) policy, is designed to protect a company from first-party and third-party claims of bodily injury, property damage, and other damages related to the products and services that the company sells.
First-party claims refer to any type of claim arising from an accident, injury, or loss caused by manufacturing defects, improper labeling, and failure to warn consumers about a wide variety of potential hazards ranging from inaccurate THC measurements to mold or the presence of carcinogens.
Third-party claims refer to any type of claim that could see a business held liable for damages that result from the use of a product. This may include property damage, loss of wages, DUIs, medical expenses, and bodily injury.
For cannabis companies, this can include incidences such as:
● Life-threatening illnesses allegedly caused by defective vaporizer cartridges
● Contaminated marijuana purchased from a third-party vendor and resold to retail customers.
● Selling edibles that cause food poisoning or some other type of illness due to poor food quality standards.
● Any form of harm that occurs due to false advertising or misleading claims made through a company’s marketing campaigns.
● Product recalls stemming from the use of illegal pesticides—or even approved pesticides if applied in a manner that is off-label.
Your CGL or monoline products policy should provide your company with a vigorous defense against such claims—but this isn’t always the case in the cannabis industry, in which some carriers utilize exclusionary clauses that so narrowly define coverage they effectively render a policy useless.
“In this new-product environment, standard CGL insurance coverage is not adequate to protect a cannabis policyholder,” Ian A. Stewart, Chair of Wilson Elser’s National Cannabis and Hemp Law practice, said.
Product Liability Exclusions and Cannabis
The devil truly is in the details—and it is not uncommon for cannabis companies to purchase an insurance policy with exclusions directly aimed at the types of products the insured sells. This is known as illusory coverage.
Michael Sampson, a partner in Reed Smith’s insurance recovery group and co-vice chair of the cannabis law team, explained it this way: “There can be marijuana-related exclusions in a CGL or other policies marketed and/or sold to cannabis-related businesses. As a result of such an exclusion, a cannabis-related business could be left with essentially no coverage, or at least no meaningful coverage for the specific risks it faces.”
The most common cannabis exclusions relating to product liability coverage include:
● Health Hazard Exclusion—Any products sold by a company that may cause some form of health hazard will not be covered. These hazards include any form of adverse health effects (and yes, that includes E-Cig and/or Vaporizer Associated Lung Injury, aka EVALI).
● Cannabis Exclusion—The general cannabis exclusion is designed to render an insurance policy ineffective if the insured operates within the cannabis industry. For cannabis companies, this can leave them exposed to a variety of risks associated with product liability, D&O, and regulatory claims.
● Carcinogens Exclusion—Cannabis companies that sell dried flower, vaporizers, and any form of a cannabis product that contains carcinogens or has the potential to create carcinogens will not be covered if their insurance policy contains this exclusion. The carcinogen exclusion will prohibit coverage for bodily injury, property damage, and personal and advertising injury.
● Psychotropic Drug, aka Impairment Exclusion—Any products with the potential to alter an individual’s mental state would not be covered in a product liability lawsuit if this exclusion was included in the policy. Virtually all forms of cannabis alter your mental state as many of the compounds in cannabis like THC and CBD, whether intoxicating or not, are psychoactive.
● Hardware Exclusion—Be on the lookout for this exclusion if you sell vape cartridges, batteries, or hardware that assists with consumption. Lithium ion batteries can explode, and the endcaps found on cartridges may leach heavy metals into the oil they contain. It’s important to secure coverage for the entire product, not just the cannabis component.
Exclusionary language leaves your company exposed to lawsuits that can directly impact your operations and the survival of your company. It’s vital that any policy you obtain provides the coverage necessary to be indemnified during a claim.
For these reasons, it is recommended that insureds review their policy language with a specialized insurance broker to make sure they are not exposed to exclusionary clauses.
Advantages of Working with a Specialized Cannabis Insurance Brokerage
Although the recreational market is still in its infancy, several product liability lawsuits have already been launched against cannabis companies.
Cannabis businesses need to protect themselves from these risks, as the regulatory frameworks that govern consumer products and devices within the industry are still being developed by agencies like the USDA and FDA.
“It is imperative for any cannabis-related business to carefully review the regulations in each jurisdiction in which it does business to ensure that it has obtained all required insurance,” advised Michael Sampson.
A specialized cannabis insurance brokerage will help ensure that your business is properly covered and holding the necessary limits of insurance. Product liability litigation poses an existential threat to every cannabis business, but the potentially catastrophic nature of such claims can be effectively managed by working with a brokerage knowledgeable of both the risks involved and the various available policies’ strengths and weaknesses.
Kirk Miller, is a commercial insurance, risk management, and business strategy leader with more than 20 years of cannabis consulting and insurance industry experience. Kirk is an Executive Producer at Nine Point Strategies. Follow him on LinkedIn https://www.linkedin.com/in/kirkemiller/