While business insurance for the cannabis industry is still not as robust as insurance broker HUB International’s U.S. cannabis segment leader, T.J. Frost, would like, good coverage is out there, despite what many business owners might believe.
“A lot of the misconceptions we see pertain to the availability and adequacy of insurance coverage. Potential clients often ask: Will the insurer pay if there’s a claim? We’ve had claims and they’ve been paid,” says Frost. “We haven’t, luckily, had an outdoor crop claim yet, but we’ve had indoor crop claims that have been paid. So, there is insurance coverage out there that can help protect your business.”
Here are the top three myths HUB International frequently encounters regarding cannabis business insurance—and why they are false.
1. No one will insure a cannabis business.
Insurance is available for the cannabis industry, Frost stresses, and cannabis businesses should get the same standard coverage as any other company—from property and casualty, product liability, EPLI and D&O policies to employee benefits and workers’ compensation. In addition, there are several must-have policies for cannabis cultivators specifically, Frost adds.
“Cultivators are essentially like farmers, so we want to make sure that the property’s insured, all the equipment [is insured] with equipment breakdown, general liability, and at that point, they’re going to need product liability, as well,” he says. “Because of the line of defense with product liability, they’re the first hand. … So, if there’s ever a claim, it’s going to go back on the cultivator as product liability.”
Crop insurance is also available to cultivators, whether growing indoors, in a greenhouse or outdoors, Frost says. “It’s a line of coverage that not a lot of people see value in because they’re producing so fast this day and age with all the technology, but you’re protecting against pesticides and bacteria and mold and fungi, so the coverage does pay [off], in our opinion.”
While HUB International insures both indoor and outdoor growers with crop insurance, it can be more difficult to procure coverage for outdoor cultivators, depending on the location, Frost says.
“How we paint the picture … with the carriers is we pick up the phone—we don’t just submit applications—[and we] tell them about their operations, tell them about their experience and tell them about what their goals are,” he says. “With that, we haven’t had an issue with crop coverage.”
2. I’m not selling finished product, so I don’t have to worry about product liability insurance.
No matter where a business falls in the cannabis supply chain, HUB International maintains that product liability is the biggest risk the industry faces. There is a “trickle down” effect that encompasses the entire industry, from production to distribution and sales, and this even includes labeling and marketing representations. All vendors need to have adequate product liability coverage and show their certificates of insurance.
“If we … review all of [a client’s] vendors—[whether] it’s the retailer or distribution company—and we don’t see that [the vendors] have product liability, we’ll pull those contracts and we’ll tell our clients, ‘There’s no protection here. We’re the first and only defense when it comes to this. So, we advise that you tell them to get [coverage] or we need to cut the ties and move on with somebody else,’” Frost says.
3. If my operation has a loss, my landlord will cover it.
A landlord’s policy most likely won’t cover a cannabis business’s loss, and the cannabis business’s loss might even cause its landlord’s insurance to be nullified for having rented to such a business. Therefore, a landlord’s insurance policy is usually never adequate, and cannabis businesses typically always need their own coverage, Frost says.
“There are obviously different companies out there that are real estate investment companies—REITs—and they have those policies in place for property, and they’re cannabis-specific policies,” he says. “[But if] we’re talking here that the landlord owns a strip mall that’s leasing out to a dispensary, [then] his current insurance is not going to allow for a cannabis dispensary in his building.”
Cannabis tenants should also review their lease agreements very carefully, Frost adds. Many lease agreements will state that tenants are required to protect any improvements they have implemented on the property, for example.
“Say a cultivation [operation] comes into a giant warehouse,” Frost says. “They’re going to put millions and millions of dollars into that. They often think that since their building is protected by the landowner, that all their tenant improvements are included in that, as well. That’s not the case. If you go back to the lease, it says you, the lessee, are responsible for [insuring] any tenant upgrades/tenant improvements to the building.”
Cannabis business owners should send the insurance section of their lease agreements to their insurance brokers—and possibly an attorney—to ensure they are properly insuring their assets, Frost adds.