With crisis comes the need for insurance coverage. It’s not top of mind right now, nor should anyone expect it to be, but business models and short-term outlooks are changing dramatically each day, and now may be a good moment to ensure that management teams are prepared.
Mike Sampson, partner in Reed Smith’s Insurance Recovery Group and co-vice chair of its Cannabis Law Team, says that business owners would do well to familiarize themselves with their insurance policies before the time comes to file a claim on some unexpected hardship.
There are several types of coverage that are in play now, as the coronavirus outbreak continues to spread across the globe and force incredible economic pressure onto small businesses.
Business interruption coverage is often a component of a company’s property insurance policy. For example, a standard policy might cover damage to a building or to personal property within. That policy may then include additional lines of coverage for situations that infringe on a business’s day-to-day operations.
Examples include: business interruption with time element coverage, for when your business experiences covered property damage and as a result experiences continued operational losses precipitated by that damage. There’s also extra expense coverage, for when a business incurs extra costs to continue operations after covered property damage.
Zooming out to the cannabis business supply chain, there’s also contingent business interruption coverage: This is triggered when it’s not your business that suffers the property damage, but rather a third party business is hit with some level of property damage that suspends normal operations—thus affecting you. Further up the supply chain, this includes vendors and, say, vape battery manufacturers.
“Usually, even in the contingent business interruption context, there has to have been some property damage that triggers the contingent property claim,” Sampson says. This means that whatever property damage is incurred by that third-party business must be a type of property damage covered by your business’s policy to trigger contingent business interruption coverage.
Oftentimes, in this current situation, it’s not like the coronavirus outbreak is causing property damage, per se. Sampson says that one argument or interpretation of this type of insurance coverage is that because the coronavirus has been shown to live on surfaces and infect property, there may very well be “property damage” as per the definition contained in a business’s policy.
Sampson stresses this: Read your policy carefully.
“The fact that this virus can live on surfaces and isn’t just communicated in the air may give additional support for the fact that there ought to be coverage for coronavirus-related loss,” he says.
In short, each situation comes down to a legal interpretation of these policies.
Then there’s civil authority coverage: This is a part of that same business interruption coverage suite, prompted when some degree of property damage is incurred after a business is ordered to shut down operations. This get us closer to the current situation in the cannabis industry.
Many states are deeming medical cannabis businesses “essential.” Under the orders issued in Massachusetts, for instance, adult-use businesses aren’t “essential.” This varies by state. Some adult-use businesses (or adult-use segments of businesses) may then be affected by civil authority orders and thus subject to claims. “That civil authority coverage may require property damage to have spurred the civil authority order, in which case it may not be coverage,” Sampson says. “But if it doesn’t have that property damage prerequisite language, then you might have a claim for coverage.”
Bottom line: There’s a lot of gray area in the way we talk about insurance policy outcomes, and the only certainty comes from reading the fine print.
“Whether or not under any of these policies and in any of these situations there’s insurance coverage is going to 100% turn on the language of the policy,” Sampson says. “There is no universal guidance that I can give or an insurance broker can give to say, ‘Absolutely yes’ or ‘Absolutely no,’ because every policy tends to be different, tends to have different language, may include different endorsements or exclusions. And so, there is no substitute for reviewing policy language.”
Cyber insurance is another area that’s worth watching. In a lot of cases, especially among administrative teams, cannabis business employees are working for home. Even more so, those third-party suppliers are even more likely to have sent employees home to work while the coronavirus outbreak continues. Added pressure on networks leads to added cyber vulnerabilities.
Same with directors and officers (D&O) coverage, a type of insurance policy that comes into play when executive-level business personnel are targeted in a civil lawsuit over claims they made or actions they took. If a business were to stay open against the mandates of a civil authority and then be called out as a potential source for coronavirus infections, this is where D&O coverage might come into play, as an example.
The coronavirus outbreak has spurred all sorts of unexpected events and changes in the way we conduct business.
“It’s really a circumstance that you want to be considering all of your losses, all of the various coverages,” Sampson says.
Take your standard liability coverage policies, or perhaps even theft coverage, for employees who are newly taking to the road for cannabis deliveries. There’s a whole new risk profile out there.
“That company, which never had to worry about … automobiles being used for business purposes may now have additional potential for liability that they didn’t have before,” Sampson says. “As business models change in this industry, like in any other industry, whether temporary or long-term, it’s important to figure out whether or not you have insurance coverage even under a general liability policy for potential risks and liabilities you face because of that new business model.”
The cost-benefit analysis is complicated, and businesses would do well to keep their level of risk in mind as the industry experiences its abrupt sea change.
“Certainly, while we’re all trying to survive the pandemic, trying to serve our clients the best we can and trying to stay sane, insurance is not often at the forefront of anyone’s mind, understandably,” Sampson says, “but nonetheless it’s probably important to take a look at your policies, know what’s covered, know what isn’t covered and what could be covered, so that you either are taking the risk with eyes wide open or able to adjust your behavior or your policy as needed.”
Looking at your policies now will let you know what’s covered. You may not be aware of everything contained in your insurance policy, and there may not be a better time than the present to investigate the potential coverage you’re carrying in these otherwise uncertain times. Sampson insists, if you think you may have a loss on the horizon, make sure now that you know how to document the claim.