Cannabis businesses often look to state and local requirements when shopping for insurance, but most state- and municipality-mandated minimums are not enough to provide adequate coverage in the event of a claim, according to Mike Bush, partner at National Cannabis Insurance Services (NCIS). And without adequate coverage, cannabis companies risk losing their license and their entire business.
Most states with some form of legalized and regulated marijuana typically require cannabis businesses to carry general liability and product liability insurance, Bush says. A general liability policy pays sums to a business if the company becomes legally obligated to pay damages from bodily or property damage, while product liability—which may or may not be included with a general liability policy—covers damages from faulty warning labels, impairment, breach of contract and product recall, among others.
“Limits can vary,” Bush says. “Most states also have bond requirements, and contractual requirements also come into play with landlords and vendors.”
Insurance requirements vary by state, and some states do not have requirements, Bush adds. Type of coverage, limits and type of business operation are variables that often vary state-by-state.
“For example, the state of California only has general liability requirements for distributors,” Bush says.
At the local level, municipalities can have insurance requirements that differ from the state requirements.
“Los Angeles County has general liability and product liability limits, although the state of California has not mandated these coverages for all operations,” Bush says.
Although cannabis businesses must meet state and local insurance requirements for compliance purposes, they should also identify and understand their unique areas of exposure and choose policies that go above and beyond those required by law to ensure they are properly covered, Bush says.
For example, Michigan has $100,000 minimum liability requirements for both general liability and product liability coverage, but the average cost of defense in a product liability claim far exceeds this at $876,000.
“Businesses need to understand what their exposures are,” Bush says. “There are no requirements for a cultivator to have crop coverage, but they have to ask themselves if they could afford to self-insure a loss if they had one. No one thinks they’re going to have a loss or lose their crop. But we’ve seen the claims, so it’s very important to have that coverage in place.”
In addition to crop insurance, product liability is another policy that cannabis businesses often overlook when it is not required by law, Bush says.
“We’ve seen companies go bare because they don’t have state requirements,” he says. “They think these policies don’t cover anything, and wonder, ‘Why should I pay for insurance?’ It goes back to asking the question: Can I cover my own loss? Can I pay for the cost to defend my company in the event of a claim?”
If the answer is no, Bush recommends that companies purchase cannabis business policies that go above and beyond state and local minimums. Those interested in learning what policies and coverage are available for their business can inquire freely here.