Many cannabis businesses purchase an insurance policy that complies with state and local regulations, and then they forget about it. But will this policy adequately protect the business if something goes wrong?
Not all policies are created equal, but there are steps cannabis businesses can take to ensure they will get properly compensated in the event of a claim, according to Mike Bush, partner at National Cannabis Insurance Services (NCIS).
First, cannabis companies should forget some of the common misconceptions about business insurance. Many business owners think that no insurance company will even cover a cannabis operation, Bush says, but in reality, there are a select few companies that work with the cannabis industry.
Once you find one, be sure to look beyond state and local insurance requirements—insuring a business with the bare-minimum policy only ensures compliance, but not that the company will be adequately protected in the event of a claim.
Insurance policies differ based on available endorsements and exclusions, Bush says, which means businesses need to read the fine print carefully.
“The differences lay in the language of the policy—its endorsements and exclusions,” Bush says. “Two policies could have the same named exclusion, but limit coverage in different ways. Exclusions can vary, and available endorsements, such as defense costs and product withdrawal, can vary.”
When deciding which insurance policy a business needs, operators should first understand the business’s exposures, he adds.
“Every company has liability exposure—general and product liability,” Bush says. “Of course, only a cultivator has a crop exposure, but the rest of the chain has an inventory exposure.”
Business owners should also inquire about defense outside the policy’s limits, as well as product withdrawal endorsement, he adds. Defense outside the limits means that defense costs have a separate limit in addition to the policy’s limits, and if a company has a liability claim and must pay to defend itself, for example, the defense costs would be a separate limit than the payout for the injured party. In addition, product withdrawal pays for expenses related to a withdrawal, such as notification to vendors, customers or the public. These types of coverage are not typically covered and must be added with an endorsement.
“More so, they should be asking about what’s not included: What exclusions on this policy are specific to cannabis operations?” Bush says. “So, companies can be sure that they don’t have a gap or are comfortable to self-insure that gap in coverage.”
Common gaps and exclusions in insurance policies that affect cannabis businesses are defense within the limits, impairment and health hazards, Bush says. Defense costs can erode the limits of a policy, he says, and businesses should have defense outside the limits. In addition, if a cannabis product contributed to the impairment of someone who uses an automobile and a claim arises from an accident, that claim could be denied if there are impairment exclusions in the policy.
Overall, cannabis business owners should ensure they have crop coverage, product liability and third-party liability, and they should be as informed as possible and understand exactly what is and is not covered in their policies, Bush says.
“Read your policy—no one does—and ask your agent,” he says. “An agent should be able to point out what is and is not covered. Now that you’ve learned a couple of things, go back to your policy or your agent and look for those limiting exclusions.”
Business owners who are curious about their current policies can have a conversation with NCIS by filling-out this quick form for more information.