Between the national legalization of recreational marijuana use in Canada effective October 17 and the ongoing state ballot proposals related to public consumption in the U.S., cannabis remains one of the most debated topics for consumers and business owners today.
Many Canadian businesses have already begun to make edible cannabis products even before those types of products are officially legal. Only marijuana products comprised of fresh or dried buds, oil, plants and seeds may be sold in Canada starting next week. The Canadian government has indicated that it will address the legal sale of edibles in the months ahead, although no deadline has been set.
South of the Canadian border, 30 states have legalized the medicinal and/or recreational use of marijuana as of this month. Four more states will have marijuana legalization measures on November ballots, including recreational usage in both Michigan and North Dakota. Yet marijuana use is still illegal according to federal law.
With such a controversial topic, the potential for a broad array of liabilities for businesses operating in the field is high. A June ballot proposal seeking to legalize medicinal marijuana use in Oklahoma was approved by voters, and now its state non-industry business officials are asking state legislators to provide legal regulatory protection to drug test employees in an effort to decrease their liabilities.
For many, understanding which insurance products will minimize liabilities in this field is an enormous challenge.
“We’ve been in the game of serving the cannabis industry for seven years in anticipation of national recreational legalization,” said Paul Clarke, National Underwriting Director, Burns & Wilcox Canada, Toronto, Ontario. “This is literally a new frontier. Much of what we have been focused on recently is educating clients about their options and requirements based on law.”
Customized General Liability (GL) policies are available to dispensaries, marijuana manufacturers and now retailers in Canada, Clarke said. These GL policies address coverage for a building, products and other related liabilities. “All of our policies are really tailor-made based on your profile and risk,” Clarke said.
Product Recall Insurance is also available for companies in Canada and covers costs such as business interruption and crisis communications, Clarke said. Yet, such specialty policies can be hard to find.
Under U.S. federal law, possession of marijuana is a misdemeanor punishable by up to one year in prison and up to a $1,000 fine for a first offense. That has made the offering of Cannabis Insurance a debatable one for most carriers, said Drew Delaney, Underwriter, Commercial Insurance, Burns & Wilcox, who works with clients in Michigan. Some carriers refuse to offer any Cannabis Insurance, even if state laws require it of business owners, because the carriers do not want to be exposed to potentially costly lawsuits.
Delaney also discussed the states’ mandatory insurance requirements for commercial medical marijuana operations. “We see some carriers willing to discuss higher limits up to maybe $500,000, but that’s about the limit. We really don’t see carriers offering $1 million or more even though that’s the normal amount that most businesses will have coverage for as part of their General Liability Insurance.”
State and provincial differences
Laws governing the use and selling of marijuana vary among Canadian provinces. For example, businesses operating in the cannabis industry in Ontario need to carry $15 million in Product Recall coverage. In British Columbia, the requirement is $10 million. As a result of these inconsistencies, many carriers in Canada are wary of providing coverage.
In the U.S. states, municipalities and even local landlords have different rules and regulations as well. For example, the Facilities Act of 2016 in Michigan requires businesses operating in the medical marijuana business have a minimum $100,000 Cannabis Insurance policy, which largely covers bodily injuries.
However, legal requirements in other states are less stringent, said John Deneen, Underwriter, Commercial Insurance, Burns & Wilcox, who works with clients in the western U.S. and states such as Colorado, California and Oregon. Recreational use became legal in Colorado in January 2014. However, the state does not require specific Cannabis Insurance of its businesses. As a result, many businesses carry nothing more than a basic General Liability policy excluding Product Liability.
Some municipalities require higher insurance limits than are required by the state, and frequently landlords will impose their own requirements.
“Often state regulators will set the base insurance requirements, but local governments or landlords can set higher standards,” Deneen said. “We always recommend that businesses work with professional insurance brokers and agents to determine what coverage should be carried based on exposures and risk tolerance, rather than simply meeting basic requirements.”
The uncertainty around what is and is not legal has even led to businesses suing governmental entities in recent years if their marijuana-related business activity is denied by local municipalities or the federal government.
Other insurance coverage may be needed
U.S. business owners in the marijuana industry may need to consider other types of insurance products to reduce their liabilities. Directors & Officers (D&O) Insurance may be recommended to businesses such as dispensaries, testing facilities and manufacturers to further protect owners and officers from mismanagement, Deneen said.
“Many large cannabis companies have a dedicated compliance officer or department but even they can have a hard time keeping up with all the changes in laws at state and local levels, especially in new markets” Deneen said. “Any professionals investing time and money in such an evolving industry should consider additional personal protections.”
Companies operating in the industry may also need Cyber & Privacy Liability Insurance, Deneen said. For example, dispensaries may have patient information in their records, but as of now they are not governed by HIPAA laws in the U.S. and may not have an experienced IT department knowledgeable about data protection.
A Pollution Liability policy may be recommended for manufacturers and growers since it cover liabilities related to discharge of pollutants, including odors emitted into the atmosphere.
In addition to Product Recall Insurance, Clarke recommends that Canadian freight companies consider Cargo Insurance if they are transporting cannabis products. Cyber & Privacy Liability Insurance should also be considered in Canada. Even Kidnap and Ransom Insurance may be needed if there is a risk to employees handling large amounts of products domestically or internationally.
A closer look at costs
The costs of Michigan mandated Cannabis insurance policies will range on average from $1,000 to $5,000 per $100,000 of coverage, Delaney said. As more legal precedents are set by marijuana-related court cases, dispensaries and testing centers may have higher premiums because of a higher risk profile.
One example of this risk is the case of a manufacturer and dispensary in Colorado sued in 2016 for making and selling marijuana-infused edibles by the family of a man accused of killing his wife. The husband, Richard Kirk, was eventually sentenced to 30 years in prison.
Delaney believes that a dispensary earning roughly $1 million in revenue may pay between $8,500 and $10,000 per year between GL and State mandated Cannabis Insurance covering bodily injuries. Under some policies, General Liability coverages may pay for the majority of claims, but each business will be faced with different options depending on what they do and where they operate. Additional policies such as D&O and Cyber & Privacy Liability will cost extra.
“You really want to make sure you work with an insurance broker or agent who knows the industry and can walk you through the options,” Delaney said.
Clarke did not want to speculate on costs of General Liability policies available in the Canadian market, because the market is likely to fluctuate quickly as recreational use expands.
“Time will tell how costs will be impacted because once it’s legal everything will change,” Clarke said. “Every business may think it will make millions of dollars operating in this industry, but there is only so much cannabis that will be consumed. So it may take time for the market to flush out.”
As with any coverage need, an insurance broker or agent must be consulted. Click here to forward this article to your insurance broker or agent to ask if you need this coverage, or share this with clients to start the conversation and ensure proper protection.
This information was provided by Burns & Wilcox, North America’s leading wholesale insurance broker and underwriting manager. Burns & Wilcox works exclusively with retail insurance brokers and agents to assist clients like you with their specialty insurance needs. Ask your insurance broker or agent to review your Commercial General Liability (CGL) and Cannabis Insurance policies to ensure you have proper protection.