On August 19, CannTrust Holdings Inc. announced that the Ontario Cannabis Store (OCS) was returning its entire $2.2 million inventory of CannTrust products. The return is in response to the suspension of CannTrust’s sales and shipments last month, after a Health Canada inspection revealed the company had grown plants in several unlicensed greenhouses.
Prior to the return, CannTrust announced the termination of its CEO on July 25; two weeks later Health Canada notified the company of several regulatory violations found at a second facility. The company’s market value fell by more than $380 million and on August 19 a class-action lawsuit against the company on behalf of shareholders was announced.
The most scrupulous and best-intentioned companies can still face challenges achieving regulatory compliance and quality control. “Even companies that are compliant with regulations can be subject to a government recall,” said Jay Virdi, Manager, Specialty Risks, Burns & Wilcox Canada, Toronto, Ontario. The most substantial expenses for a company impacted by a government recall typically are not the loss of the recalled product, but the expense of recalling it, Virdi explained.
Product Recall coverage, as part of a Cannabis Insurance policy, can help a company survive and mitigate the cost of business interruption and brand rehabilitation in the wake of a recall. “The brand damage a company suffers because of a product recall has the greatest negative impact on its balance sheet.”
Indeed, 75 percent of the almost five million Canadians who consume cannabis cited product quality and safety as important considerations, according to the Q2 2019 National Cannabis Survey from Statistics Canada. Price was a main consideration for only 42 percent, the survey reported.
Cannabis: a risky business
In addition to regulatory compliance challenges there is a vast array of known—and significant—risks involved in growing, manufacturing and selling cannabis and cannabis products like edibles and concentrates.
The greatest risk is inherent in the industry. Although cannabis is legal for medical or recreational use in 33 U.S. states, the District of Columbia and Canada, it remains illegal at the federal level in the U.S., classified as a Schedule 1 substance under the Controlled Substances Act of 1970. The 33-state figure does not include states that have legalized only those cannabis products with less than 0.3 percent tetrahydrocannabinol (THC), such as hemp and products that contain cannabinoid (CBD).
Because the industry operates within this unique legal gray area, officers, directors and investors in cannabis-sector businesses could still potentially be charged with committing crimes under federal law, irrespective of state law. For this reason, Directors & Officers (D&O) Insurance is often critical for businesses to attract and retain top talent.
“Even companies that are compliant with regulations can be subject to a government recall.” – Jay Virdi, Burns & Wilcox Canada
The other risks and exposures for a cannabis-sector business vary from state to state based on the regulatory model of the state, said John Deneen, Commercial Underwriter, Burns & Wilcox, Denver, Colorado. “Some states have special regulations and licensing for edibles and concentrates—the more processed cannabis products—and then dispensaries have a separate set of standards and licensing. Other states are more vertically integrated, where the same entity is growing, processing, manufacturing and selling their own product.”
Cannabis growers must manage the potential exposures of contamination of their product from pesticides or mold, as well as the dangers posed to their crops by equipment failure, fire or weather events. “Grow operators typically put hundreds of thousands or millions of dollars into their facilities, including the specialized grow lights and HVAC systems that they use,” said Deneen. Cannabis Insurance policies with Commercial Property coverage help the insured replace or repair damaged equipment or buildings.
Cyber and Privacy Liability Insurance can also assist dispensaries and other cannabis-sector businesses, which are favored targets of cybercriminals, in securing their clients’ or patients’ personal data as well as their own records. Cyber and Privacy Liability Insurance also helps mitigate exposures that are unique to cannabis-sector businesses, said Deneen. In order to help combat the cannabis black market, for example, most states require that dispensaries maintain detailed records of the chain of custody from legal growers for all of their stock in order to sell it.
“There have been instances in California of dispensaries not being able to sell and having to destroy their product because they cannot prove that it came from legitimate sources,” Deneen said.
Products Liability coverage is an integral component of Cannabis Insurance, explained Virdi, as it helps the insured cover legal and other expenses associated with bodily injury or property damage caused by its products.
Edibles are a particular liability concern for companies that produce them, because they are relatively new to many consumers and the effects can be delayed by up to two hours after they are consumed, leading the inexperienced user to consume more and risk psychological and physical effects of overconsumption.
The cash-only nature of conducting business in the cannabis sector, as well as the proximity of states where the use and sale of cannabis is legal to states where it is not, leaves businesses vulnerable to armed robbery and theft. For an industry that is predicted to reap from $75 billion to $100 billion-plus in the U.S. and $5 billion to $10 billion in Canada over the next two decades, the lack of access to reliable, secure banking represents a significant threat.
A comprehensive Cannabis Insurance policy includes Workers Compensation, Auto, Cargo and Stock coverage and can help mitigate the risks associated with criminal activity and accidents that may happen while growing or transporting cannabis.
“From an insurance perspective, we provide solutions from seed to sale,” said Virdi.
Protect assets with reliable, experienced partners
The cannabis sector involves a number of factors that warrant protection.
The black market for cannabis still poses stiff competition for legitimate businesses as well as a theft threat from criminal enterprises; the legitimate cannabis provider marketplace has itself become crowded; reliable supply chains and partnerships are still evolving; banking and transactions in the U.S. remain restricted to cash only; and federal, provincial and state regulations for the sale, growth and production of cannabis and cannabis-containing products vary and sometimes conflict with one another.
“It is important for a business owner in the cannabis industry to understand that they are taking on a certain amount of risk and it is recommended to focus their insurance strategy on protecting themselves against those risks that are going to be most detrimental to their ability to operate going forward.” – John Deneen, Burns & Wilcox
Given this landscape of risk, legal and regulatory uncertainty and rapid industry evolution, companies have the best odds of long-term success if they employ sound business practices, act with the highest level of integrity and transparency, partner with reputable, established third-party vendors and implement the highest levels of quality assurance controls, Virdi emphasized.
Investing in the guidance and support of insurance brokers and agents experienced in serving the cannabis industry is another essential component to an enterprise’s success, according to Deneen.
“I think the best thing a business owner can do is to look at the terms and conditions of a Cannabis Insurance policy or group of Commercial Property or Commercial General Liability (CGL) policies, instead of just focusing on the price or the limits,” said Deneen. Just because a Commercial Property policy has a high limit does not mean that it offers broad coverage or coverage in the most critical areas, he explained.
“It is important for a business owner in the cannabis industry to understand that they are taking on a certain amount of risk and it is recommended to focus their insurance strategy on protecting themselves against those risks that are going to be most detrimental to their ability to operate going forward.”
Brokers and agents well-versed and experienced in providing clients with Cannabis Insurance, Deneen said, are familiar with the cannabis industry and the laws and regulations that govern it, including the latest changes and developments.
“It is critical to work with a broker or agent who will get to know a client’s needs and help them craft a policy or group of policies that will work to provide them with the coverage that they need rather than use a one-size-fits-all approach,” he added.
This information was provided by Burns & Wilcox, North America’s leading wholesale insurance broker and underwriting manager.