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Guest Blog: Insurance Challenges for Cannabis Businesses

As the cannabis industry grows and business challenges proliferate, there are a variety of legal issues that are increasingly of interest to cannabis operators. Evoke Law specializes in trademark protection and brand licensing for the cannabis industry, and also offers a wide range of consumer protection legal services, including packaging and labeling compliance, recall plans, and counseling to avoid making impermissible product health claims. We also leverage our extensive network of diverse legal specialists to offer our clients information and resources that will bring additional overall value.

Our first Guest Blog is by Jason Horst, Esq., Principle at Horst Counsel, on the topic of insurance.

Cannabis companies keep hearing that they need to “cover up.” However, California’s regulations only require those holding distributor licenses to carry general liability insurance, and those regulations do not require non-distributor licensees to carry any liability insurance at all.  Nevertheless, many California cannabis operators are finding themselves subject to other requirements that they carry liability insurance. For example, some local jurisdictions have begun establishing their own insurance requirements. In November 2017, Los Angeles rolled out an ordinance requiring that every permitted cannabis operator in the City carry products liability insurance. Complying with these cannabis insurance requirements is both trickier and more fraught than it might appear, so it is critical for operators to be diligent on multiple levels.

When it comes to local cannabis insurance provisions, it is important to understand that these requirements tend to vary significantly from jurisdiction to jurisdiction. Los Angeles requires all operators to carry products liability insurance, while Long Beach requires public liability insurance. The City of Coalinga has gone so far as to publish two full pages of insurance requirements, including a mandate that the city be added as an “additional insured” through specific insurance forms on a policy issued by a state-admitted insurance carrier. Because of these differences, cannabis businesses must carefully scrutinize their local regulations to ensure that they purchase compliant insurance. It would be tragic for a business to master seed-to-sale tracking systems, point of sale banking solutions, and complicated packaging requirements, only to put its license and business in jeopardy by purchasing the wrong insurance policy.

Making things even more complicated, insurance markets for the cannabis industry are still in its infancy, and the fact that cannabis remains a controlled substance under federal law has kept most insurance carriers out of the market entirely. This is especially true for “plant-touching” lines of coverage such as general liability, products liability, and property insurance. Accessibility to—and quality of—these insurance products unfortunately lag well behind comparable industries.

The absence of a robust cannabis insurance market affects the process of complying with local insurance requirements in important ways. For starters, it can make compliance literally impossible. There is currently only one admitted insurance carrier in the State of California offering liability insurance to cannabis companies. That insurer offers coverage only to dispensaries, cultivators, and manufacturers. This means that distributors cannot adhere to a requirement like the City of Coalinga’s that all operators carry liability coverage from an admitted insurer. Operators who find themselves in this position are better served by educating their regulators and seeking exemptions, rather than just obtaining a non-compliant policy and hoping for the best.

Indeed, even if operators can comply with a local requirement to purchase coverage through admitted insurers, they would still be well-served to educate their regulators as to why the insurance requirement is ill-advised, at least when it comes to products liability. The only admitted products liability policy available for cannabis businesses excludes coverage for (1) any bodily injuries or property damage allegedly caused by cannabis impairment or pesticides, (2) any violation of Proposition 65, and (3) any illness or disease whatsoever. With all these exclusions, virtually no claims for products liability that would realistically be made against cannabis companies would be covered under the policy.

Finally, and perhaps most critically, standard insurance policies are not intended to cover cannabis operations, and contain provisions that expressly bar such coverage (i.e., through controlled substances exclusions). So, while cannabis-specific policies are more expensive and potentially harder to find, operators should always purchase insurance specifically tailored to the cannabis industry, ideally through a broker with experience writing such policies.

Jason Horst offers a range of risk management and litigation services to clients in and servicing the cannabis industry, including counseling related to insurance placement, risk transfer strategies, and preparing insurance specifications. Jason chairs the Insurance Working Group for the National Cannabis Bar Association and is a member of the California Cannabis Industry Association’s Insurance Committee and a member of the National Cannabis Bar Association’s Finance and Insurance Subcommittee.  

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