Marijuana Insurance Rapidly Evolving in North America

The Canadian federal government is expected to legalize the recreational use of marijuana as early as this summer. The number of client registrations for medical marijuana in Canada reached nearly 270,000 by the end of 2017.

In the U.S., marijuana remains illegal at the federal level, but 29 states and the District of Columbia have legalized the use of medical marijuana and nine states and the District of Columbia allow recreational use.

The growth of businesses involved in the cannabis industry points to an increasing need for growers and retailers or dispensaries in each country to have the type of insurance they need to protect against an unforeseen liability that could threaten the existence of the business itself. Liability policies to protect property and products should be in place, while additional policies covering Directors & Officers (D&O) may be recommended.

The marijuana industry is highly regulated in both Canada and the U.S., with each country offering their own set of regulations.

Stark differences in the U.S. market

Even though the U.S. market is largely tied to medical marijuana, both the medical and recreational use markets are expected to grow as state laws evolve. The U.S. legal cannabis industry is on track to hit $25 billion by 2025, according to the latest forecast from cannabis analytics firm New Frontier Data, published in April. The data included revised industry sales projections, predicting that the $8.3 billion U.S. medical and recreational marijuana industry will grow at a compound annual growth rate of 14.7 percent.

“While insurance is available for cannabis growers and dispensaries, the lack of legislation at the federal level has resulted in few carriers that offer such policies,” said John Deneen, Underwriter, Burns & Wilcox, Denver, Colo.

Yet the concern over the federal government cracking down on companies in the cannabis industry is mitigated by the fact that there have been virtually no efforts by federal representatives to act on the federal law. Perhaps the bigger concern in the U.S. has been that carriers may not honor a claim on the grounds of the activity being federally illegal, though that should not be a deterrent for companies getting policies.

“Cannabis companies are investing heavily to get up and running and ought to protect those investments,” Deneen said. “A business owner needs to look at how much of a loss they are able to sustain and keep the business going. Most operators in this industry have a high tolerance for risk but they still need to take a realistic look at their ability to remain in business following a property loss or liability claim.”

Generally speaking, in the U.S. market, growers or retailers in the marijuana industry should consider Premises and Product Liability policies grouped together, Deneen said. Premises Liability covers the ongoing operations of dispensaries, grow operations, and extraction facilities while Product Liability protects against bodily injury or property damage caused by the products themselves. It is important to note that few dispensaries in the U.S. can allow cannabis products be consumed onsite.

“Cannabis companies are investing heavily to get up and running and ought to protect those investments.” – John Deneen, Burns & Wilcox

Property coverage can protect a business’s equipment, building, loss of income and more. Additional coverage is available for finished products and crops, although the cost of crop insurance is prohibitive for most businesses, Deneen said. A frequently overlooked exposure is Pollution Liability which can result from the use of pesticides and other chemicals in the production process, as well as the smell emanating from production facilities.

While only a few carriers offer insurance policies for businesses in the cannabis industry, the costs of such insurance in some markets is becoming more affordable as those few carriers are competing fiercely to write coverage for the growing industry.

“Overall prices have been going down even though competition is relatively limited,” Deneen said. “The market is changing rapidly and there’s not a lot of precedent in terms of claims.”

How legalized recreational use would affect Canada

Based on the expectation of a Canadian federal law legalizing recreational adult use of cannabis, both regulations and investments in the industry are rising. As a result, growers, retailers and other businesses in Canada that have catered to the legal medical marijuana activity are wondering what is next.

This legislation, and the liability associated with it, is expected to impact large and small commercial cannabis growers as well as retail storefronts (dispensaries). Distribution of marijuana items is regulated by the provinces, based off the federal guidelines around the legal use of the substance.

“Right now the market here in Canada, for cannabis-related insurance, is in flux,” said Paul Clarke, National Underwriting Director, Burns & Wilcox Canada, Toronto, Ont. “In fact, the way policies are written may change from month-to-month, and the types of policies made available by insurance carriers evolve regularly as well. Coverage not available six months ago may be available now.”

Clarke said the potential for growth in companies that service the market in Canada is extensive depending on whether recreational use becomes legal. Another expectation is that the development of commercial growers in Canada may push some of the micro cultivators, or smaller, niche growers out of the marketplace. Commercial growers should have Commercial Property and General Liability coverage to cover a wide range of potential liabilities and building costs associated with costly equipment or structural issues that may arise. Commercial Property policies can cover business interruption, stock and biological assets, co-insurance, equipment breakdown and more. D&O coverage should also be in place to protect executive team members for any personal liabilities.

The ongoing market dynamics also mean that new products will be developed as demand arises, Clarke said. Ontario, because of the way it distributes and regulates provincially, has made it mandatory for all licensed producers to carry a minimum $15 million limit in Product Recall insurance, Clarke added.

“The way policies are written may change from month-to-month, and the types of policies made available by insurance carriers evolve regularly as well. Coverage not available six months ago may be available now.” – Paul Clarke, Burns & Wilcox Canada.

“As the industry continues to evolve, we will most likely see other provinces possibly impose the same mandatory provisions for insurance requirements,” Clarke said.

Retail outlets or dispensaries require an operating license and Commercial Property insurance that includes much of the coverage available to growers, which also includes crime liability, business interruption, medical marijuana supplemental coverage and more. A high level of security is required, including a monitored security alarm with a certificate required by the government. Limits are typically available up to $15 million for dispensaries.

“We anticipate that more products will be coming to the market and we see our role as providing brokers and clients with the education they need to make smart decisions to make sure they don’t have an unfunded liability,” Clarke said.

With more use may come the need for higher liability for those companies that service the cannabis market in Canada. “A lot of investment is happening right now in Canada,” Clarke said. “The costs of this insurance will vary depending on the scale of operations and many other factors. The market is drastically different from what it is in the U.S.”

Insurance is still valuable for businesses in the industry

Stillwater Brands is a Colorado-based provider of marijuana products such as dissolvable THC and CBD, and cannabinoid infused teas and coffees. Chief Operating Officer, Jeremy Goldstein, said that the various insurance products they carry, from General Liability and Product Liability insurance, are needed to protect against costly liabilities that could occur. Stillwater also has a D&O policy.

“We have multiple entities to insure and as we grow, our company’s needs and costs continue to trend higher,” Goldstein said.

“It’s a tough operating environment. There still aren’t a lot of (insurance) choices out there. It is a myth, though, that you can’t get insured in this industry.”

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 if Cannabis Insurance is right for you.