LEASING SPACE to a cannabis business can be lucrative for commercial landlords. Dispensaries, cultivation operations and cannabis manufacturers often seek retail storefronts, warehouses or industrial space and may be willing to pay premium rents.
But property owners who rent to these businesses should understand that doing so can introduce unique insurance, financing and liability challenges.
The primary issue stems from the legal conflict between state and federal law. While many states allow medical or recreational marijuana sales, cannabis remains illegal under federal law and is classified as a Schedule 1 controlled substance. Because of that classification, many traditional insurance carriers are reluctant to insure properties that house cannabis operations.
Why insurers view cannabis tenants as higher risk
Cannabis businesses present several risks that traditional insurers consider outside the norm for typical retail or industrial tenants.
First, many cannabis businesses are cash-intensive due to banking limitations. Because marijuana remains illegal federally, many banks are reluctant to serve the industry. As a result, dispensaries often operate with significant amounts of cash on-site, increasing the risk of theft, robbery and burglary.
Second, growing operations have elevated property hazards.
Cultivation facilities often use high-intensity lighting systems, irrigation equipment and specialized HVAC systems that increase electrical load and humidity levels, raising the risk of fire, mold or water damage.
Third, manufacturing operations that extract cannabis oils use volatile solvents and specialized extraction machines, which increases the risk of explosion or fire.
This distinction between cannabis activities is important from an insurance standpoint. A retail dispensary primarily presents a theft exposure, while a manufacturing operation using solvents introduces increased fire and explosion risks.
Pitfalls to watch for
- Limited insurance options. Many standard carriers will not insure properties leased to cannabis operators.
- Higher premiums. Properties with cannabis tenants may face higher insurance costs due to theft and fire risks.
- Coverage exclusions. Standard commercial general liability policies often contain cannabis exclusions that limit protection.
- Policy cancellation risk. Insurers may cancel coverage if they discover a cannabis tenant that was not disclosed.
- Security requirements. Policies may require strict safeguards such as vault storage, alarms and surveillance systems.
Landlords sometimes assume that if a tenant complies with state cannabis regulations, insurance coverage will automatically follow. In reality, insurance policy requirements often go beyond state regulations and must be reviewed carefully.
Steps landlords can take to manage risks
Commercial landlords considering cannabis tenants should take several steps before signing a lease or renewing their insurance.
- Call us to review your policy. We can help determine whether cannabis-related tenants are excluded from coverage. If your current policy bars tenants in the cannabis sector, we can work with you to find other insurance solutions.
- Require strong tenant insurance. Tenants should carry general liability, product liability and property coverage and name the landlord as an additional insured.
- Consider triple-net leases. These leases allow landlords to pass insurance and other costs to the tenant.
- Confirm lender requirements. Some mortgages prohibit leasing to cannabis businesses.
Alternative markets
If we can’t find an insurer that is licensed in our state, we can go to the non-admitted market to find a carrier. These surprise lines insurers offer policies designed specifically for property owners leasing to cannabis businesses and typically address those risks. Policies may:
- Cover buildings leased to dispensaries, cultivators or manufacturers
- Address higher theft exposure associated with cash-heavy operations
- Include coverage for fire risks related to cultivation lighting or extraction equipment
- Provide liability protection for the landlord if a claim arises from a tenant’s operations
- Incorporate strict security and storage requirements to reduce loss exposure