SOME OF the biggest risks that make cannabis operations hard to ensure are fire, theft and product liability, according to panelists on a recent webinar hosted by Insurance Journal.
The industry experts emphasized the importance of businesses understanding their policies and ensuring that they comply with the special safeguards they require policyholders have in place.
Cannabis businesses faces risks that are unique to the industry, and they need to take unique safeguards and precautions to reduce the likelihood of a claim.
Here’s a look at three risks that the industry has to contend with and how that affects underwriting.
Product liability
There are two main product liability issues that the panelists discussed: those concerning Delta 8 and THC-infused beverages.
Sales of products such as edibles and drinks that contain Delta 8 are the strongest in states that do not have recreational or medical cannabis laws on the books and hence where marijuana is illegal.
There are concerns about the safety of these products, which are unregulated, that can make insurers skittish about covering the companies that make and sell them.
“From a product liability underwriting standpoint, [Delta 8 products are] more difficult,” said Mike Kirk, underwriter for Cannasure, a division of Boston-based One80 Intermediaries. “You don’t have the regular state regulations like you would have on THC products and you’re not sure what’s going into the product”
Meanwhile, THC beverages have taken off, but one of the biggest challenges with them is that some are extremely potent, which could set a manufacturer and even the selling retailer up for a product liability lawsuit if someone gets sick from using the product.
While most THC beverages have 2.5 or 5mg of THC, some have 10 and a few have 100mg.
Someone drinking an entire can of the latter could be in for a medical emergency.
Theft
Since cannabis businesses often handle large amounts of cash, they are targets for theft. But getting a claim paid after an incident can turn problematic if the policyholder didn’t abide by the policy contract requiring certain protective safeguards.
Beth Ossino, vice president and casualty claims manager for Golden Bear Insurance Company, said some cannabis operation owners will attest in their application that they have the safeguards the policy requires and then it turns out they didn’t after they file a theft claim, which could invalidate the policy and the insurer rejecting the claim.
Insurers will typically require cannabis operators to have strong safety and security protocols in place,, said Michael DeNault, cannabis practice leader for World Insurance Associates.
Protocols insurers may require
- Using armored cars to transport bank deposits.
- Hiring security services for the facility.
- Storing cash in a sturdy safe.
- Having a wired alarm system.
- Having sprinklers.
- Installing bollards in front of entrances to deter cars from ramming them.
Fire risk
Fire risk is typically unique to growing operations, and underwriters prefer that growers use LED rather than incandescent bulbs, which can overheat and start a fire, said Cannasure’s Kirk: “If we are insuring a grower, they have to be 100% LED or fully sprinkled. Otherwise, they won’t be covered … our reinsurers won’t be on board.”
But even LED-based systems also have a risk: the drivers of those LEDs, which can get hot when on for long periods of time.
One way to get around this is to design a system that uses a driverless setup or to place the driver outside the grow room, he said.
Another fire prevention and mitigation protocol is ensuring proper ventilation. Kirk said that grow rooms should be individually ventilated so that if there is a fire in one room, the flames and smoke won’t spread to other rooms.
“When underwriting, we really look for rooms that are individually ventilated and use LEDs,” he said.
The takeaway
One of the keys to cannabis businesses succeeding is to provide as much information as possible when applying for coverage.
Said Kirk: “Information is everything on the application. The more you can give will help the application move to the top of my stack.
Send me photos of the interior and exterior of the facility. Provide a narrative. Tell me about the business and the safeguards you have in place.”
Also, make sure that you understand all the caveats and what’s required of you, such as having an alarm system and other safeguards.