In this rapidly growing industry, the right insurance policies can protect cannabis businesses from a variety of financial risks. Without an effective risk management solution, a business could suffer financial ruin when things go wrong. Here are 7 things to know about cannabis insurance.
1. Limited Supply of Cannabis Insurance Companies
One of the biggest issues in the cannabis industry is the lack of comprehensive insurance options. Many insurers are not willing to take the risk of working with federally illegal cannabis businesses. As a result, businesses are limited to opting for generic policies that do not meet all of their needs.
A study by New Dawn Risk found that in the entire industry, only six insurers offer cannabis coverage. As a result, companies must pay higher premiums, between 20 and 30% more than traditional industries. Major insurers like Progressive Corp, Farmers Insurance, Liberty Mutual, and AXA SA offer limited coverage.
A lack of cannabis cargo insurance, for instance, in cannabis transportation insurance can add on additional operational costs. Companies may be forced to split their shipments to reduce the risk of complete loss or match their coverage.
2. Cash-Only Industry
Since cannabis is a federally scheduled controlled substance, financial institutions do not commonly work with cannabis companies due to the fear of criminal prosecution. A small number of banks and credit unions have attempted to satisfy the high demand.
However, much of the industry operates on a cash-only basis. Due to the greater security threat faced with cash-only operations, insurers are hesitant to provide proper protection to cannabis businesses that are at high risk for theft.
Cannabis companies should ensure that assault and battery are included in their coverage due to the high risk of crime affecting the industry. Having a strong risk management program that includes armed security, armed car service for transporting products, and surveillance cameras can reduce premium rates and ensure companies get better coverage.
3. Hemp Insurance Availability Is Increasing
The 2018 Farm Bill legalized the cultivation of hemp as long as it contains less than 0.3% THC. Since Hemp and CBD are newly legal markets, they are covered separately from cannabis coverage.
At the moment, insurance placements are found mainly in the excess and surplus (E&S) market that serves customers who cannot get coverage on the standard markets.
In addition, producers can get crop insurance through the US Department of Agriculture on top of their private insurance policies. Hemp insurance options in the standard market and in farm liability packages are slowly but surely increasing.
4. Faulty Vape Products Limit Coverage
All segments of the supply chain, whether it is a producer or a retailer, may face exposure from faulty vape products that results in an injury or are improperly labeled. Cannabis processors that extract oil from biomass can face litigation if a claim happens.
Exploding batteries in vape pens from a handful of Chinese battery manufacturers have resulted in fatalities. Insurance carriers do not cover operations that use vape pens from these manufacturers. For this reason, it is important for businesses to source quality products to reduce business risk and protect consumers.
Many insurance companies are still hesitant to cover vape products or charge high rates for this coverage. 2019’s spate of vaping-related respiratory illnesses has only worsened the insurance coverage issue in this space.
5. Insurers Have Difficulties Setting Premiums
One of the major challenges for insurance underwriters in this industry is that there is not a lot of actuary data to develop a good estimate. Since the industry is new and many companies have no cannabis business insurance, underwriters do not have the actuary data or loss history to accurately price their coverage and cover their consumers.
6. Cannabis Insurance Requirements Vary By State
State regulations regarding cannabis business insurance are different between each state. Some states do not have insurance requirements while others do. Cannabis businesses must check the state regulations where they do business to ensure they obtain the necessary insurance.
For example, Massachusetts states that certain cannabis companies should “obtain and maintain general liability insurance coverage for no less than $1 million per occurrence and $2 million in aggregate, annually, and product liability insurance coverage for no less than $1 million per occurrence and $2 million in aggregate, annually…”
7. Insurers Are Preparing for Federal Legalization
Cannabis insurance carriers are preparing behind the scenes for an exponential increase in cannabis sales as federal legalization looms close. In 2020, the cannabis insurance industry wrote about $250 million in policies.
Cannabis legalization is on the fast track in Congress with Majority Leader Chuck Schumer proposing a comprehensive draft bill to legalize cannabis. In addition, Congress has passed numerous bipartisan bills that offer cannabis banking and criminal justice reform.
Congress’ slim Democratic majority in the Senate and the broad nature of the bill compared to incremental reform proposed in others can work against the passage of the bill. While the future of these bills may not be certain, insurers are still optimistic about the future of the industry.
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