First Cannabis Business Owners Policy approved in California

California Insurance Commissioner Dave Jones announced Monday that he has approved the first Cannabis Business Owners Policy (CannaBOP) in the State of California. The American Association of Insurance Services (AAIS) designed the new CannaBOP program for cannabis dispensaries, storage facilities, processors, manufacturers, distributors and other cannabis-related businesses operating in the state.

“Cannabis businesses need insurance coverage to help them recover when something goes wrong just as any other legalized business does,” said Commissioner Jones in a statement announcing the policy. “This first-of-its-kind Cannabis Business Owners Policy or CannaBOP program will make it easier for more insurers to enter the market and fill coverage gaps for cannabis businesses. I encourage insurers to take advantage of this new standardized CannaBOP program to file more cannabis insurance products with the department to meet the needs of this emerging market.”

Earlier this year, the California Department of Insurance (DOI) approved insurance coverage for commercial property owners leasing to the cannabis industry. According to the DOI, specific commercial activities and businesses addressed by this coverage include cannabis labs, product manufacturing, cultivation, and dispensary operations.

The California specific business owners policy (BOP) program for the cannabis industry from AAIS includes forms, rules, and rating information, much of which is similar to the standard AAIS BOP. It provides a package policy with both property and liability coverage for qualifying California cannabis dispensaries, storage facilities, distributors, processors, manufacturers and other businesses participating in or supporting the California cannabis industry.

Related: Marijuana and insurance policy disputes

Important definitions

The CannaBOP (AAIS CB 0204 03 18) provides the following definitions for “cannabis” and related topics.

• Cannabis is given a very broad definition, and includes all parts of the cannabis sativa plant, growing or not, even if it has been processed into any sort of compounds, concentrates, derivatives or other preparations, edibles, topical products or other consumable or disposable items. Not included as “cannabis” are mature stalks and fiber produced from such stalks, oil or cake made from the seeds, compounds, mixtures or derivatives made from the stalks, oils or cakes just referenced, or sterilized seeds that are unable to germinate.
• Cannabis accessories are equipment, products or materials used, intended, or designed for use in “cannabis activities” or ingesting, inhaling, smoking or any other method of consuming “cannabis” in any form or quantity.
• Cannabis activities are defined as commercial activity regulated by California that is in any was related to “cannabis.” The policy clearly is for those in the growing, processing, or selling business, Activities include but are not limited to cultivation, delivery, transportation, distribution, labeling, packaging, testing, manufacturing, processing, possession, sale and storage in any form or quantity.

Related: When marijuana collides with the claims industry

Property definitions

For purposes of the CannaBOP policy, a “dependent location” is one within the “basic territory” operated by others that the insured relies on as a contributing, recipient, leader, or manufacturing location. Leader locations are those that attract customers to the business. If the insured is growing cannabis, a dependent location is the operation the insured sends the cannabis to in order to be processed.

The term “secondary dependent location” is specific to the CannaBOP policy. This is a location within the “basic territory” that is not owned or operated by a “dependent location” that supplies services or materials to the “dependent location” that are used by that location in supplying services to the insured, or that receives products from a “dependent location” that receives the insured’s products.

Example: The insured is a cannabis dispensary. It receives processed cannabis from Paul’s Perfect Processing. Paul’s Perfect Processing receives fresh cannabis to process from Holly’s Happy Farms. Holly’s Happy Farms is a secondary dependent location, and Paul’s Perfect Processing is a dependent location.

Not included as “secondary dependent locations” are airfields, bridges, pipelines, roads, tunnels, waterways or any other similar structure. Locations that supply water, wastewater removal, communication or power supply are not “secondary dependent locations.”

Related: First surety bond program for cannabis industry approved in California

Property not covered

The policy is designed to provide coverage for cannabis operations, but there is an exclusion. There is no coverage if the origin and chain of custody of the cannabis is not traceable using a cannabis activity tracking (CAT) system or similar system that is compliant with all California laws, rules and ordinances for tracking and tracing cannabis systems.

Also excluded is cannabis that has ever been subject to “cannabis activities” without a valid license to engage in such activities or in violation of any state or local law, rule, ordinance or regulation, by an individual or entity other than a government entity, or that has been combined with another substance other than “cannabis” that is prohibited by the Federal Food and Drug Administration (FDA) or is prohibited by any state rules.

This policy does not cover controlled substances, contraband or property in the course of illegal trade or transport. However, the exclusion does not apply to “cannabis” or “cannabis accessories” that have not been combined with other controlled substances and that the insured possesses, transfers or trades exclusively within California, in the regular course of “business,” in compliance with all applicable laws, rules, regulations and ordinances of the state of California and the insured’s local jurisdiction where the business operates.

The CannaBOP policy also has an exclusion for digital or virtual currency. Because cannabis is still federally illegal, many banks are wary of accepting cash from businesses, making the use of bitcoins and other virtual currency attractive. The policy excludes digital or virtual currencies, including cryptocurrencies and digital tokens.

Related: Most small business owners feel they don’t have adequate insurance

The CannaBOP policy has several nuances specifically related to the cannabis industry that are different from a traditional BOP policy. Insurance agents and brokers with clients in California that are in the cannabis business — or that are exploring the possibility — should obtain a copy of the AAIS policy as soon as possible to become familiar with its terms, coverage and exclusions.

Related: 10 most common agribusiness insurance claims

Christine G. Barlow, CPCU, (cbarlow@alm.com) is an editor with FC&S Online, the authority on insurance coverage interpretation and analysis for the P&C industry. It is the resource agents, brokers, risk managers, underwriters, and adjusters rely on to research commercial and personal lines coverage issues.