Gram shop liabilities are creating new coverage risks — Part 2
The maturing cannabis market presents new business opportunities as consumption lounges open, as well as unique risk management challenges.
Editor’s Note: Part one of this two-part series explained the rise of cannabis consumption lounges and discussed some of the similarities and risks of dram shop entities.
As discussed in part one of this series, dram shop laws are generally credited for the widespread adoption of responsible beverage service training and other standards. The challenge for gram shops or consumption lounges is that determining impairment can be more difficult as authorities grapple with how to accurately measure subjective cannabis impairment and the impact of mixed cannabis-alcohol impairment.
Gram shop liability
Although Nevada has recently included the same civil liability protections that shield bars and restaurants in the state’s regulations for cannabis consumption lounges, the general trend appears to be going in the other direction. Michigan, for example, recently amended its regulations to expressly allow individuals who are injured or who suffer damage by a minor or visibly intoxicated person to take action against the licensee who sold or transferred the marijuana. The liability landscape is therefore a critical consideration when determining the risk profile for any particular on-site cannabis consumption facility.
Consider this scenario: 25-year-old Katie meets her friends at a restaurant in West Hollywood where she has two drinks with dinner, followed by two more drinks at a nearby bar. The friends then visit a licensed cannabis consumption lounge where Katie consumes two 10 mg edible products. The group finishes the evening at a nearby nightclub where Katie has another three drinks before deciding to drive home. On the way home, Katie strikes and kills a pedestrian. In this scenario, the restaurant, bar and nightclub are all immune from liability under California’s dram shop statute, but the cannabis consumption lounge is not. The attorney for the deceased pedestrian’s family has an easy choice to make; he sues Katie and the cannabis consumption lounge, which he considers the party with “deep pockets.”
The chance of successfully defending the cannabis consumption lounge under these facts is far from clear because the law is not developed. How courts will address questions of liability and apportionment in cannabis consumption cases will mature and diverge across jurisdictions.
Imposition of civil liability may depend on consideration of which type of plaintiff can recover from those furnishing cannabis, how the liability should be apportioned between the licensed vendor and the customer causing the loss, and whether there is any need to protect vendors that provide cannabis to consumers.
Some argue that, like a bartender, those providing service to on-site consumers have no legal duty to correct a potentially dangerous situation and should face liability only if they aggravate the situation by providing more cannabis to an obviously impaired patron. Using the “reasonable person” standard could permit a case-by-case assessment of whether the vendor should have denied service based on knowledge that the customer posed a risk. This approach is likely to be affected by local views on consumption until the adoption of a recognized standard or through appellate court decisions.
Protecting against potential loss for gram shop liability
Given the uncertain risk environment for on-site cannabis consumption, those who seek to obtain a license should implement a risk management strategy that incorporates insurance protections and an affirmative program to mitigate risk through procedures and training.
Liability insurance for on-site cannabis consumption
Regardless of the type of case brought, litigation is expensive. One study by the Small Business Administration (SBA) found that an average civil case can cost $50,000 to $100,000 to get through trial. Without insurance, the amount of money involved could force a business to convert assets, incur debt or even close its doors.
The availability of liability insurance for on-site cannabis consumption remains limited. Policies that do exist are modeled after liquor liability insurance, sometimes called host liquor liability insurance, for those who provide or permit alcohol consumption but do not sell it. Licensees are therefore well advised to work with an experienced insurance broker who understands the cannabis insurance market.
Standards and training
Similar to how other licensed cannabis operations have matured, on-site consumption activity must be accompanied by the development of recognized standards and procedures to avoid costly litigation. This would include such actions as enforcing a reasonable per-customer consumption limit, posting warnings about potential impairment, possible partnerships with ridesharing services and even obtaining agreement from consumers to refrain from driving as a condition of sale.
In addition, a modified version of responsible beverage service training must be developed and adopted by the cannabis industry. This training would likely incorporate elements of drug recognition training currently used by law enforcement, though that training has been criticized by some experts and courts as scientifically unreliable.
Several important questions have been raised by state regulators looking at how to license on-site consumption facilities:
- May the lounge be attached to a cannabis retail facility or must it be a stand-alone facility?
- If cannabis sales are permitted in the lounge, will sales be limited to single-use cannabis products and what are the limits?
- Will the customer be allowed to bring in cannabis, and if so, how does one verify that the cannabis was legally purchased from a licensed source?
- What will be the packaging, labeling and warning requirements for single-use cannabis products sold on-premises?
- What other warnings are required on the premises?
- Should there be an education requirement for patrons to ensure against over-consumption and problems caused by delayed effects?
- Must cannabis that is purchased at the facility be consumed on-premises or may the customer leave with the product?
- What occupational health and safety requirements will be mandated for the protection of employees at the facility to prevent unsafe exposures?
- What role do local governments have in zoning and permitting?
At this stage in the development of the regulations and civil tort liability around on-site cannabis consumption, much remains uncertain. Important questions are still unanswered in most jurisdictions that are considering whether to allow on-site cannabis consumption. As we wait for the emergence of recognized standards, operators must closely follow state and local regulations and consider voluntarily adopting other measures that demonstrate advocacy for reasonable use and protection of customers. Efforts to minimize liability and risk should be a key element of the business planning for those seeking to operate in this sector of the cannabis industry.
Ian Stewart is the regional managing partner of Wilson Elser’s Los Angeles office and co-chair of the firm’s national Cannabis Law Practice, where he leads a national multidisciplinary team of lawyers serving all aspects of the cannabis and hemp industries, as well as financial institutions and insurance companies that service those industries. Contact him at ian.stewart@wilsonelser.com.
Otis Felder is a partner with Wilson Elser Los Angeles office and has substantial trial and appellate experience in state and federal court. He represents cruise lines and vessel operators and owners, as well as insurers’ interests in marine and shore-side pollution claims. As corporate counsel supervising brand protection and promotion, he provides substantial experience to the emerging cannabis industry. Contact him at otis.felder@wilsonelser.com.
For more information on risks related to the cannabis industry, check out ALM’s Cannabis Insurance Coverage Specialist designation at www.nutraining.com.
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