6 keys to ensure cannabis businesses are properly insured
From protective safeguards to builders risks, these are the must-have coverages for cannabis companies.
As entrepreneurs enter the budding cannabis industry, there are many regulatory hurdles they need to overcome on both local and state levels which can be overwhelming. However, many don’t realize the significant loss control measures needed to succeed in this industry.
Risk management and a proper insurance portfolio are not only required in many state jurisdictions, but necessary to protect investments and assets.
Each state, city and county have slightly different requirements, but there are six things that are integral any for cannabis businesses to keep in mind to be properly insured:
1. Protective safeguards for theft coverage of inventory
In order to secure cannabis inventory coverage, the business must have specific protective safeguards in place. Many insurance carriers have what is called, “protective safeguards” or “warranties” that policyholders agree to for the policy to respond; most specifically referring to theft claims.
Within the protective safeguards on a cannabis property insurance policy, insurance carriers require a vault with a specific weight, sometimes bolted to the ground where cannabis inventory is stored. If a vault is too small to contain all your cannabis inventory, many create a custom-fortified room, vault and sometimes a shipping container.
However, not all these options are approved by each carrier, so it’s extremely important to discuss the protective safeguards on an insurance proposal to ensure the company is meeting the specific guidelines.
2. Security
Many insurance carriers, especially when referring to property insurance, require some sort of security to protect the property and its contents.
Some examples that are approved by most carriers are:
- Interior and exterior cameras.
- Security systems that are connected to a third party.
- Security guards that patrol the property.
Note, a camera that is not connected to a third-party security company will not satisfy the carrier’s requirements.
3. Compliance
Cannabis insurance carriers require that all cannabis operators follow their local and state cannabis regulations for the policy to respond. If the business’ cannabis license has lapsed during a claim — the carrier has the right to not pay the loss per the insurance contract.
4. Construction vs. vacancy vs. operational
This is an important topic for operators to understand as there is not a single policy that can cover all three of these exposures at the same time.
In the cannabis industry, many potential operators purchase or lease a building while they are applying for a cannabis license. The building remains vacant until they receive their cannabis license. Once licensed, the operator will typically need to update the building to meet the needs of their future business operation. Once complete, the building is ready for its grand opening and will be fully operational. During this entire process, there are different policies to provide coverage during the transition, which are:
- Vacant building insurance: Depending on if the cannabis organization purchases the building or leases the building and it is in a triple net lease — the company needs to ensure it purchase an insurance policy that permits long-term vacancy. Standard insurance policies have a vacancy clause and exclusion which means the building must be fully operational for the policy to respond to a loss.
- Construction insurance such as builders risk or ‘course of construction’: It is important to understand you will likely need to change your insurance policy or notify your existing carrier if they allow construction while the building is vacant. You will also need to purchase a policy that covers the hard cost and soft cost while the building is under construction. For example, if the building burns down at 90% completion of the project, the construction policy (builders risk) would be the carrier to respond during the loss and likely cover up to 90% of completion, which is where the project left off during the loss. A vacant building and general liability policy alone will not cover this loss.
- Cannabis operational insurance: Once the construction is complete and a Certificate of Occupancy is issued from the city, the facility is ready to be fully operational as intended. This means, it is time to cancel the vacant property insurance policy, the vacant general liability policy and the course of construction/builders risk and move it into a cannabis program. Operators will then buy general liability, product liability, property insurance and other coverages for their operational company.
Working with a professional risk manager that specializes in the cannabis industry will make these three transitions much easier than they sound. As a new cannabis operator, it is important to keep your risk manager informed prior to each new phase.
5. Protecting employees
In many states where cannabis is legal, it is required for cannabis operators to purchase workers’ compensation insurance and not having this coverage can lead to heavy fines. Some states, such as California, require companies to purchase workers’ compensation insurance if there is as little as one part time employee.
6. Employment practice liability insurance
This is a growing industry with growing pains. When companies grow at a rapid pace with large employee fluctuations such as additions, layoffs and changes in wages or employee schedules, there is plenty of room for errors that can cause a claim.
Employment practice liability insurance is a coverage that protects employers from wage and hour discrepancies, wrongful termination, harassment and other employee-related issues.
It is always important to have an employee handbook and stay compliant with all local, state and federal employment laws, but regardless of how organized your company is claims can still happen.
The cannabis industry can be a challenging one but with proper risk management and by working with a qualified cannabis insurance expert, cannabis operators can be assured they will be able to minimize losses, save money and if there is a claim, feel at peace that it will likely be covered.
Stephanie Bozzuto is the co-founder of Cannabis Connect Insurance, a partner of Acrisure LLC, a fintech leader that operates a top-10 global insurance broker. With program management skills, Stephanie has co-developed cannabis insurance product offerings and is utilized as a cannabis insurance expert for other Acrisure insurance brokerages throughout the nation.
Opinions expressed here are the author’s own.
Editor’s Note: ALM has launched the six-module designation, Cannabis Insurance Claims Specialist (CICS), to educate experts focused on serving businesses operating in the cannabis industry. The courses provide an overview of the industry and address issues related to claims, real estate, risk management, workers’ compensation and financing. For more information on the CICS, visit www.nutraining.com or contact Johanna Abshear, client success coordinator, at jabshear@alm.com.
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