June 4, 2018
At the request of the California Department of Insurance, AAIS has developed a BOP policy for the cannabis industry. It has been approved in California as of today. This article will discuss the new policy, AAIS CB 0204 03 18 Cannabis Business Owners Policy California. A lot of the policy matches the AAIS BOP; we will therefore discuss the parts particular to the coverages related to cannabis exposures.
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Many definitions are standard and are found in any policy. Some are particular to the risk involved. The definition of "you" and "your" makes a point to specify that registered domestic partners are included as spouses for the purposes of the policy.
The "basic territory" is the standard United States, territories and possessions, Canada and Puerto Rico. Regarding cannabis, however, the "basic territory" is limited to California and does not include land or property owned by the United States government. This is because cannabis is still federally illegal.
"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.
Along with cannabis, accessories are defined. "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". This highlights that the policy 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. Remaining definitions are standard and include computers, hardware, limit, media, pollutants, data records, fungus, hardware, and other standard terms.
The conditions are standard as well and include assignment, cancellation, nonrenewal, inspection, changes, liberalization, cooperation, and other typical conditions. When a policy is cancelled, return premium is calculated on a pro rata basis and is refunded within eight business days of the cancellation unless the policy is subject to audit. Notice of nonrenewal is provided at least sixty days, but no more than 120 days before nonrenewal.
The condition covering misrepresentation or fraud is unique in that it has two sections. One condition is for misrepresentation in relation to fire, and the other with respect to loss caused by other than fire. If the loss is caused by fire, coverage is not provided if misrepresentation or concealment of a material fact or circumstance that relates to the subject insured, or the insured's interest in, or the insured has committed fraud or sworn falsely regarding this insurance.
If the loss is caused by other than fire, then the policy is void for the "insured" and "you" if either has concealed or misrepresented a material fact or circumstance, or insurable interest in, or there has been a fraud or false swearing by "you" or any other "insured" relative to matters involving this insurance.
Property coverages start with a significant number of additional definitions that are common to property policies. 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.
"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. 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".
Unlike the AAIS standard BOP, this form includes a definition of "specified perils" including aircraft, explosion, falling objects but not including loss to personal property in the open or inside a building unless the building has been damaged by a falling object, fire, leakage from fire extinguishing equipment, lightning, riot, civil commotion, "sinkhole collapse", sudden and accidental loss caused by smoke, sonic boom, vandalism, vehicles, volcanic action, water damage, weight of ice, snow or sleet, windstorm or hail, valuable papers and records and water damage.
There are no changes between the property covered in Coverage A from the standard AAIS BOP. Coverage B uses revised language, but the intent is the same and there are no coverage changes.
While this policy is designed to provide coverage for cannabis operations, 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 contraband or controlled substances, but defines it more specifically than the commercial BOP. Controlled substances, contraband or property in the course of illegal trade or transport is not covered. 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 your "business", in compliance with all applicable laws, rules, regulations and ordinances of the state of California and the insured's local jurisdiction where he operates. Because this policy is designed to provide coverage for cannabis operations and the federal government still considers it illegal, this policy provides coverage for what could be considered illegal under certain circumstances.
Data records and programs carry the same exclusion as in the regular BOP, but there are some new exceptions. Data records, programs or applications that integrated into and operate or control any HVAC, refrigeration, humidification, lighting, elevator or security are covered. Keeping the operation running is critical, and since live plants are the product, accommodations are made for systems that control the air conditioning and heat, water, humidification and other systems. The exclusion in the regular BOP for land, water, growing crops or lawns has eliminated growing crops from the exclusion.
The CannaBOP policy has an exclusion for digital or virtual currency. Since 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.
The exclusion for land, water and growing crops that appears in the regular BOP is modified in the CannaBOP form; growing crops are removed as an excluded item since growing of crops, including indoor or outdoor cannabis, is excluded in the trees, shrubs, plants, lawns or crops exclusion. The trees, shrubs, plants, lawns or crops exclusion does not cover indoor and outdoor:
Growing or unharvested "cannabis"
Grain, hay, straw or other crops
Trees, shrubs, plants, other than "cannabis" or lawns, unless provided for under extensions of coverage or these plants are part of a vegetated roof.
This section does not appear in the AAIS standard BOP. The exclusions listed in this section apply to Coverage A Buildings and Coverage B Business Personal Property. Boilers are excluded except for loss to steam boilers, steam pipes, steam turbines or to steam turbines caused by the explosion of gas or fuel in a fuel box, firebox, combustion chamber or flue.
Coverage for furs is limited to $2,500 for loss by theft of furs or fur garments. Glassware and fragile articles are excluded from breakage except because of a "specified peril" or building glass breakage. Exceptions to the exclusion include glass that is part of a building or structure, bottles or other containers for sale, lenses of photographic or scientific equipment or "cannabis accessories". Remember "cannabis accessories" are equipment, products or materials used in consuming "cannabis" in any way, shape or form, or used in any "cannabis activities" which include cultivation, processing, delivery, laboratory testing and other such activities. Decorative glassware in a shop is not covered if it is knocked over and broken; but if bottles used for packaging and selling "cannabis" are broken, there is coverage for those items.
Many of the additional coverages are the same as those in the standard BOP. Lock and key replacement is an additional coverage that does not appear in the regular BOP. Because of the valuable nature of "cannabis", it is important to keep the product and the environment under lock and key. Expenses up to $1,000 are covered for any one loss to replace or repair exterior or interior locks and keys if because of a theft to the premises if a covered theft caused damage or theft of property.
Coverage for removal of property to protect it from being damaged by a covered peril is an additional coverage and does not increase the limit of covered property. The standard time limitation of 30 days exists. This is restricted so that coverage does not apply to "cannabis" or "cannabis accessories" that are moved outside the state of California or to, over, or through any land or property owned by the United States government. This is because the government still considers cannabis illegal, and many states have not yet legalized cannabis.
The extension for Building Property – Off Premises is standard, except for an exclusion for loss to "cannabis" or "cannabis accessories" while located on, being moved to, over, or through land or property owned by the U.S. government or from vehicles that do not comply with all state and local laws, rules, regulations and ordinances regarding the transportation of "cannabis" or "cannabis accessories". Again, since cannabis is illegal on a federal basis, transporting cannabis across government property is an illegal act.
Trees, shrubs and plants are covered under an extension with an exception for "cannabis" or trees, shrubs or plants that are part of a vegetated roof. For non-owner tenants, this coverage does not include the cost of removing trees, shrubs and plants that are owned by the landlord and located on the "described premises". The property owner should have his own coverage for that property.
Under Business Personal Property Off Premises, coverage is not extended to "cannabis" or "cannabis accessories" while located on or being moved to, over, or through land or property owned by the U.S. government, or from vehicles that do not comply with state and local laws regarding transportation of "cannabis" or "cannabis accessories". Business personal property in portable storage units is not provided for "cannabis" or "cannabis accessories" that are stored in violation of any state or local laws. As mentioned previously, the lack of uniform state laws makes cannabis in other areas illegal.
Coverage is available for personal effects owned by "you" or "your" partners, officers, directors, trustees, members, managers, joint venturers or "employees" except for "cannabis" or "cannabis accessories". This policy is intended to provide coverage for the cannabis operation itself, not for the cannabis that belongs to various employees. Coverage for any property is $2,500 unless a higher limit is shown on the declarations.
Much of the loss of income coverage is standard. When civil authority orders the seizure, confiscation, destruction, or quarantine of "cannabis" or "cannabis accessories" owned or possessed by the insured, due to the actual or alleged violation of federal, state, or local laws or regulations concerning "cannabis", "cannabis accessories", "cannabis activities", controlled substances, contraband or other property in course of illegal trade, coverage is not provided. The period of loss extension is for sixty consecutive days instead of thirty in the existing BOP.
Under earnings from dependent locations, secondary locations are included in the CannaBOP form as covered if the loss is by a peril insured against. The remainder of this section is the same as the regular BOP.
The form is open perils, so unless a peril is excluded, there is coverage. Excluded perils are then listed in the policy. Standard anticoncurrent causation language applies, and is worded a little differently from the regular policy for clarity; there is no difference in intent. Nothing in the excluded perils section is specific to cannabis coverage, the exclusions are very similar to the regular BOP.
Boiler explosion is an additional exclusion that does not appear in the regular BOP, but it is not strictly related to the cannabis exposure. Some of the exclusions appear in a different order, but there are not additional exclusions specifically related to the cannabis exposure.
Much of this section is standard duties after a loss. If damaged property includes "cannabis", the carrier may require that proof of loss include copies of all applicable and available records, reports, and logs generated or stored as part of a cannabis activity tracking (CAT) system or a similar tracking system. It includes all tracking information in the insured's care, custody or control, and well as any tracking information the insured can receive from others.
This and the next several sections, How Much We Pay, Loss Payment, Additional Conditions are very similar to the regular BOP, with very few differences that are cannabis specific. There are some differences in the valuation section, particularly under actual cash value and how the actual cash value of the structure is determined. Actual cash value is handled the same for property not eligible for replacement cost.
Loss payment has a separate section on adjusters where if a new adjuster is assigned within six months, a written status report is sent to the insured. The rest of the sections are standard. The CannaBOP does not provide the Optional Property Coverages listed in the standard BOP.
As in the property section, the liability coverages start out with definitions. Many are the same, but some are different. For injury or damage arising out of "cannabis", "cannabis accessories" or "cannabis activities" the "coverage territory" is limited to the "basic territory", which is limited to California and does not include land or property owned by the United States government. For activities not related to cannabis the territory follows the standard BOP. The definition of "products" includes "cannabis" and "cannabis accessories"; the rest of the definition of "product" and remaining definitions are the same as what appears in the standard BOP.
Standard liability coverage is available and straightforward. Coverage also exists for "bodily injury" or "property damage" arising out of the insured's commercial "cannabis activities". This coverage exists however only if at the time of the "occurrence", the insured had been issued all applicable and required licenses, permits and authorizations by the state of California and any local jurisdictions that the business operates in and all permits and licenses are in good standing. The permits, licenses and authorizations must allow the insured to engage in or conduct "cannabis activities" that are the actual or alleged cause of the "bodily injury" or "property damage".
Exclusions are very similar to those that appear in the standard BOP but appear in a different order. Missing exclusions are for war, employment liability, contracts, and violations of the Telephone Consumer Protection Act of 1991, the CAN-SPAM act of 2003, the Fair Credit Reporting Act and the Fair and Accurate Credit Transaction Act. Exclusions that appear in the CannaBOP policy but are not in the standard BOP include a section in the liquor liability exclusion when coverage is excluded if the insured violates or fails to comply with any applicable law, rule, regulation or ordinance concerning "cannabis", "cannabis accessories" or "cannabis activities". Another exclusion pertinent to cannabis appears in the product recall exclusion, so that any withdrawal or recall of "cannabis" or "cannabis accessories" manufactured, packaged, sold, handled, stored, tested, distributed or disposed of as part of the insured's "cannabis activities" is not covered.
Medical payments is the same as what appears in the standard BOP except for the order of exclusions and requirements for expenses arising out of commercial "cannabis activities". For medical expenses to be covered from "cannabis activities", the insured must have been issued all required licenses, permits, and authorizations by the state of California and any local jurisdiction where the business operates to engage in or conduct "cannabis activities" that caused or are alleged to cause the "bodily injury". The licenses, permits and authorizations must be in good standing.
Fire legal liability, like med pay; has the same language as the standard BOP except for a section that fire legal only applies to "cannabis activities" if the insured has all the proper licenses, authorizations and permits required by the state of California and local jurisdictions, and that all licenses and permits are in good standing.
Personal and advertising injury has the same exception for "cannabis activities". There is no coverage for personal or advertising injury arising out of "cannabis activities" unless all necessary permits, licenses are authorizations required by California are present and in good standing. A few exclusions are missing from the CannaBOP personal and advertising exclusions. They are professional services, employment practices liability, war, and violations of the Telephone Consumer Protection Act of 1991, the CAN-SPAM act of 2003, the Fair Credit Reporting Act and the Fair and Accurate Credit Transaction Act.
Additional Liability Exclusions
An additional section appears in the CannaBOP policy for additional liability exclusions. These exclusions are for animals, cannabis cultivation, cannabis laws and regulations, cannabis-related illness, sickness and disease, cannabis use, inhalation or exposure, contract or agreement, controlled substances, contraband and property in illegal trade or transportation, employment practices, lead, professional services, prohibited or restricted materials, punitive damages, security guards, watchmen or patrolmen, statutory violations or war. Some of these exclusions are standard and self-explanatory, such as contract or agreement, animals employment practices, lead, professional services, and war. Other are specifically directed to the nature of the business.
"Bodily injury", "property damage", or "personal and advertising injury" that arises out of the cultivation of "cannabis" is not covered. Cultivation includes but is not limited to planting, propagating, cloning, fertilizing, growing or harvesting "cannabis". These activities are better suited for crop or other agricultural policies. As has been seen in other exclusions, injury and damage are not covered if the insured is in violation or noncompliant with any laws, regulations, or ordinances regarding "cannabis", "cannabis activities" or "cannabis accessories". Chronic illnesses, sicknesses or diseases, or aggravation thereof that is in any way related to "cannabis" use or exposure is excluded. Chronic illnesses include but are not limited to addiction, birth defects, cancer, depression or other neurological issues or conditions or organ conditions or arterial damage or disease. Cannabis has not been extensively studied due to regulations that prohibit such study; the policy does not want to provide coverage for unknown ill side effects from use of "cannabis". Likewise, injury or damage resulting from use, inhalation or exposure to "cannabis" that occurs at the described premises, that occurs as part of a "products" demonstration or sample, or while such "cannabis" is in the insured's care, custody or control or the care, custody or control of anyone acting on the insured's behalf.
The exclusion for controlled substances or contraband in the course of illegal transportation or trade has an exception for "cannabis" and "cannabis accessories". The exception applies when cannabis and such accessories have not been combined with any other substances or material that violates any state or local law, rule or regulation. "Cannabis" and "cannabis accessories" that the insured possesses, transports or trades in the "basic territory" in the regular course of the insured's business and is in compliance with all rules, laws, regulations and ordinances is covered.
Professional services for the sale of "cannabis" or "cannabis accessories" and any advice or recommendations made by employees or the insured about uses, effects, or characteristics of "cannabis" are not considered professional services. However, if the individual providing advice is a licensed or registered pharmacist, physician, nurse or other medical professional, that is professional service and would be excluded. Prohibited or restricted materials including "cannabis activities" that cause injury, damage, or personal and advertising injury are excluded. However, for the exclusion prohibited or restricted materials are limited to ingredients or substances, other than "cannabis", that are defined by the Federal Food and Drug Administration as banned, prohibited or restricted both when used and sold as part of the business and at the time of the "occurrence" give rise to said injury, damage, or personal or advertising injury.
A significant exclusion exists for injury, damage or personal and advertising injury that arises out of or that involves security guard, patrolman, watchman, or other force hired by the insured or others acting on the insured's behalf. Because security is essential for cannabis operations, there are exceptions to the exclusion. Coverage applies if the injury, damage or personal and advertising injury took place at the described premises, the guard or other personnel was licensed or employed by a security organization, and that organization carried $1,000,000 in general liability coverage, and that policy was in force at the time of loss and did not excluded "cannabis" activity or assault and battery. In addition, the insured must be listed on that policy as a named insured.
These last sections of the CannaBOP mirror those sections in the standard BOP with one exception. The standard BOP has a nuclear liability exclusion that does not appear in the CannaBOP policy. Otherwise, the coverages are identical.
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