Specialty Insurance

‘Great Opportunity’ Awaits California Cannabis Insurers: Exclusions Concern Brokers

California’s Insurance Commissioner Dave Jones is pleased with what his department has achieved so far but encourages more carriers to enter the cannabis market.
By: | July 18, 2018 • 6 min read

When California voters approved legal recreational marijuana in November 2016, the state’s insurance commissioner Dave Jones knew he needed to get rolling.

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“Shortly thereafter I launched a cannabis insurance initiative, the objective of which was to increase the availability of insurance for the cannabis industry across the supply chain and all of its coverage needs,” Jones said.

His approach was multi-pronged. Jones led tours of cannabis production facilities for insurance executives, convened a public hearing on the sector’s insurance gaps and added more resources within his department to make sure that carriers and brokers were responded to in a timely manner.

A Growing Cannabis Market

Surplus lines carriers were first into the market, but in 2017, California added an admitted carrier and has also seen sureties provide capacity for landlords that rent to cannabis operations.

“We are very pleased with the results,” said Jones, who continues to encourage carriers to enter the market. One of the keys to this effort is dispelling the notion that insurance carriers underwriting for cannabis might risk running afoul of the federal government, which still classifies marijuana as a Schedule 1 drug.

“I took note that the U.S. Senator from Colorado [Cory Gardner- R] met with President Trump, and President Trump indicated that the administration would not be enforcing federal laws against cannabis in those states that have legalized it,” Jones said.

“Although insurers are concerned about federal intervention, I think their concerns are misplaced and I think they should come to the market.” — Dave Jones, Insurance Commissioner, State of California

“We sent out yet another letter to the CEOs of the insurance companies that we regulate, pointing this out and assuring them that the risk of federal intervention is zero,” Jones said.

Despite his efforts, Jones said the federal prohibition is probably tamping down carrier appetite to cover cannabis operations.

“Although insurers are concerned about federal intervention, I think their concerns are misplaced and I think they should come to the market,” Jones said.

Mike Bush, a partner with Cleveland, Ohio-based National Cannabis Insurance Services, said business for cannabis insurance brokers and carriers has been building steadily in California.

“After licenses and regulations are fleshed out, the business operation needs to be fully insured to protect the business’ assets, ” Bush said. “California has been a leader in developing insurance solutions for cannabis operations and we have a number of markets willing to insure cannabis operations,” Bush said.

That said, Bush added there are a number of start-ups in the industry and that things take time to develop.

Dave Jones, Insurance Commissioner, State of California

“So I think everyone is finding things take longer than they thought, and then a rush of activity comes in spurts. Now we are seeing more of a steady stream of insurance applications,” Bush said.

Bush also noted his focus is making sure cannabis operations have the right coverages and that claims are paid out properly.

“Product liability and crop/inventory insurance are the big exposures for a cannabis operation,” Bush said.  “Once the right coverages are in place, the claims process follows the coverage form.”

Bush said though that he has already seen carriers put restrictive exclusions on policies without being transparent with the insured.

“It’s very important to review all applicable coverage limitations and exclusions prior to quoting,” Bush said. “If the claims process runs well, given how much public and media attention is being placed on the budding cannabis industry, then our industry will get favorable reviews,” Bush said.

He added his firm is offering insurance products to the cannabis industry in half a dozen states (and growing) with California being a target market.

Prioritizing the Right Approach

One retail commercial insurance broker who has been placing cannabis insurance coverage for more than a decade said he thinks Jones has gotten the insurance market in California off on the right foot.

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“I think Dave Jones’s office has done a great job as a state agency to work with this industry and say ‘hey, what are the issues you are facing and how can we address them?’ ” said Michael Aberle, a senior vice president with Next Wave Insurance Services, which offers a full suite of commercial insurance coverages to the cannabis industry.

Aberle is also the chair of the insurance committee of the California Cannabis Industry Association, a group which is working with Jones’s office and insurance carriers to educate cannabis business owners  about insurance coverage and risk management best practices.

Aberle thinks there are enough insurance carriers willing to serve the California cannabis market and ample capacity. His concern is more around the area of product liability coverage: how strict California’s regulators are going to be around labeling issues, the litigiousness of the state and the country in general, and as Bush mentioned, a preponderance of insurance form exclusions.

He sees a key coverage issue with labeling. Will marijuana products in smokable or other ingestible forms give consumers the benefits the label promises? And when the consumer is disappointed and litigates, how robust will the cannabis provider’s insurance coverage be in defending the cannabis company?

“I think Dave Jones’s office has done a great job as a state agency to work with this industry and say ‘hey, what are the issues you are facing and how can we address them?’ ” — Michael Aberle, senior vice president, Next Wave Insurance Services

“If you talk to any attorneys in the cannabis industry, the ability to meet the burden on labeling is going to be extremely tough. This is going to open the door to, I wouldn’t call them life shattering claims, but there are going to be enough of them that they could cause the carriers to bounce out [of the market],” Aberle said.

Should the federal government loosen its prohibitions on marijuana, Aberle added, that will create new exposures for those growers and sellers who sell their products across state lines.

“When this becomes legal, the FDA is going to regulate this,” Aberle said. Cannabis companies that envision national distribution in their futures will need to consider the product liability exposure ramifications of that.

“The faster you run to the finish line, you might find out you are so far behind (from a compliance perspective) that you haven’t learned what you need to run that operation,” Aberle said.

A Promising Future for the Industry

Jones said he sees in California cannabis a segment of the agricultural industry that is very well regulated and presents a good opportunity for insurance carriers.

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“Part of what I am doing is educating the insurance underwriters that cannabis is a heavily regulated industry. They have to track the product from seed to sale. In some ways, this should give the industry comfort as to who is compliant, who they can know is following the rules and can do the sorts of things that can mitigate risk. I think it’s a tremendous opportunity for the insurance industry and they should take advantage of it,” he said.

The state’s insurance department lists five carriers that are underwriting some aspect of the cannabis industry in California: Golden Bear Insurance, California Mutual Insurance Company, Continental Heritage, AAIS (not a carrier, but they have an admitted program), and California’s State Fund, which is not newly admitted but does offer workers’ compensation coverage to the cannabis industry.

The state lists more than 100 insurance brokers that are currently serving the cannabis industry in California.  In mid-August, HUB International, a global property/casualty broker, announced that it formed a cannabis and risk services practice, under its Agribusiness & Farm Specialty Practice.

“There is a huge misunderstanding in the cannabis industry about insurance coverage, which leaves businesses underinsured, or even uninsured,”said T.J. Frost, U.S. Cannabis Segment Leader for HUB.

HUB is offering general liability and product liability insurance, among a number of other coverages and services, including workers’ compensation and crop insurance. &

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Scenario

A Recall Nightmare: Food Product Contamination Kills Three Unborn Children

A failure to purchase product contamination insurance results in a crushing blow, not just in dollars but in lives.
By: | October 15, 2018 • 9 min read
Risk Scenarios are created by Risk & Insurance editors along with leading industry partners. The hypothetical, yet realistic stories, showcase emerging risks that can result in significant losses if not properly addressed.

Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.

PART ONE: THE HEAT IS ON

Reilly Sheehan, the Bethlehem, Pa., plant manager for Shamrock Foods, looks up in annoyance when he hears a tap on his office window.

Reilly has nothing against him, but seeing the face of his assistant plant operator Peter Soto right then is just a case of bad timing.

Sheehan, whose company manufactures ice cream treats for convenience stores and ice cream trucks, just got through digesting an email from his CFO, pushing for more cost cutting, when Soto knocked.

Sheehan gestures impatiently, and Soto steps in with a degree of caution.

“What?” Sheehan says.

“I’m not sure how much of an issue this will be, but I just got some safety reports back and we got a positive swipe for Listeria in one of the Market Streetside refrigeration units.”

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Sheehan gestures again, and Soto shuts the office door.

“How much of a positive?” Sheehan says more quietly.

Soto shrugs.

“I mean it’s not a big hit and that’s the only place we saw it, so, hard to know what to make of it.”

Sheehan looks out to the production floor, more as a way to focus his thoughts than for any other reason.

Sheehan is jammed. It’s April, the time of year when Shamrock begins to ramp up production for the summer season. Shamrock, which operates three plants in the Middle Atlantic, is holding its own at around $240 million in annual sales.

But the pressure is building on Sheehan. In previous cost-cutting measures, Shamrock cut risk management and safety staff.

Now there is this email from the CFO and a possible safety issue. Not much time to think; too much going on.

Sheehan takes just another moment to deliberate: It’s not a heavy hit, and Shamrock hasn’t had a product recall in more than 15 years.

“Okay, thanks for letting me know,” Sheehan says to Soto.

“Do another swipe next week and tell me what you pick up. I bet you twenty bucks there’s nothing in the product. That swipe was nowhere near the production line.”

Soto departs, closing the office door gingerly.

Then Sheehan lingers over his keyboard. He waits. So much pressure; what to do?

“Very well then,” he says to himself, and gets to work crafting an email.

His subject line to the chief risk officer and the company vice president: “Possible safety issue: Positive test for Listeria in one of the refrigeration units.”

That night, Sheehan can’t sleep. Part of Shamrock’s cost-cutting meant that Sheehan has responsibility for environmental, health and safety in addition to his operations responsibilities.

Every possible thing that could bring harmful bacteria into the plant runs through his mind.

Trucks carrying raw eggs, milk and sugar into the plant. The hoses used to shoot the main ingredients into Shamrock’s metal storage vats. On and on it goes…

In his mind’s eye, Sheehan can picture the inside of a refrigeration unit. Ice cream is chilled, never really frozen. He can almost feel the dank chill. Salmonella and Listeria love that kind of environment.

Sheehan tosses and turns. Then another thought occurs to him. He recalls a conversation, just one question at a meeting really, when one of the departed risk management staff brought up the issue of contaminated product insurance.

Sheehan’s memory is hazy, stress shortened, but he can’t remember it being mentioned again. He pushes his memory again, but nothing.

“I don’t need this,” he says to himself through clenched teeth. He punches up his pillow in an effort to find a path to sleep.

PART TWO: STRICKEN FAMILIES

“Toot toot, tuuuuurrrrreeeeeeeeettt!”

The whistles of the three lifeguards at the Bradford Community Pool in Allentown, Pa., go off in unison, two staccato notes, then a dip in pitch, then ratcheting back up together.

For Cheryl Brick, 34, the mother of two and six-months pregnant with a third, that signal for the kids to clear the pool for the adult swim is just part of a typical summer day. Right on cue, her son Henry, 8, and his sister Siobhan, 5, come running back to where she’s set up the family pool camp.

Henry, wet and shivering and reaching for a towel, eyes that big bag.

“Mom, can I?”

And Cheryl knows exactly where he’s going.

“Yes. But this time, can you please bring your mother a mint-chip ice cream bar along with whatever you get for you and Siobhan?”

Henry grabs the money, drops his towel and tears off; Siobhan drops hers just as quickly, not wanting to be left behind.

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“Wait for me!” Siobhan yells as Henry sprints for the ice cream truck parked just outside of the pool entrance.

It’s the dead of night, 3 am, two weeks later when Cheryl, slumbering deeply beside her husband Danny, is pulled from her rest by the sound of Siobhan crying in their bedroom doorway.

“Mom, dad!” says Henry, who is standing, pale and stricken, in the hallway behind Siobhan.

“What?” says Danny, sitting up in bed, but Cheryl’s pregnancy sharpened sense of smell knows the answer.

Siobhan, wailing and shivering, has soiled her pajamas, the victim of a severe case of diarrhea.

“I just barfed is what,” says Henry, who has to turn and run right back to the bathroom.

Cheryl steps out of bed to help Siobhan, but the room spins as she does so.

“Oh God,” she says, feeling the impact of her own attack of nausea.

A quick, grim cleanup and the entire family is off to a walk-up urgent care center.

A bolt of fear runs through Cheryl as the nurse gives her the horrible news.

“Listeriosis,” says the nurse. Sickening for children and adults but potentially fatal for the weak, especially the unborn.

And very sadly, Cheryl loses her third child. Two other mothers in the Middle Atlantic suffer the same fate and dozens more are sickened.

Product recall notices from state regulators and the FDA go out immediately.

Ice cream bars and sandwiches disappear from store coolers and vending machines on corporate campuses. The tinkly sound of “Pop Goes the Weasel” emanating from mobile ice cream vendor trucks falls silent.

Notices of intent to sue hit every link in the supply chain, from dairy cooperatives in New York State to the corporate offices of grocery store chains in Atlanta, Philadelphia and Baltimore.

The three major contract manufacturers that make ice cream bars distributed in the eight states where residents were sickened are shut down, pending a further investigation.

FDA inspectors eventually tie the outbreak to Shamrock.

Evidence exists that a good faith effort was underway internally to determine if any of Shamrock’s products were contaminated. Shamrock had still not produced a positive hit on any of its products when the summer tragedy struck. They just weren’t looking in the right place.

PART THREE: AN INSURANCE TANGLE

Banking on rock-solid relationships with its carrier and brokers, Shamrock, through its attorneys, is able to salvage indemnification on its general liability policy that affords it $20 million to defray the business losses of its retail customers.

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But that one comment from a risk manager that went unheeded many months ago comes back to haunt the company.

All three of Shamrock’s plants were shuttered from August 2017 until March 2018, until the source of the contamination could be run down and the federal and state inspectors were assured the company put into place the necessary protocols to avoid a repeat of the disaster that killed 3 unborn children and sickened dozens more.

Shamrock carried no contaminated product coverage, which is known as product recall coverage outside of the food business. The production shutdown of all three of its plants cost Shamrock $120 million. As a result of the shutdown, Shamrock also lost customers.

The $20 million payout from Shamrock’s general liability policy is welcome and was well-earned by a good history with its carrier and brokers. Without the backstop of contaminated products insurance, though, Shamrock blew a hole in its bottom line that forces the company to change, perhaps forever, the way it does business.

Management has a gun to its head. Two of Shamrock’s plants, including Bethlehem, are permanently shuttered, as the company shrinks in an effort to stave off bankruptcy.

Reilly Sheehan is among those terminated. In the end, he was the wrong person in the wrong place at the wrong time.

Burdened by the guilt, rational or not, over the fatalities and the horrendous damage to Shamrock’s business. Reilly Sheehan is a broken man. Leaning on the compassion of a cousin, he takes a job as a maintenance worker at the Bethlehem sewage treatment plant.

“Maybe I can keep this place clean,” he mutters to himself one night, as he swabs a sewage overflow with a mop in the early morning hours of a dark, cold February.

Bar-Lessons-Learned---Partner's-Content-V1b

Risk & Insurance® partnered with Swiss Re Corporate Solutions to produce this scenario. Below are their recommendations on how to prevent the losses presented in the scenario. This perspective is not an editorial opinion of Risk & Insurance.®.

Shamrock Food’s story is not an isolated incident. Contaminations happen, and when they do they can cause a domino effect of loss and disruption for vendors and suppliers. Without Product Recall Insurance, Shamrock sustained large monetary losses, lost customers and ultimately two of their facilities. While the company’s liability coverage helped with the business losses of their retail customers, the lack of Product Recall and Contamination Insurance left them exposed to a litany of risks.

Risk Managers in the Food & Beverage industry should consider Product Recall Insurance because it can protect your company from:

  • Accidental contamination
  • Malicious product tampering
  • Government recall
  • Product extortion
  • Adverse publicity
  • Intentionally impaired ingredients
  • Product refusal
  • First and third party recall costs

Ultimately, choosing the right partner is key. Finding an insurer who offers comprehensive coverage and claims support will be of the utmost importance should disaster strike. Not only is cover needed to provide balance sheet protection for lost revenues, extra expense, cleaning, disposal, storage and replacing the contaminated products, but coverage should go even further in providing the following additional services:

  • Pre-incident risk mitigation advocacy
  • Incident investigation
  • Brand rehabilitation
  • Third party advisory services

A strong contamination insurance program can fill gaps between other P&C lines, but more importantly it can provide needed risk management resources when companies need them most: during a crisis.



Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]