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Transportation Risks

Cannabis Transport Risk

There are billions to be made, but those transporting the product tread carefully.
By: | February 20, 2018 • 6 min read

While driving around with a hundred pounds of marijuana might be a criminal activity in most places, it’s just another part of the business day in states like California, Nevada and Colorado.

As legal marijuana gains a foothold across the United States, those in the industry say it’s an exciting and challenging time. With a small, high-value product and lots of cash involved, the risk of theft is high. Add in the myriad of state regulations and the prospect of a federal crackdown, and legal cannabis transportation can be a risky business.

 High Value Product with Big Risk

Recreational cannabis is now legal in eight states, and it is on track to become a $24 billion industry by 2025, according to the Cannabis Industry 2017 Annual Report. From the fields to counters of dispensaries, the growing industry continues to face a number of operational challenges due to its unique legal status.

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Because cannabis remains illegal under federal law, many banks and insurers do not want to participate, leaving large parts of the industry unbanked and uninsured.

As a result, there are notable risks in transporting product. Cannabis distributors not only transport hundreds of pounds of high-value product but also six-figure sums of cash.

For transport companies like Hardcar Security in California, the risk is big. It took the company eight months to find insurance to cover their operations, product and cash, said CEO Todd Kleperis.

“You become a huge target [for criminals] and your risk profile is off the charts,” Kleperis says.

“It’s not an easy business to get in.”

Hardcar Security transports cannabis products and cash in California for the medical and recreational marijuana industry. Due to the risk involved, Hardcar operates more like a military operation than a transport company, Kleperis said.

Trucks are unmarked, armor-plated and equipped with bulletproof glass. Most drivers are former military veterans, travel armed, and take different routes to minimize risk.

“We want to make sure that when people see our trucks, they don’t know if its product or cash. I don’t even want them knowing what our trucks look like,” said Kleperis.

Green Insurance Options

The legal marijuana industry is in its infancy, but a few insurers and brokers are starting to enter the market. Zeyger Insurance in Calabasas, Calif., offers insurance to every area of the cannabis industry, from manufacturing and transportation to retail.

Zeyger president and founder Michael Senderovich has been attending cannabis industry meetings and events to stay in touch with the concerns and needs of businesses. There is strong interest coming from California, he said.

How to cover government seizure is the number one question when we’re at trade shows. It’s specifically excluded in every policy I’ve seen.– Denny Christner of Cannabis Insurance Associates

“There are already 10,000 applications in the city of Los Angeles alone, and they are all still pretty much pending. It’s moving very slowly, but there is a lot of interest. And they need insurance,” Senderovich said.

Much like any other industry, cannabis companies are seeking insurance products like general liability, workers’ compensation and product liability. What complicates the matter is that cannabis remains illegal under federal law and is subject to varying state and local laws, especially when it comes to transportation and distribution.

There is no straightforward path to coverage and every policy is written differently according to the market and risk, says Lisa Chaumont, vice president of underwriting, Cannabis Insurance Solutions, in Broomfield, Colo.

Denny Christner
Cannabis Insurance Associates

“It depends on a number of factors. Whether they are transporting for themselves or for a third party. Whether it is armored, how it is carried,” Chaumont said.

One of Chaumont’s main carriers offers a policy that covers up to $100,000 in product and up to $50,000 in cash.

One unique aspect is that product coverage is only triggered when an entire load is stolen. A typical deductible is $2,500, and while it can vary dramatically by strain, the average going rate for a pound of cannabis in California is $1,600.

While there are many brokers and insurers advertising coverage, many don’t offer the coverage cannabis companies really need, Senderovich said. Many have fine-print marijuana exclusions.

So, while policies may cover general liability, auto and property, they likely don’t cover cannabis. For those that do offer full coverage, the requirements can be high.

“Our insurance would not allow us to do both product and cash without armored trucks. There is no insurance carrier in the world that would do that,” Kleperis said.

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“Seed to sale” regulatory systems in many legal states track products with packaging and barcodes from the time it leaves the farm until the time it is sold. This chain of custody not only helps regulators track product, but also can help insurers, Chaumont said.

In one recent claim for stolen product, the insurer was able to verify the cannabis all the way back through the system to the farm.

Good coverage also doesn’t come cheap, and underwriters want to see a lot of documents, including business licenses and appropriate state and local cannabis permits. In California, the Bureau of Cannabis Control started accepting applications for retailers and distributors in early-December.

“We get a lot of startups that don’t have a permit yet are looking for quotes or coverage, and we really can’t continue that process until they show proof. Underwriters are doing a good job of classifying and clearing the prospects,” said Denny Christner, CIC, Cannabis Insurance Associates, a division of Brown & Brown Insurance in Lafayette, Calif.

 Regulations and Federal Law Uncertain

Cannabis’ illegal status under federal law continues to be the biggest hurdle in the industry, one that scares away most insurers, Christner said. While federal legalization could make the industry “no different than alcohol,” challenges will remain as long as marijuana remains on the DEA’s list of Schedule I drugs, he said.

Michael Senderovich
President and Founder of Zeyger Insurance

The federal government has had a lax attitude over the past couple of years, but transporters cannot cross state lines or any place that is considered federal land.

At Hardcar, drivers are routed to ensure they do not approach any federally-regulated lands or risk going through federal checkpoints.

“If you cross a federal checkpoint anywhere within the state of California, you put yourself in immediate risk,” he said. “You have to route your drivers to ensure they’re not going anywhere near them.”

In December, the California Highway Patrol seized a vanload of 1,875 pounds of marijuana from distribution company Old Kai.

While the company produced documents proving they were complying with new state and local laws, authorities said it didn’t matter because the rules were not yet in place until January 1, 2018. And even within legal states, cities and counties are starting to create their own laws.

“How to cover government seizure is the number one question when we’re at trade shows. It’s specifically excluded in every policy I’ve seen,” Christner said.

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And the risks from the federal level could be growing. U.S. Attorney General Jeff Sessions announced in early January 2018 the rescinding of an Obama-era policy that discouraged federal prosecutors from pursing marijuana-related charges in states that had legalized it.

Most in the industry say it’s symbolic only and unlikely to have any impact.

Politicians in legal states note that the federal government is unlikely to confront states given the growing public acceptance of marijuana use. Sessions did not order prosecutors to go after legal cannabis but instead said the decision would be up to each of the 93 U.S. district attorneys.

“It will be business as usual …The risk you put yourself at, personally and financially, is very high. But the bigger the risk, the bigger the potential windfall.

“The people who are now on top of the alcohol industry and are worth billions are those that took risk in the prohibition era,” Kleperis said. &

Craig Guillot is a writer and photographer, based in New Orleans. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Cyber Resilience

No, Seriously. You Need a Comprehensive Cyber Incident Response Plan Before It’s Too Late.

Awareness of cyber risk is increasing, but some companies may be neglecting to prepare adequate response plans that could save them millions. 
By: | June 1, 2018 • 7 min read

To minimize the financial and reputational damage from a cyber attack, it is absolutely critical that businesses have a cyber incident response plan.

“Sadly, not all yet do,” said David Legassick, head of life sciences, tech and cyber, CNA Hardy.

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In the event of a breach, a company must be able to quickly identify and contain the problem, assess the level of impact, communicate internally and externally, recover where possible any lost data or functionality needed to resume business operations and act quickly to manage potential reputational risk.

This can only be achieved with help from the right external experts and the design and practice of a well-honed internal response.

The first step a company must take, said Legassick, is to understand its cyber exposures through asset identification, classification, risk assessment and protection measures, both technological and human.

According to Raf Sanchez, international breach response manager, Beazley, cyber-response plans should be flexible and applicable to a wide range of incidents, “not just a list of consecutive steps.”

They also should bring together key stakeholders and specify end goals.

Jason J. Hogg, CEO, Aon Cyber Solutions

With bad actors becoming increasingly sophisticated and often acting in groups, attack vectors can hit companies from multiple angles simultaneously, meaning a holistic approach is essential, agreed Jason J. Hogg, CEO, Aon Cyber Solutions.

“Collaboration is key — you have to take silos down and work in a cross-functional manner.”

This means assembling a response team including individuals from IT, legal, operations, risk management, HR, finance and the board — each of whom must be well drilled in their responsibilities in the event of a breach.

“You can’t pick your players on the day of the game,” said Hogg. “Response times are critical, so speed and timing are of the essence. You should also have a very clear communication plan to keep the CEO and board of directors informed of recommended courses of action and timing expectations.”

People on the incident response team must have sufficient technical skills and access to critical third parties to be able to make decisions and move to contain incidents fast. Knowledge of the company’s data and network topology is also key, said Legassick.

“Perhaps most important of all,” he added, “is to capture in detail how, when, where and why an incident occurred so there is a feedback loop that ensures each threat makes the cyber defense stronger.”

Cyber insurance can play a key role by providing a range of experts such as forensic analysts to help manage a cyber breach quickly and effectively (as well as PR and legal help). However, the learning process should begin before a breach occurs.

Practice Makes Perfect

“Any incident response plan is only as strong as the practice that goes into it,” explained Mike Peters, vice president, IT, RIMS — who also conducts stress testing through his firm Sentinel Cyber Defense Advisors.

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Unless companies have an ethical hacker or certified information security officer on board who can conduct sophisticated simulated attacks, Peters recommended they hire third-party experts to test their networks for weaknesses, remediate these issues and retest again for vulnerabilities that haven’t been patched or have newly appeared.

“You need to plan for every type of threat that’s out there,” he added.

Hogg agreed that bringing third parties in to conduct tests brings “fresh thinking, best practice and cross-pollination of learnings from testing plans across a multitude of industries and enterprises.”

“Collaboration is key — you have to take silos down and work in a cross-functional manner.” — Jason J. Hogg, CEO, Aon Cyber Solutions

Legassick added that companies should test their plans at least annually, updating procedures whenever there is a significant change in business activity, technology or location.

“As companies expand, cyber security is not always front of mind, but new operations and territories all expose a company to new risks.”

For smaller companies that might not have the resources or the expertise to develop an internal cyber response plan from whole cloth, some carriers offer their own cyber risk resources online.

Evan Fenaroli, an underwriting product manager with the Philadelphia Insurance Companies (PHLY), said his company hosts an eRiskHub, which gives PHLY clients a place to start looking for cyber event response answers.

That includes access to a pool of attorneys who can guide company executives in creating a plan.

“It’s something at the highest level that needs to be a priority,” Fenaroli said. For those just getting started, Fenaroli provided a checklist for consideration:

  • Purchase cyber insurance, read the policy and understand its notice requirements.
  • Work with an attorney to develop a cyber event response plan that you can customize to your business.
  • Identify stakeholders within the company who will own the plan and its execution.
  • Find outside forensics experts that the company can call in an emergency.
  • Identify a public relations expert who can be called in the case of an event that could be leaked to the press or otherwise become newsworthy.

“When all of these things fall into place, the outcome is far better in that there isn’t a panic,” said Fenaroli, who, like others, recommends the plan be tested at least annually.

Cyber’s Physical Threat

With the digital and physical worlds converging due to the rise of the Internet of Things, Hogg reminded companies: “You can’t just test in the virtual world — testing physical end-point security is critical too.”

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How that testing is communicated to underwriters should also be a key focus, said Rich DePiero, head of cyber, North America, Swiss Re Corporate Solutions.

Don’t just report on what went well; it’s far more believable for an underwriter to hear what didn’t go well, he said.

“If I hear a client say it is perfect and then I look at some of the results of the responses to breaches last year, there is a disconnect. Help us understand what you learned and what you worked out. You want things to fail during these incident response tests, because that is how we learn,” he explained.

“Bringing in these outside firms, detailing what they learned and defining roles and responsibilities in the event of an incident is really the best practice, and we are seeing more and more companies do that.”

Support from the Board

Good cyber protection is built around a combination of process, technology, learning and people. While not every cyber incident needs to be reported to the boardroom, senior management has a key role in creating a culture of planning and risk awareness.

David Legassick, head of life sciences, tech and cyber, CNA Hardy

“Cyber is a boardroom risk. If it is not taken seriously at boardroom level, you are more than likely to suffer a network breach,” Legassick said.

However, getting board buy-in or buy-in from the C-suite is not always easy.

“C-suite executives often put off testing crisis plans as they get in the way of the day job. The irony here is obvious given how disruptive an incident can be,” said Sanchez.

“The C-suite must demonstrate its support for incident response planning and that it expects staff at all levels of the organization to play their part in recovering from serious incidents.”

“What these people need from the board is support,” said Jill Salmon, New York-based vice president, head of cyber/tech/MPL, Berkshire Hathaway Specialty Insurance.

“I don’t know that the information security folks are looking for direction from the board as much as they are looking for support from a resources standpoint and a visibility standpoint.

“They’ve got to be aware of what they need and they need to have the money to be able to build it up to that level,” she said.

Without that support, according to Legassick, failure to empower and encourage the IT team to manage cyber threats holistically through integration with the rest of the organization, particularly risk managers, becomes a common mistake.

He also warned that “blame culture” can prevent staff from escalating problems to management in a timely manner.

Collaboration and Communication

Given that cyber incident response truly is a team effort, it is therefore essential that a culture of collaboration, preparation and practice is embedded from the top down.

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One of the biggest tripping points for companies — and an area that has done the most damage from a reputational perspective — is in how quickly and effectively the company communicates to the public in the aftermath of a cyber event.

Salmon said of all the cyber incident response plans she has seen, the companies that have impressed her most are those that have written mock press releases and rehearsed how they are going to respond to the media in the aftermath of an event.

“We have seen so many companies trip up in that regard,” she said. “There have been examples of companies taking too long and then not explaining why it took them so long. It’s like any other crisis — the way that you are communicating it to the public is really important.” &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected] Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]