Surety

The Buzz Over Bonds

Bonding requirements in the weed business are wildly inconsistent and sometimes seem biased against the industry.
By: | May 2, 2017 • 6 min read

Now that medical and/or recreational use of marijuana is legal in nearly a quarter of U.S. states, several are now requiring marijuana dispensaries and growers to obtain surety bonds to make sure the businesses are viable and upstanding.

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But some are questioning the high bond amounts required by states like Arkansas, Florida and Connecticut, claiming it’s “cannabigotry” in a drive to stamp out the controversial businesses. Colorado last year relaxed its surety bond requirements after too many mom and pop firms went out of business due to the tightening of the surety bond market there.

Some marijuana bonds guarantee compliance with a state license, but most often the bonds guarantee payment of tax revenue on the sale of marijuana, said Victor J. Lance, president and owner of Lance Surety Bond Associates Inc. in Doylestown, Pa.

“These bonds are currently very difficult to place, and most bond companies avoid writing them for primarily two reasons — federal law still makes possession and use of marijuana illegal, and the threat of RICO [Racketeer Influenced and Corrupt Organization] lawsuits,” Lance said.

In 2015, an anti-marijuana group sued several Colorado dispensaries and companies doing business with them, including Merchants Bonding Co., claiming they violated the federal RICO act. The surety bond firm settled and immediately exited the marijuana bonding business, and most other bond companies followed suit.

“However, there are still some bond companies willing to write these bonds for qualified applicants,” Lance said. “If federal law changes, which some think is only a matter of time, this will most certainly change as more and more bond companies re-enter the industry.”

Different Approaches

Regardless of federal law, state regulators “need to be thoughtful” in setting appropriate penal sums and determining bond language, he said. Some states like Florida and Connecticut require surety bonds for $1 million or more, but it’s very difficult, if not impossible, for most new businesses to qualify for a bond of that size.

Victor J. Lance, president and owner, Lance Surety Bond Associates Inc.

“If a state decides to require a bond that no bond company is comfortable writing, the requirement becomes unattainable for most businesses and can be detrimental to the growth of the marijuana industry in their state,” Lance said. “It’s important for state regulators to consult with the surety industry, such as the legal counsel at the Surety & Fidelity Association of America, before deciding on new bonding requirements.”

Colorado last year removed the surety bond requirements for marijuana firms. Other RICO lawsuits against marijuana firms and those that do business with them have since been dismissed by federal judges or turned down by the U.S. Supreme Court.

The Arkansas Medical Marijuana Commission proposed surety bond requirements for marijuana businesses wishing to obtain licenses, which must be approved by the Arkansas Legislature. The state will initially award 32 dispensary licenses on a lottery basis and five cultivation facility licenses based on the firms’ merits.

To qualify for a cultivation license, applicants must provide proof of assets or a surety bond in the amount of $1 million, an initial $500,000 performance bond, and proof of at least $500,000 in liquid assets.

For dispensary licenses, applicants electing to cultivate medical marijuana on the premises must provide proof of assets or a surety bond in the amount of $200,000 and proof of at least $100,000 in liquid assets.

Keith Mansur, publisher of the Oregon Cannabis Connection’s OCC Newspaper in Grants Pass, Ore., said that the Arkansas bond requirements for dispensaries are not overly odious, but the requirements for growers are.

“I think what’s really driving this is ‘cannabigotry,’ ” Mansur said. “They are afraid of the unknown and the Feds perpetrate the myth that cannabis is bad because they still classify is as a Schedule I controlled substance. But all of that ridiculous scheduling causes fear.”

Still, he’s not sure that having no bond requirement is a good thing.

Companies need to know “that there’s more risk involved than just opening their doors,” said Mansur.

Keith Mansur, publisher, Oregon Cannabis Connection newspaper

For smaller firms, a $10,000 license and/or tax bond runs between $300 and $1,500, said Gary Eastman, president of Swiftbonds in Leawood, Kan.

To get any type of surety bond, companies need to show three years’ worth of financials or the applicant needs to have great credit, Eastman said. For small firms, Swiftbonds typically asks for a basic profit and loss statement, but also encourages a balance sheet statement. As most dispensaries do not have a lot of assets, the firm looks for strong cash flow and sometimes a letter of credit or some other type of collateral.

“We tell companies that even if they can’t get a bond today, continue to work with the surety company, sending updates and financial statements,” he said. “If the company shows continuous progress and that they’re taking all the right steps — instead of trying to grow too aggressively, cutting costs so they can’t service customers — then they can ultimately get a bond.”

Some states, like Washington, don’t require surety bonds, but they do require dispensaries and growers to have commercial general liability insurance or commercial umbrella insurance, with limits of not less than a million dollars, said Susan Coakley, insurance specialist at New Growth Insurance in Alameda, Calif.

“Marijuana firms typically are cash-only businesses, so if they ever had an insurance claim, the insurer could not pay them $5,000 in cash to resolve the claim,” Coakley said. They’d need to use lawyers as intermediaries.

There are some brokers who are selling GL policies to marijuana firms so they can meet the regulatory requirements, but if the firms ever had a claim they wouldn’t be covered, she said. The red flag to watch for is verbiage in the policy that excludes the cannabis business.

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T.J. Frost, commercial and surety insurance adviser at HUB International in Seattle, said that in Washington, local utilities sometimes require marijuana firms to put money upfront, just in case they ever miss a utility payment. That amount could be in the range of $150,000, or around $8,000 for a startup. The fee for such a bond is 20 percent.

HUB’s risk services team also inspects properties and helps clients seeking insurance prepare by discussing potential fire hazards, sprinkler systems, light wire exposure, exit requirements and the need for cameras, safes and vaults.

“One thing we pride ourselves [on] is that we can help companies with risk mitigation, because there were companies that started out in people’s houses that were catching fire because they were doing it indoors,” Frost said.

HUB also brings in attorneys knowledgeable about the marijuana industry to work with clients on accounting, taxes and other issues.

“We want our clients to be successful; we want them to pave the way for others,” Frost said. “We try to be an advocate for them, not just their insurance broker.” &

Katie Kuehner-Hebert is a freelance writer based in California. She has more than two decades of journalism experience and expertise in financial writing. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Management

The Profession

Verizon’s risk manager David Cammarata loves when his team can make a real impact on the bottom line.
By: | May 2, 2017 • 4 min read

R&I: What was your first job?

I was a financial analyst with the N.J. Casino Control Commission.

R&I: How did you come to work in risk management?

I was told at a Christmas luncheon in 2003 that I was being promoted into a new job.

R&I: What is the risk management community doing right?

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I think the risk management community is getting a lot better at utilizing big data and analytics to manage risk. Significant improvements have been made, but there is still much more room for improvement.

R&I: What could the risk management community be doing a better job of?

I think that the insurance and brokerage communities need to really start thinking about what this industry is going to look like in 10 years. They need to start addressing how they are going to remain relevant. I think that major disruptions to existing business models will occur and that these disruptions combined with innovation and technological advances may catch many of today’s industry leaders by surprise.

David Cammarata, assistant treasurer, risk management and insurance, Verizon Communications Inc.

R&I: What was the best location and year for the RIMS conference and why?

San Diego, any year.

R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?

I think the advent of cyber risk and cyber insurance. For several years it has been, and it continues to be, the main topic of discussion at industry meetings.

R&I: What emerging commercial risk most concerns you?

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I think the most scary scenarios include a nuclear, biological, chemical or radiological event, a widespread global health epidemic and/or a widespread state sponsored cyber shutdown.

R&I: How much business do you do direct versus going through a broker?

We do almost all of our business through a broker.

R&I: Is the contingent commission controversy overblown?

No. It’s a conflict.

R&I: Are you optimistic about the U.S. economy or pessimistic and why?

Optimistic because hopefully President Trump’s policies (lower taxes and less regulation) will be pro-business and good for the economy.

R&I: Who is your mentor and why?

My dad, who passed away many years ago. He was very influential during the formative years of my career. He taught me how important integrity and reputation were to your brand and he had a very strong work ethic.

R&I: What have you accomplished that you are proudest of?

I would have to say raising two awesome kids. My daughter is graduating from James Madison University this year as co-valedictorian. My son is finishing his sophomore year at Rutgers and has near perfect grades. But more importantly, both of my kids have turned out to be really good people.

R&I: How many emails do you get in a day?

A lot.

“I love it when the risk management organization is able to contribute in a way that makes a real impact to the corporation’s overall objectives. On several occasions we have been able to make real contributions to the bottom line.”

R&I: What is your favorite book or movie?

“My Cousin Vinny.” That movie makes me laugh no matter how many times I watch it.

R&I: What’s the best restaurant you’ve ever eaten at?

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My dad used to take me to a place called Chick & Nello’s. It was an Italian place that did not have a menu. They came to your table and told you the two or three items they were making that day. The food was out of this world.

R&I: What is your favorite drink?

Iced tea. The non-alcoholic kind.

R&I: What is the most unusual/interesting place you have ever visited?

I can think of several places but for me it would be a tie between India and Italy. India just has such a different culture and way of life and Rome has breathtaking historical sites.

R&I: What is the riskiest activity you ever engaged in?

Well, one of the best thrill rides I’ve been on was Kingda Ka at Great Adventure. It feels risky but probably isn’t all that risky. I flew in a prop plane with my brother-in-law one time … that felt kind of risky. I have also parasailed, does that count? I think it definitely has to be driving on the N.J. Turnpike day in and day out.

R&I: If the world has a modern hero, who is it and why?

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What about the Fukushima 50? I don’t think I could have done what they did.

R&I: What about this work do you find the most fulfilling or rewarding?

I love it when the risk management organization is able to contribute in a way that makes a real impact to the corporation’s overall objectives. On several occasions we have been able to make real contributions to the bottom line.

R&I: What do your friends and family think you do?

I don’t think they really know. My children see me as dad; others just see me as an executive with Verizon.




Katie Siegel is a staff writer at Risk & Insurance®. She can be reached at [email protected]