Cannabis Producers Need to Be Very Careful With Their Insurance Purchases

By: Tyler Scott | February 1, 2019

Tyler Scott is a partner with Husch Blackwell and is based in the firm’s Kansas City office. He advises both insurance companies and their insureds and regularly counsels businesses regarding policy coverage and exposures, as well as strategies that minimize risk and possible litigation. He can be reached at [email protected].

Generally speaking, disputes between carriers and insureds are not infrequent; however, coverage disputes in the cannabis industry can be of a different caliber altogether. There is ample evidence suggesting that, on a very basic level, cannabis industry participants face heightened risks when purchasing and using insurance products, with the end result being that many operators believe they have adequately insured potential risks when in fact they haven’t.

With this in mind there are several key areas for cannabis industry operators to consider when purchasing insurance.

Make Sure All Risks Are Insured

Cannabis operations span many different business models and range from very simple to very complex. When considering insurance products, operators need to carefully consider the components of their operations—i.e., manufacturing, transportation, wholesale or retail sales—as each of these will affect the types of coverage needed.

Some coverages are universal, like property insurance, which covers damage to the operator’s equipment, and commercial general liability coverage, which protects the business against claims brought by third parties for personal injury or property damage. But even those universal policies should be purchased with operations in mind. For example, property insurance should probably include inventory to protect theft or damage to an operator’s products. Similarly, regardless of whether your operations involve cultivation, manufacturing or retail sales, commercial general liability coverage should include products liability and completed operations hazard coverage to protect against claims for damages from individuals allegedly caused by the cannabis products manufactured or sold, or services provided.

Claims for product liability have been asserted against cultivators and retail stores alike. Other more specialized coverages should also be considered: given the prevalence of cash as the primary method of exchange in the cannabis industry, some degree of crime/theft coverage is a smart way to manage the associated risks. Other forms of insurance will be required depending upon the makeup of the underlying business; for example, some operators will find that they need crop coverage if cultivation is part of their business.

On the retail side of the industry the product mix one offers may well dictate the kinds of coverage required. If an operator has both medicinal and recreational sales, this has implications for insurance. The operator’s policy needs to expressly insure both the medicinal and recreational products and portions of the business.

Be Wary of Exclusions

Development of insurance products tailored to the specific needs of the cannabis operators is limited. Because tailored policies are rare, some policy terms or coverage exclusions common in standard insurance policies may effectively void coverage for cannabis operators.

One standard exclusion that has been relied upon to deny coverage is the illegality exclusion, which excludes coverage for conduct illegal under state or federal law. While the operator may be located in a state in which cannabis is legal, the growing, manufacturing and sale of cannabis is still illegal under federal law (the Controlled Substances Act). The legal status of cannabis in federal law is not likely to change in the immediate future, and the conflict between federal and state law presents a dilemma for carriers and insureds alike. The safest course for a cannabis industry operator is to discuss the illegality exclusion with its broker or insurer to address the concern and confirm that it will not apply to cannabis business activities legal under state law.

Claims for product liability have been asserted against cultivators and retail stores alike.

Operators must also be wary of how their property insurance policy defines covered property, because it will often exclude coverage for contraband (which cannabis could be considered due to its illegality under federal law), growing crops and plants. Such a definition could eliminate or significantly limit coverage.

There are other exclusions that sometimes appear in commercial general liability policies worthy of mention:

Exclusions for injuries arising out of the performance of a criminal act or caused by a person under the influence of intoxicants (cannabis may be considered an intoxicant and ingesting it is technically a criminal act under federal law).
The “Smoking Products Hazard” Exclusion — this hazard is often used to protect the insurer from covering nicotine products such as cigarettes or vapes, but would apply to exclude injuries arising out of a large part of a cannabis business (smoking) if interpreted broadly; this exclusion often includes other language that is not beneficial, such as exclusions pertaining to claims or damages arising out of marketing, distribution or other sales practices and exclusions for damages arising out of the design and or failure to warn regarding the product.

Choice of Law Provisions

Certain policies will provide that the law of the state where the insurer is located governs the policy. As of this writing, only 10 states have legalized recreational use of cannabis; many more are governed by a patchwork of state laws allowing for various levels of medicinal use.

The applicable state law controlling an insurance policy can greatly impact coverage and recovery of damages: If the insurer is located in a state that does not permit the sale or production of cannabis, it increases the risk that a court will deny coverage based upon one of the policy exclusions or provisions discussed above.

Choose Advisors & Business Partners Carefully

When it comes to cannabis operations, the coverage provided by a standard insurance product may not be as robust as it appears. To avoid harmful surprises, operators should consider working with specialized insurers with specifically tailored cannabis industry policies. These policies may be more expensive, but they are particularly tailored to the industry and reduce the likelihood that the insurer will refuse to insure cannabis as illegal, or use some other exclusion that voids or limits coverage. At a minimum, cannabis operators should work with knowledgeable advisors as they look to acquire comprehensive insurance programs for their businesses to ensure they fully understand the coverage such insurance will provide, and to help identify potential coverage gaps and pitfalls.

How a Carrier Partner Can Help Navigate a Challenging Management and Professional Liability Market

A combination of a choppy economy with increased claims frequency and severity could lead to rate increases in the Management & Professional Liability market.

By: Risk & Insurance | April 3, 2024

Rates in the management & professional liability (M&PL) markets were on the rise from 2020 to early 2023 and are now falling rapidly.

M&PL divisions manage a number of different insurance products including management liability (D&O), professional liability (E&O), employment practices liability (EPL), fiduciary liability policies, cyber, etc. In 2023 and into 2024, a big influence on the marketplace has been the extremely aggressive and softening public company D&O market.

Though these rates have been softening for management liability, that may change over the next few years as companies continue to adjust their business models motivated by economic uncertainty. Layoffs were up nearly 200% last year, Forbes reported, even as other recession indicators, like the inflation rate, improved. A recession could lead to an increased claim activity and force carriers to raise rates.

“Whenever there is a meaningful downturn in the economy, we tend to see claim frequency pop up,” said George Schalick, Jr., senior vice president of the Management and Professional Liability Division at Philadelphia Insurance Companies (PHLY).

With continued fiscal uncertainty, businesses potentially already burdened with pandemic-related claims should seek a carrier with a long history in M&PL products. They will provide much-needed risk management guidance and be better positioned to support their insureds during market fluctuations.

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.