Cannabis Producers Need to Be Very Careful With Their Insurance Purchases

By: | February 1, 2019 • 5 min read
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.

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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.

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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.

4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.

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That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.

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Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]