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

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]