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Just imagine you own a marijuana retail operation buying your product from several dozen growers. You decide to apply for product liability insurance as you’ve developed a concern if a lawsuit or claim was to arise from your product sold into the stream of commerce was to affect your company. You complete a lengthy application with perhaps your insurance broker that includes specific questions on if your business includes itself as an additional insured on the policies from your suppliers.
You truthfully answer no, which results in the carrier declining your request for insurance.
This situation is occurring in the marketplace as carriers mandate from cannabis applicants that they be included on the insurance of their suppliers. As Guy Fieri from the popular show Diners, Drive-Ins and Dives says “everyone in the pool” applies to marijuana insurance as carriers decide how much risk is too much risk, particularly if they are the only carrier likely to respond to potential litigation.
If for example, a retailer buys concentrates from a manufacturer who used several growers to produce the final product. Only the retailer has product liability, while the growers and manufacturers escaped this obligation. That one insurance company is wondering what is their legal obligations particularly when they are the sole carrier left to defend the suit.
Limited number of insurance carriers, difficult underwriting requirements, and claims being denied are reasons the cannabis industry has chosen not to insure their product exposures
The truth is most cannabis operations do not have product liability insurance. The reasons include limited availability, cost, difficult underwriting, and fear the insurance carrier will not pay should they have a claim.
The current number of cannabis product liability insurance carriers is probably less than five. The price for these policies is based on revenue and typically starts at approximately $2,500 per year and moves up based on the revenue of the licensee. The higher the revenue, the larger the premium. Furthermore, certain insurance carriers will only insure for medical marijuana operations and will not participate in the recreational market.
The challenge using our example of a retail cannabis operation is obtaining certificates of insurance from 50 suppliers for product liability is impossible. One supplier not having coverage eliminates the retailer’s chance to purchase the insurance. The decline is worse if the cannabis business owner is renewing from another policy that will trigger other important policy provisions that involve recognizing prior periods of time.
Over the years, we’ve heard many cannabis licensees state their lack of trust of insurance companies to pay their claims. In our opinion, this uncertainty can be somewhat unjustified or naive as our experience has indicated cannabis insurance carriers will generally pay legitimate claims with the understanding the policy governs the relationship. However, we have not experienced every type of claim with all of our insurance carriers and underwriting groups that we represent past or present. A good chance exists, the larger the potential insurance claim particularly if its product liability, you can expect a review of the underwriting file, policy language, and potential dog fight over what is covered.
What if I’m applying for product liability insurance and I don’t obtain certificates of insurance from my suppliers?
In our experience your application is likely to be declined. However, a discussion with a licensed insurance broker is warranted to determine if the insurance carrier will reconsider their position. In my opinion, the insurance companies must consider these obstacles that are impossible to overcome and set reasonable underwriting standards based on the market conditions of the cannabis industry. A mandate by the insurance carrier, while failing to realize these market conditions along with underlying agreements between various parties is a failure in the underwriting process.