Cannabis business insurance requirements, restrictions, and more change from carrier to carrier, state to state, company to company, etc.
As a business owner, you know that the commercial life is multifaceted—there are so many working parts that need to be greased continuously to move and work together in harmony so that you can make money. Commercial insurance is the same way. Requirements, restrictions, and more change from carrier to carrier, state to state, company to company. Insurance can be confusing, but that is why we are here. We are here to help guide you in the right direction so that your cannabis business can follow requirements for rental agreements, carrier conditions, state laws, federal regulations, and more.
For example, did you know that business owners routinely enter into agreements that include insurance requirements? Rental or lease agreements between tenants and landlords typically require both parties to have specific insurance and the contract dictates how the insurance company will respond to a claim.
Is Your Cannabis Insurance in Compliance?
In Washington, The Washington Liquor and Cannabis Board requires cannabis businesses to have insurance by statute. The enforcement of the insurance requirements is usually straightforward: the tenant won’t receive the keys to the property unless they prove that they have proper insurance. Similarly, the cannabis company won’t receive a license unless they can prove they comply with the statutory insurance requirements.
In other words, before a loss occurs there is a mechanism that ensures the parties comply with what was agreed upon in the contract. In the event of a claim, the process is clear: the insurance company will settle the loss in accordance with the contract requirements and the insurance policy provisions.
What Happens If a Contract Is Signed and Proper Insurance Is Not in Effect?
The short answer is that the party that is required to have insurance may be out of compliance and the other party can, in effect, cancel the contract. This can have devastating consequences for the party that fails to comply with the contract requirements, even if no loss occurs.
For example:
- A processor signs a long-term contract with a grower to provide extraction services at a price that provides a profit to the processor. After six months, the grower asks for proof that the processor has the proper insurance. The processor does not have the required insurance and finds out the cost of the insurance exceeds the profit in the contract. The grower cancels the contract and moves the business to another processor.
- A lender finances the purchase of equipment and buildings so that a grow operation can increase production. A covenant in the loan requires the borrower to insure all the new property and business interruption insurance. The borrower is unable to purchase the proper insurance and the lender requires immediate repayment of the loan because the borrower is not compliant with the loan provisions. The grow operation cannot repay the loan and is forced to declare bankruptcy.
The second example is a particular risk for cannabis companies because their access to traditional lenders is limited.
What can your marijuana business do to help avoid experiencing this common predicament? For starters…
- Know your contract. If you are not well-versed in legalese, consider talking to a lawyer or legal secretary to help you sift through the jargon. You need to know your requirements and restrictions so that you can follow them. One of our agents can also help you understand what needs to happen for you to be protected.
- Ask questions. If you are not sure about something, ask for clarification. This is particularly important if it has something to do with a contract or state law. If the person you are talking to cannot ease your confusion, consider talking to someone who is a professional in the field. Here at Mosaic, we personally love questions, and we have been writing marijuana insurance since 2012, so we’re ready to answer any insurance questions that you have. Also, if you happen to have company questions outside of coverage, you can still ask us. We might be able to point you in the right direction to someone who can help you with other business endeavors.
- Have good communication and don’t be a stranger. This includes good and frequent communication with property contacts like landlords, banks you received loans from, and your insurance agent. Typically, the closer you are to someone, the likelier chance you will have updated information and healthy business relationships.
- Your community is also important to communicate well with. Small towns might feel put-off by your existence—civilians, local police, city board members, the mayor, etc. A few of our cannabis insurance clients have mentioned to us in small talk that the first thing that they did when they opened up shop was attend a community board meeting and local churches to introduce themselves and show everyone that they are friendly business owners. They said that it really helped them feel like part of the community, spread word about their existence, and show people that they are people too. Having healthy ties to the community can help you make a profit as well as avoid future targeted items like ghosting, boycotting, striking, theft, and vandalism.
Dan Wozniak, a funding specialist in the cannabis industry, agrees that borrowers and lenders would do well to work closely with their insurance advisers during the borrowing process.
“In cannabis, financing each deal is often substantially different and has unique requirements,” said Dan. “If the proper insurance is not in force, all parties could be exposed in a variety of unforeseen ways.”
Are you interested in learning more about the cannabis finance industry? Dan can be reached at alternative.woz@gmail.com or 805-705-1754 for more information about financing availability and requirements.
Some More Scenarios of a Cannabis Company That Is Not in Compliance:
1. A CBD topical shop fell on some hard times due to COVID-19. They had to apply for a bank loan to stay open and get back on their feet. Nothing changed for them other than that loan—they kept the same employees, their business products did not change, they have the same commercial car they’ve had for 5 years, etc. Unfortunately, they did not think to talk to their insurance company. If they did, they would have known that taking out a loan changed the insurance requirements that they had to have for various coverages like their commercial auto insurance. After totaling their work car in an at-fault accident, they had another unfortunate surprise—they would not be covered because they no longer had the minimum requirements for different parts of their car insurance policy, including their minimum liability requirements. So, their car insurance company refused to pay for any part of the claim. Missing that one quick and important phone call to their insurance agent resulted in the cannabis business having to buy a new vehicle for the person they hit and pay the medical bills for the person they hit as well as their employee. Ouch! Not surprising, they had to close permanently, and the business owners will be suffering financially for years to come.
2. A marijuana vape shop purchased a safe after their cannabis insurance company told them that they had to have one for a claim to be covered if a break-in and theft were to happen. However, they did not read the contract closely and get a safe that met the carrier’s requirements, which they found out too late when they were robbed and called their carrier to file a claim. They were told that they were not covered because they did not meet the contract agreement. They had to pay for damages and product loss out-of-pocket, and no compensation happened for the money that was stolen out of the register.
- Also, for most insurance companies that require a safe/vault, there are usually extra requirements that need to be met—such as the safe needing to weigh at least 550 lbs. (For more information on common safe requirements, view our cannabis blog post here.)
- Additionally, keep in mind that most cannabis insurance carriers also require a minimum amount of liability insurance and/or product liability insurance to get insured through them. For example, a coverage limit of 1 million or more is a common requirement.
3. Owners of an Oregon marijuana processing plant decided to move to Washington. They spoke to their insurance company, which is new to writing cannabis coverage, and let them know that they were moving so that their insurance would be up to date. The agent failed to tell them that they now needed product liability insurance (something that Oregon does not require, but Washington does). There is now a big mess on fighting over a recent claim and state penalty charges since their agent did not get them what they needed after they asked. This kind of fight can take years to sort out, and in the meantime, that can make a company close for good.
- (Being in the insurance industry for over a decade, and writing in 9 states, we know the importance of getting the right coverage for your marijuana business in the state that you are operating in. That is why we have a team of agents that are specifically trained in the cannabis insurance field. If you have a coverage question, ask us!)
4. A CBD edibles company in Washington recently heard about how another company like theirs in California started delivering their products to people’s doors. It is a huge trend right now, and they decided that they wanted to jump on the bandwagon. They are now going to court for a huge fine because while California has legal door-or-door delivery of cannabis products, Washington does not.
5. Texas recently legalized recreational marijuana, so a Texas tobacco shop expanded their products to include some cannabis items. Excited over the new products and the business they were bringing to the shop, the store continued to expand their different marijuana options, getting some products from out-of-state cannabis retailers. All was going great, until they were shut down for selling delta-8 products. Texas has specifically outlawed delta-8, labeling it as a Schedule 1 substance. As they fight the lawsuit and criminal charges, the owners are looking at not only bankruptcy but possible jailtime.
6. A cannabis dispensary has a few locations in California, and they decide that they want to open some more stores in other states. For their grand opening in their first Montana marijuana shop, they decide to stick with some of their marketing spiels that worked so well in California. Now, Montana is going after them for not complying to their state cannabis marketing laws. Remember—different states have different statutes for what is ok and not ok while marketing products, particularly for products like cannabis, tobacco, and alcohol. Label requirements, signage laws, what ads can and cannot have in them, etc. can significantly vary from state to state.
- Also, another thing to take away from this example is that Montana is a state that is newer to weed legalization, while California is one of the first states to legalize cannabis (and it has over a decade under its belt). Generally speaking, states that are newer to the pot industry tend to have stricter laws. If you are wondering about your state laws, visit .gov websites like your state’s insurance commissioner website or alcohol and cannabis board website.
What Else Is Important for Cannabis Companies to Remember?
1. Meeting your building codes is important if you want to have valid coverage. If you remodel your building and then have an electrical fire for example because the old wiring could not handle the new equipment you purchased, you might not be covered if you did not meet your building codes.
- Other than remodeling because you want to, you could be forced to remodel after a damage occurs. Remodeling expenses are not cheap, especially if you need to upgrade your building to fit to code. Losses are not always preventable even if you are very cautious. The world is currently experiencing higher than normal building damages from things like rallies, wildfires, and floods. Additionally, there are other things that happen here and there in everyday life that can destroy your building, like fallen powerlines, earthquakes, and electrical issues.
- Building ordinance coverage (also known as code corrective coverage) can help you prepare against building code expenses. Building ordinance insurance comes into play when a loss causes damage to your building, and you need to rebuild. Many people face the problem of having to pay out-of-pocket during a rebuild because they must meet building codes and without this coverage, their expenses surpassed their insurance claim limits.
- We have a short video series with more examples on how code corrective insurance is helpful.
2. You can lose your cannabis company if you have a TCPA violation. The Telephone Consumer Protection Act (TCPA) of 1991 was passed by Congress to help control spam. It has been an increasing problem for the public, and many of our clients have run into TCPA problems over the last few years. Retail stores have been using text messages and phone calls to make sure clients do not forget them and to help sell new products. The coronavirus increased this occurrence with in-person marketing plummeting in 2020 and 2021. Even now with in-person services being an option again, many people are still staying home more often and ordering more online than before the pandemic hit.
- It is good to try to keep in touch with your clients, but you need to make sure that you are not doing unsolicited means of contact. TCPA allows for someone to receive damages of up to $500 per phone call/email. We are seeing class-action lawsuits and cannabis business owners are ending up with millions of dollars in exposure.
- Remember, as a business owner, you are responsible for your employees’ actions. If your employee violates the TCPA, you can still get in trouble.
- There is no insurance coverage that is available for this exposure…So, what can you do? Watch our Cannabis Director, Steve Boone, talk about the steps you need to take to ensure that your business is not sending out unsolicited material.
3. It goes without saying that fraud is a serious offense. And, being investigated for it even if you are found innocent can tarnish your reputation, put you in debt, give you crazy amounts of stress, result in your employees losing their jobs, force you to closedown due to bankruptcy, etc.
- Fraud example: In 2020, The Washington State Liquor and Cannabis Board shutdown and suspended a Centralia, Washington cannabis lab for 180 as they were investigated for falsifying THC potency levels. Products were claimed to have higher THC levels than they had, and the lab owner attempted to destroy evidence of the falsified data. Read more about the case here.
- As a business owner you are probably thinking that you would never lie to your clients, or do anything to risk losing the company that you worked so hard to build. But, it’s not all about your business owner morals. It is important to know that errors like this can happen by accident and/or by an employee that you hire who is doing it on purpose. Make sure that you have good insurance (i.e., errors and omissions coverage, management liability insurance, employment practice liability insurance, etc.). We can help you get the right coverage that you need for your business. Call us at 425-320-4280. You can read more about the Praxis Lab shutdown here.
4. Be ready for the different seasons and talk to your agent prior to seasonal trends to make sure that your business is ready. For example:
- Spring commonly has flood claims from the increase in rain and the melting of ice/snow. Make sure that your flood insurance is ready.
- Summertime has a lot of wildfire claims from the hot and dry weather. How is your insurance for natural disasters?
- Fall has a lot of flooding claims from more rain on top of dry soil that can’t absorb adequately. Fall also tends to have a high amount of slipping claims with the increase in rain and dead leaves on the ground. In addition to flood insurance, make sure that your liability insurance and workers comp coverage is up-to-date to protect you adequately if a claim were to happen.
- Winter brings on freezing, which leads to plumbing water damage claims, slip and fall lawsuits, increases in car accidents from black ice, etc. There is also an increase in robberies, thefts, vandalism, and cyber crimes during the wintertime due to the holidays and darker weather, so in addition to talking to your insurance agent about the above coverages, ask them about crime insurance and cyber insurance.
5. Language barriers can result in wants and needs not being understood and coverage not being fulfilled correctly. We have fluent English and Spanish speakers on our team.
6. It is also important to remember that business owners should keep their insurance agents informed as they enter into new contracts. Frequently, the cost to conform to contracts is insignificant given the risks of non-compliance. If you have more questions, please reach out to your Mosaic representative.
7. Examples of some other items that you should keep your insurance agent updated on:
- New equipment
- New employees (for coverages like workers comp)
- Updates to existing structures
- New structures
- Building onto old structures
- Opening a new location
- Moving locations
- Buying a new company car
- Making serious upgrades to a company car
- If you start delivering product yourself
- New bank loan
In other words, if you make a big change, contact your Mosaic independent insurance agent.
