When many policyholders think of their commercial or business insurance policy, they recall the 1 or 2-page declaration sheet that summarizes eligible coverages. Unfortunately, insurance policies are not that brief. Rather, policies are dozens or hundreds of pages and buried inside those pages are all types of exclusions, conditions of and exceptions to their insurance coverage and cannabis insurance is no exception.
Many cannabis business owners purchase traditional property policies, assuming they’re insured. Then, when a claim arises, they discover they’re not covered. There are notable provisions that an insured should know about and address proactively to protect against an insurance claim denial. Some examples include:
- Notifications. In most insurance policies, there are affirmative obligations to notify the carrier in the event the “insured property” has undergone significant renovations or modifications; failure to do so could result in a denial of coverage. For those operators that are rehabbing an existing structure, it’s important to disclose your plans and changes to your insurance agent or broker.
For new construction, depending on what type of facility is being constructed, it’s important for the owner and builder to collaborate ensuring the appropriate amount of builder’s risk is placed especially in light of the unique use of a cannabis-based property.
- Protective Safeguard Endorsements. The title of this endorsement makes it sound like something you might want, right? “Protective” and “safeguard” are both positive words. In actuality, it’s an endorsement on a property policy that can exclude coverage in certain scenarios. These endorsements are included in the insurance policy and contain a number of conditions that must be both in place and maintained throughout the life of the policy. Failure to secure and maintain compliance with these requirements can invalidate coverage and lead to claim denial that otherwise would have been covered. Examples of Protective Safeguard Endorsements include but are not limited to: (i) having an automatic sprinkler system; (ii) working automatic fire alarms; and/or (iii) surveillance/security.
Because of the potential coverage gaps created by this endorsement, it’s essential to know if it’s attached to your policy or not and if it can be removed. If it can’t be removed, you must have an internal process in place where any type of suspension of a protective safeguard device is immediately communicated to your insurance agent who will notify your insurance carrier.
- Crops. One of the most salient issue for insurance carriers and policyholders is whether a policy covering a marijuana-related loss is enforceable. Simply put, there is no uniform answer. Some courts hold that an insurance carrier does not have to pay for cannabis crops because to do so would be contrary to federal law. Other courts have reached contrary results deferring to the federal government’s hands-off approach to state-regulated marijuana. Complicating the issue are local bans on marijuana in states where it is otherwise legal.
Because the state of the law is far from settled, it is important to work with your insurance professional to choose a carrier that understands cannabis coverage.
For example, cannabis crops require specific coverage for different growth stages. Depending on how these growth stages are characterized it can give insight into whether cannabis can be qualified as raw materials and are therefore stock or whether the plants are classified as growing crops and are insured differently.
- Equipment/Machinery. In addition to the real estate boom, there has been a technology boom in the cannabis industry. From growing methods leveraging sophisticated grow lights, to super-critical extractors that cost hundreds of thousands of dollars. Significant investment goes into operating and successfully competing within the cannabis space.
Accordingly, owners should consider the expenses and potential loss of revenue due to mechanical or electrical failure of any type of equipment due to power surges, burnout, malfunctions or user error. Obtaining equipment breakdown insurance will help a business get back into full operation quickly, with minimal expense. Depending on the cost and nature of the equipment you may have to schedule the coverage or secure specific/additional coverage. It’s always advisable to conduct a risk assessment of equipment to get a comprehensive picture of risk exposure and review current insurance policies to identify key exclusions.
Although the production, sale, and distribution of cannabis is legal in many U.S. states, it is still illegal federally. This disparity can cause confusion when it comes to insurance compliance. Cannabis companies will want to secure industry-specific coverage for risks associated with, but not limited to, property and business interruption. It is prudent for prospective cannapreneurs, investors, owners, and operators to meet with a qualified insurance professional who is knowledgeable of cannabis businesses to review coverages to ensure the correct assets are adequately protected.
Cannalex Law thanks our guest bloggers for this post.
Stuart Dorf, JD, Senior Vice President of Business Development at Globe Midwest Adjusters International, is a licensed public adjuster and attorney who specializes in helping large and small companies to ensure they receive the maximum amount of insurance proceeds from extreme weather events, fires, and unplanned disaster losses.
Jeff Uherek oversees the Grand Rapids office as a Regional Vice President at Globe Midwest Adjusters International which specializes in representing homeowners, commercial property owners, and business owners during the insurance claim process to ensure each receives a fair and just settlement.
 Tracy v. USAA Cas. Ins. Co., No. 11‐00487 LEK‐KSC, 2012 WL 928186 (D. Haw. Mar. 16, 2012).
 Green Earth Wellness Center, LLC v. Atain Specialty Insurance Co. 163 F. Supp. 3d 821 (D. Colo. 2016).