As one of the most rapidly evolving industries worldwide, cannabis faces risks, unlike any other market. Despite forecasted growth rates and a broader societal acceptance, some cannabis companies struggle with the risk management aspect of the business. Unfortunately, many insurers remain on the sidelines, offering little support or products for the cannabis space.
However, AlphaRoot, a tech-enabled commercial insurance broker calibrated to cannabis, provides risk management support and tailored insurance products to cannabis companies. This post serves as a guide for this fast-growing industry.
Understanding the Ever-Changing Cannabis Market
The cannabis industry is thriving, with new opportunities surfacing daily. What’s more, experts predict global cannabis sales to reach $30 billion this year. Still, the cannabis industry faces plenty of stigma and misunderstanding, muddying up the landscape with unanswered questions.
Despite the doubt, several new states voted to legalize the recreational use of cannabis. New York regulators recently rolled out the first round of cultivator licenses to prepare for upcoming industry demand. And New Jersey began recreational cannabis sales the day after 4/20, the unofficial cannabis holiday.
Many firms have undoubtedly invested in cannabis companies as a diversification strategy. Fortunately, this approach only encourages other investors to follow suit, expanding funding options for cannabis companies. Additionally, venture capital funding for the industry has gone from a trickle to a steady flow in the past few years.
However, new state regulations often raise questions on the federal level, with many rules contradicting each other. Even as the US alters its approach to cannabis use, compliance remains an ever-present challenge the cannabis industry must navigate.
Risks Cannabis Companies Face
Risks Cannabis Companies Face Compliance isn’t the only challenge, though. Like any other organization, cannabis companies face the same fundamental risks of merely doing business. Consider the famous “slip-and-fall” claims or the many companies dealing with employment-related litigation.
The above scenarios are only the tip of the iceberg regarding the extensive vulnerabilities cannabis operations might face. Consider the following risks cannabis companies often encounter.
Compliance and Licensing Challenges
Due to the industry’s legal landscape, obtaining the property license for your business and maintaining compliance with national, state, and local regulations is of utmost importance. But it can often feel like a battle of federal vs. state vs. local laws.
Still, cannabis companies are vulnerable to halted operations, destroyed crops, or, worse, permanently shuttering due to non-compliance. Some cannabis companies have found ways to bypass traditional laws, such as the savvy Chelsea-based dispensary in New York City.
Property Losses
Cannabis companies are particularly vulnerable to property losses as the weather dictates harvest yields for many verticals in the space. For example, losing a crop or settling for a less-than-ideal harvest could be detrimental to a cultivator. Plus, a loss could come in many ways: vandalism, climate change, accidents, etc.
Many cannabis companies — labs, extractors, manufacturers, etc. — rely on state-of-the-art equipment or machinery that’s costly to replace or repair. Also, consider what a weekend fire would do to operations. Finding a new space to work and maintaining operations is a headache enough, not to mention managing concerned customers or investors.
Financing Complications
As with any new venture, cannabis startups frequently face funding challenges. But even mid-market and late-stage operations have faced a murky financial landscape over the past several years, mainly because venture capital and private equity firms haven’t jumped in with both feet.
As mentioned, portfolio diversification encourages firms to invest in the cannabis space, but it’s still a challenge most cannabis companies must navigate. Also, many traditional financial institutions either can’t or won’t support the industry. As a result, smaller credit unions and more localized financing have become the economic backbone of the industry.
Legal Liability
The federal government doesn’t regulate testing or manufacturing in the cannabis space, opening up companies to a plethora of liability lawsuits. Unsurprisingly, it’s not uncommon for inadequate labeling, design defects, or manufacturing defects to cause customer dissatisfaction.
Customers can take legal action against a product or service if they think it caused bodily injury or property damage. Cannabis companies need to protect their customers and operations against costly litigation, frivolous or not.
Recommended Coverage for Cannabis Companies
Each vertical within the cannabis industry faces a unique set of risks and benefits from customized insurance plans. Nevertheless, here are a handful of coverages that often form the solid base of a robust risk management plan.
General Liability
General LiabilityGeneral liability offers broad protection against some of the most fundamental risks cannabis companies face. Known as “slip-and-fall” or “all-risk” insurance, this policy covers personal or property damage and bodily injury occurring on the business premises.
Property
This policy is first-party coverage that protects the Total Insurable Value (TIV) of your operation’s property, reimbursing cannabis companies for direct property losses.
Product Liability
Cannabis companies offering tangible products or services risk third-party lawsuits claiming bodily injury or property damage. Products liability insurance covers defense fees and settlements, even for ungrounded claims. This coverage is particularly critical in the cannabis space as testing and manufacturing aren’t regulated at the federal level.
Crop
As a type of property coverage, crop insurance covers crop loss due to a physical loss by a covered peril. For example, consider a fire in the cultivation facility and the damage it would cause to the cultivator’s facilities and crops.
Professional Liability
Professional liability, also known as errors and omission (E&O) insurance, covers cannabis companies in third-party or client lawsuits claiming substandard work or service. Work errors or oversights, missed deadlines, budget overruns, etc., often result in costly cases — but E&O insurance responds to these mishaps.
Cyber Liability
Cyber insurance protects companies from third-party lawsuits relating to electronic activities (i.e., phishing scams). Plus, it offers many recovery benefits, supporting data restoration and reimbursement for income lost and payroll spent.
Directors & Officers
Shareholders, competitors, investors, etc., can sue a cannabis company’s executives, putting their personal assets at stake. Directors and officers (D&O) insurance protects these assets from lawsuits alleging leaders of wrongful acts managing the business.
Side A: Protects corporate directors and officers’ personal assets
Side B: Reimburses company funds used to indemnify sued individuals
Side C: Provides companies balance sheet protection
Workers’ Compensation
Employers are typically responsible for their medical costs and lost wages when employees sustain work-related injuries. This policy covers these expenses, protecting employees while simultaneously keeping cannabis companies running smoothly.
Employment Practices Liability
Cannabis companies with any number of employees face the risks of allegations, such as discrimination, wrongful termination, breach of contract, etc. This coverage protects cannabis companies against lawsuits related to employment practices.
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The cannabis industry is evolving at an unprecedented pace, with new regulations unfolding almost daily. Cannabis companies must keep up with industry demand and maintain their momentum.
AlphaRoot provides ongoing support and risk management guidance to cannabis companies, from startups to newly public companies. Download their free Cannabis Risk Management Guide to help you better manage the exposures along your operation’s development journey or reach out by emailing info@alpharoot.com to learn more about your cannabis insurance options.