Authored By: Max Carter CEO
Cannabis firms lack basic protections with a $1bn insurance gap in the industry
Sourcing insurance has always been a challenge for cannabis companies, although many states require proof of insurance for cannabis business applicants seeking licences.
But insurance premium costs are inflated because of the nature of the business. A Californian cannabis farmer we met reported that he knew of only two insurers who would provide the general liability policy required for any farm to legally operate in California, and, at present he cannot find an insurer who will provide the crop insurance he really wants.
Larger firms still struggle with higher costs and availability. Kyle Kazan, chief executive of Glass House Group, says that his cultivation facilities in California pay double the insurance premiums required for his non-cannabis farms (Source FT.com). He found it an ongoing challenge to find insurers who understand the industry.
One further group to consider are the suppliers of professional services to cannabis businesses. Accountants, lawyers, venture capitalists and angel investors will invalidate many of their professional liability and D&O covers by working with any cannabis firm – insurances which are legally required for them to work professionally for any client.
There is a significant demand for insurance policy wordings that will protect this group; and putting this in place could help drive up the quality of corporate accounting and financial reporting among listed cannabis businesses.
Currently, fear of government sanctions is the driving force behind reticence among insurers to get involved with the cannabis industry. However, the insurance community – brokers, risk managers and underwriters alike – typically thrive on finding solutions to challenging problems. We have already seen evidence of this. In 2019 the US National Cannabis Risk Management Association (NCRMA) announced that it was setting up a member-owned insurance company to help it manage and transfer its risks
We also believe that another solution could be for cannabis businesses to consider establishing self-funded captives domiciled in countries with more understanding regulatory regimes.
The current global crisis will make it tougher for producers to obtain insurance, as providers further tighten terms and conditions and introduce exclusions, while insurers who may have been looking to enter the marker will put their plans on hold.
While we wait to see how the cannabis industry weathers the stresses of COVID-19, it is vital that we
maintain the discussion around how best to help it find the cover it needs for the future.
You can download the New Dawn Risk white paper on cannabis insurance at https://www.newdawnrisk.com/2020/03/16/us-cannabis-is-a-burning-issue-for-the-insurance-industry/
Max Carter is the CEO of insurance broker New Dawn Risk.
