Covered?

Columns - Guest Column: Insurance

Insurance can get tricky for cannabis-related businesses. Ensure your policy is adequate for your dispensary with these expert tips.

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Cannabis dispensaries that operate within states where cannabis has been legalized medically and/or recreationally are at risk for the same types of first-party and third-party losses as many other businesses.

There could be a fire in, or other damage to, your dispensary's building. A customer could slip and fall inside your dispensary or suffer bodily injury after consuming or using a product sold by your dispensary. Like most businesses today, dispensaries must worry about cyberattacks, which can give rise to both first-party (your dispensary) and third-party (the patient or customer) losses. These are just some of the myriad risks that any dispensary faces.

As such, both first-party and third-party insurance coverage is a necessity for all dispensaries, as well as for other businesses in the cannabis industry.

When procuring insurance, you should be cognizant of not just what coverage a policy provides, but also what coverage a policy excludes.

Currently, however, there is not a large insurance market available to dispensaries. Today, few, if any, “mainstream” insurers provide coverage for cannabis-related businesses. To obtain coverage, it may be necessary for you to turn to agents or insurers who specialize in cannabis-related insurance. Insurance brokers and coverage attorneys can also help you locate and obtain the coverage you are seeking.

Plan Selection

In assessing your insurance coverage needs, you should first review the laws and regulations of the state in which you operate. Many states require that dispensaries procure insurance. Pennsylvania, for example, requires that dispensaries “obtain and maintain an appropriate amount of insurance coverage that insures the site and facility and equipment used in the operation of the facility.” It further requires that “[a]n adequate amount of comprehensive liability insurance covering the [dispensary’s] activities authorized by the permit shall begin on the date the initial permit is issued … and continuing for as long as the [dispensary] is operating under the permit.”

Additionally, Pennsylvania requires that all medical-marijuana dispensaries “obtain and maintain workers’ compensation insurance coverage for employees at the time the [dispensary] is determined to be operational by the Commonwealth.”

Massachusetts’ requirements are more specific: “A registered medical-marijuana dispensary shall obtain and maintain general liability insurance coverage for no less than $1 [million] per occurrence and $2 [million] in aggregate, annually, and product liability insurance coverage for no less than $1 [million] per occurrence and $2 [million] in aggregate, annually, except as [otherwise] provided. … The deductible for such a liability policy shall be no higher than $5,000 per occurrence.”

In addition to reviewing applicable state laws and regulations, you should consider the nature of your operations when assessing your insurance needs. If you intend to maximize your insurance coverage, consider at least the following types of coverages:

  • Commercial General Liability (“CGL”): CGL insurance covers various types of third-party claims against a policyholder, such as claims alleging bodily injury or property damage.
  • Property/Business Interruption: Property insurance is a form of first-party insurance. It provides coverage to your dispensary in the event of a fire or other property damage. Business interruption coverage helps offset losses incurred if your dispensary must suspend operations due to property damage or certain other causes.
  • Professional Liability: Pennsylvania, for example, requires that, with limited exception, “a dispensary shall ensure that a physician or pharmacist is present at the facility at all times during the hours the facility is open to dispense or to offer to dispense medical marijuana to patients and caregivers.” Under certain circumstances, those individuals and/or others employed by a medical-marijuana dispensary in Pennsylvania may “consult with the patient or the caregiver regarding the appropriate form and dosage of medical marijuana to be provided.” Similarly, Arizona requires a dispensary to “[e]mploy or contract with a medical director.” Professional liability insurance helps protect a policyholder if a physician or a pharmacist, for example, makes an error while consulting or in rendering any other professional services.
  • Directors and Officers (“D&O”): Massachusetts’ regulations, for example, expressly stipulate that a registered cannabis dispensary may have “board members [and] directors.” D&O coverage helps protect those individuals in the event that they are sued for a wrongful act, such as an error or breach of duty.
  • Product Liability: In addition to dispensing cannabis-containing products, dispensaries may also sell “instruments, devices and services related to the use of medical marijuana," as noted in Pennsylvania (or related to the use of marijuana in general in recreational dispensaries). And, any of those cannabis-containing or other products could give rise to a third-party product-liability claim. Product liability insurance covers such claims.
  • Product Recall: Product recall insurance provides coverage in the event a policyholder must recall one or more of its products. Dispensaries are not exempt from this risk. In fact, contemplating such a scenario—Pennsylvania, for example, specifically prescribes the steps a dispensary must take in the event of a recall: “A dispensary shall notify the [Commonwealth] and the grower/processor immediately upon becoming aware of any complaint made to the dispensary by a patient, caregiver or practitioner who reports an adverse event from using medical marijuana dispensed by the dispensary. … A dispensary shall coordinate the return of the recalled medical marijuana with the grower/processor.” Massachusetts also requires that a registered cannabis dispensary have “[a] procedure for handling voluntary and mandatory recalls of marijuana. Such procedure shall be adequate to deal with recalls due to any action initiated at the request or order of the [Commonwealth], and any voluntary action by” the dispensary.
  • Cyber: Like most businesses today, dispensaries throughout the United States likely rely on networks, servers and computer systems to conduct business. For example, Nevada requires that a dispensary maintain an electronic verification system, which can be used to, among other purposes, verify “the identity of a person to whom marijuana, edible marijuana products, or marijuana-infused products are sold or otherwise distributed.” Pennsylvania likewise requires that a dispensary implement an electronic tracking system. Thus, your dispensary may be at risk for data breaches or other injuries caused by cyberattacks. Cyber insurance covers many of the costs and other losses associated with a breach or other injury caused by a cyber event.

The foregoing list of coverages certainly is not exhaustive. There are other types of insurance—some specific to the cannabis industry—that your dispensary should consider to ensure that no gaps exist in your coverage.

What May Not Be Covered?

When procuring insurance, you should be cognizant of not only what coverage a policy provides, but also what coverage a policy excludes. Many insurance policies contain exclusions for illegal or criminal acts or activities. Other policies may exclude coverage specifically for claims arising out of controlled substances or psychotropic substances. And, still other policies may contain exclusions for products/completed operations—exclusions which, arguably, could preclude coverage for claims arising from your dispensary’s products. Therefore, it is imperative to review insurance policies closely.

Having the right insurance policy can prevent a financial domino effect by helping to mitigate losses and by protecting you and your business from liabilities.
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You should also be aware of potential public policy-based defenses to coverage. Such defenses are predicated on federal law, which makes it “unlawful for any person knowingly or intentionally … to manufacture, distribute, or dispense or possess with intent to manufacture, distribute or dispense” cannabis. Therefore, insurers have argued that, because cannabis is still illegal under federal law, the insurance policies they sold are essentially unenforceable. While that argument is susceptible to many rebuttals (and has yielded mixed results in the federal courts), one of the strongest responses is that an insurer knew it was insuring a cannabis-related business. Having sold insurance to the business and collected premiums—all while knowing the nature of the policyholder’s business—the insurer should not be able to avoid coverage for a cannabis-related loss. The ability to do so would defeat the parties’ intent and potentially render the coverage illusory. Therefore, it is important to be transparent about the nature of your business when you apply for and procure insurance.

Like any other business owner, you will want to ensure you and your business are protected in the event of a lawsuit, or another type of claim or loss. Insurance is an important asset, and you should make sure you have all necessary coverage. To do so, consider the nature of your operations, the risks you face, the available insurance market, applicable laws and regulations, and relevant policy language.

Michael H. Sampson is partner in Reed Smith LLP’s Insurance Recovery Group. He practices in Pittsburgh. Zachary S. Roman was a 2017 Reed Smith LLP summer associate in Pittsburgh.