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One of the biggest catch-22’s of the cannabis industry is that in order to get investors for your business you need to have cannabis business insurance. So, as a cannabis entrepreneur, you either end up paying through the nose for expensive policies (requiring more funding) or buying only as much insurance as you can afford and hoping for the best (bad idea). It’s important to get the right coverage at the best price, and to work with an experienced broker who knows the cannabis industry. But that’s not all. There are many factors that affect cannabis business insurance costs. Read on to learn what they are and how to lower your costs by limiting risks.
How the SAFE and CLAIM Acts Could Totally Change the Cannabis Industry
Cannabis is changing, thanks in part to two bills in Congress: the Secure and Fair Enforcement Banking Act and the Clarifying Law Around Insurance of Marijuana Act (called SAFE and CLAIM, respectively). This legislation would allow banks to do business with cannabis companies without fear of punishment for violating Federal law. The Claims Act specifically identifies insurance companies as “support businesses” that need this kind of amnesty as well.
States are Closing in on Insurance for Cannabis Businesses
Indeed, forecasters predict that 2023 will be the year SAFE and CLAIM pass the Senate, due to the Acts’ broad support in Congress as well as from the banking and insurance industries (not to mention the American people). For their part, states with legalized cannabis are taking matters into their own legislative agendas by creating similar amnesty laws that would impose some order on the industry. The more pro-cannabis states, such as California, Colorado and Washington already have banks and insurance companies openly working with cannabis companies.
Less Risk = Affordable Cannabis Business Insurance Costs
This is great news for cannabis entrepreneurs and investors, obviously. And it’s really great news for insurers. As more states legalize cannabis, and public sentiment sways toward legalization, the industry stabilizes. With that stabilization, insurers can standardize the risk-assessment process, offer more types of coverage, lower prices, and even specialize in specific categories in cannabis business insurance. And, importantly, the evolution from cannabis as a cash-only business to one that’s supported and backed by financial institutions reduces a lot of the risk that keeps many insurers from covering cannabis businesses (and could eventually lower the cost of premiums).
Still, uncertainty and variability remain the norm for now and the foreseeable future. Insurance-policy-wise, you’ll see the segmentation of the cannabis industry into different categories, with different options and costs for each one. For example, depending on your business’s focus — dispensary, distributor, grower, medical marijuana supplier, or hemp cultivator, you’ll have specific types of insurance policies that are recommended based on your business needs with lots of variations in cost.
Cannabis Business Risks Vary Based on Market Segment
As the industry matures, data is emerging that can guide entrepreneurs and underwriters in developing appropriate, affordable coverage. The National Association of Insurance Commissioners (NAIC) in its Regulatory Guide: Understanding the Market for Cannabis Insurance, identifies some cannabis-specific business characteristics that insurers can use to project insurance costs. These areas include: the number and types of cannabis licenses a company possesses; depth of experience in cannabis operations; the use of blockchain technology in processing, distribution, and retail transactions.
In general, most cannabis companies will need a combination of traditional insurance and cannabis-specific policies. Here’s what’s recommended regardless of the type of cannabis business you’re operating:
- Commercial General Liability
- Product Liability
- Property Insurance
- Technology E&O
- Workers Compensation
- Directors & Officers
- Employment Practices Liability
- Crime Insurance
- Commercial Auto Insurance
- Builders Risk
But don’t stop there. According to the NAIC, cannabis business insurance needs are highly individual and specific to individual companies, based on factors including the founders’ experience and financial position. So, in addition to the above list, shop for coverage that’s tailored to the unique needs of your business. Here’s an overview of business insurance recommendations and costs for key segments of the cannabis industry.
Cannabis Business Insurance Costs for Hemp Companies
The 2018 Farm Bill legalized the cultivation of industrial hemp (cannabis that contains less than .3% THC). This provided hemp companies with access to government crop insurance through the U.S. Department of Agriculture. (Find out more about the Hemp and Farm Programs). Still, there are many other aspects of hemp cultivation that require coverage, and hemp companies should get traditional business coverage, too.
The types to consider include: Commercial General Liability, Property; Product Liability; Inventory Coverage; Employment Practices Liability, Directors and Officers, Technology E&O, Including Cyber liability; and Workers’ Compensation. The pricetag? According to Cannabis Business Times, annual premiums for $1 million policy could run as much as $150,000.
Cannabis Business Insurance Costs for Medical Marijuana
Those interested in getting into medical marijuana need traditional business such as Commercial General Liability, Property Coverage, Product Liability, and others. But the key difference between other cannabis businesses and medical marijuana business is the need for malpractice and professional negligence for medical cannabis physicians. These policies can be pricey, naturally.
The good news is that insurers tend to model malpractice insurance off the existing data they use for regular medical malpractice insurance – so, they’re not starting from scratch. You’ll probably need to budget five to six figures for yearly premiums for a medical marijuana business. Getting enough coverage could be tough, though. According to the NAIC medical marijuana practitioners need limits up to $5 million or $10 million, if not more, while many carriers are more conservative with how much they’ll cover.
Cannabis Business Insurance Costs for Dispensaries
Again, dispensaries will need traditional business insurance including Commercial General Liability, Premises Liability, Product Liability, and others. But the big difference between dispensaries and other segments of the cannabis business is that they are retail operations with employees working directly with customers.
So, you can factor in policies centering around workers, including Employment Practices Liability, Directors and Officers Liability, Employee Theft, and Crime Insurance. Unfortunately, these last two are problems that plague the cannabis industry, partly due to the cash-only nature of the business.
Dispensary owners also need Technology and Cyber Insurance, given the close seed-to-sale tracking software that’s required to even get a dispensary license. On the plus side, dispensaries can often get coverage packages, based on the fact that some insurers mandate certain policies (general liability, for example), but may negotiate rates on “nice-to-haves,” such as earthquake insurance. Insurers will factor in a dispensary’s gross sales to help determine premium costs.
Cannabis Business Insurance Costs for Growers
It’s tough out there for cannabis growers. While industrial hemp cultivators have access to Federally backed insurance, growers of cannabis that contains THC do not. And private crop insurance can be difficult to procure because insurance companies are reluctant to back cannabis farms that cross state lines. On the other hand, the risks cannabis growers face are similar to other agricultural operations, such as weather and theft – and insurers always like it when they can model their risk assessment on familiar data.
What cultivators should look into — in addition to the traditional business policies mentioned above — are policies for Equipment Breakdown, Earthquake/Volcanic Eruption, and Sprinkler Leakage. Your policy ideally covers you for $1 million in losses with premiums in the ten-thousands yearly. Underwriters will factor in the size of the farm to determine coverage and premiums.
Cannabis Business Insurance Costs for Distributors
Some states require cannabis distributors to be integrated into the supply chain (makes it more difficult to drive away with the goods!). In addition, distributors sometimes are required to be licensed in another segment of the business, such as wholesaler or processor, to get a distributor license. Distributors should look into the traditional coverage above, as well as Automobile Liability and Cargo insurance. As with some other cannabis businesses, distribution has an existing model in traditional businesss, you can expect premiums similar to companies that use a similar distribution model as yours.
Cannabis Business Insurance for Your Company
While market stabilization is still on the horizon, the cannabis industry is lots more established than it was even a year ago. Cannabis entrepreneurs have more and better options at price points that don’t completely break the bank. While we all wait impatiently for the passage of laws like the SAFE and CLAIMs Acts, the insurance options will remain challenging. That’s why it’s a really good idea to choose an insurance provider who is knowledgeable and experienced in cannabis business risk assessment.
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