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Anyone starting a cannabis business knows they need to manage their numerous risks with a solid cannabis risk management plan. For starters, cannabis remains illegal in several states and at the Federal level. It has a complex supply chain that needs sophisticated seed-to-sale tracking software. It takes a lot of personnel – from growers, to budtenders, to investors. And because banks, which are Federally backed, could get in trouble for working with cannabis companies, it’s mostly a cash business.
That’s a lot of plates to keep spinning in the air, especially if you’re not protected with the appropriate insurance coverage for cannabis companies. For those starting a cannabis business or working with one, this guide will help you understand the current state of cannabis risk management and how to work through them in order to get the cannabis business insurance policies that will protect every aspect of your cannabis business.
Why Risk Assessment is so Challenging for Cannabis Businesses
If you’ve been Googling “how to get insurance for a cannabis business,” you already know that the risks involved with cannabis keep many brokers away. Though many aspects of the cannabis industry share similarities with other industries – most notably agricultural business such as wine-producing vineyards – the way cannabis is regulated is so new, different, and constantly changing that many traditional insurers are taking a wait-and-see approach before they dive into the risks involved in insuring cannabis businesses.
Cannabis’s relatively new entry into the global marketplace – and its attendant legal issues – also means that the typical risk assessment procedures that insurance companies perform to gauge the amount of coverage needed to protect a company simply don’t apply. While most industries have standard risk assessment tools used to evaluate and calculate risk there are no such standardized, widely accepted cannabis risk management tools.
Another reason risk assessment is so challenging for cannabis businesses has more to do with how insurance works than with the cannabis industry itself. Insurance companies rely heavily on the banking industry and most banks (except for some highly progressive and risk-taking banks in states where cannabis has been legal for a long time such as Colorado and California), won’t work with cannabis companies because it’s technically a Federal crime to do so. Because of this, it’s difficult if not impossible for cannabis businesses to get the kind of risk-management cushions that are commonplace in other industries, such as credit cards, bankruptcy law protection and even federal patents and trademarks which are a huge hedge against risk.
The Three Biggest Risks Facing Cannabis Businesses
Despite all of these challenges, they’re not even an entire list of all of the risks facing cannabis businesses. According to the National Cannabis Risk Management Association, (NCRMA) the most critical risks for cannabis businesses are:
1. Employee theft.
Those working inside the company have easy access to the product, they run the cash registers, and they know a lot about how the company works. Protecting against insider theft is critical for cannabis businesses.
2. Product tampering.
This could happen anywhere along the supply chain. Cannabis business’s whose product harms someone could be liable for injury and damages.
3. Adjusting to compliance regulations.
Legal compliance varies from state to state and the laws themselves change frequently making adherence challenging for cannabis companies. If you’re found to be out of compliance with state laws, you could be subject to hefty fees.
In addition to these risks, cannabis companies also must contend with the kinds of risks that other companies — especially agricultural ones — face, including product liability, general liability, cyber liability, and crop loss.
How the SAFE Banking Act and the CLAIM Act Could Help Cannabis Companies Manage Risk
Obviously, the legal limbo of cannabis on the Federal level makes standard risk assessment – and therefore insurance coverage – more complicated than for other businesses with no such Federal illegality issues. While certainly not all of cannabis business’s risk stems from this, a good portion can be traced back to the Federal government classifying cannabis as a Schedule I drug – on the level of heroin and cocaine — even though states have legalized it. The good news is, many Federal legislators are trying to mitigate these legal risks with bills to remove legal jeopardy from companies that do business with cannabis companies, such as banks and insurance companies.
The bill that’s made the most progress in congress is the SAFE Banking Act. This law would allow banks to do business with cannabis companies without risking their own legal standing. If the SAFE Banking Act became law, cannabis companies wouldn’t have to deal in so much cash, which would reduce their exposure to a number of risks, including theft. This risk reduction would also engender trust from the investor community which would further reduce overall risk exposure. The SAFE Banking Act has passed the House several times but continues to be voted down in the Senate.
Another bill that would reduce risk for cannabis companies is specifically targeted at insurance companies. Modeled on the SAFE Banking Act, the Clarifying Law Around Insurance Marijuana (CLAIM) Act, would allow insurance companies to do business with cannabis companies without fear of Federal prosecution. As of now, the CLAIM act is still waiting to be voted on in the House.
Risk Management for Cannabis Companies: Partner with Experts
Though many insurers are opting out of insuring cannabis businesses, more and more are joining the fray, especially as more states move to legalize it. Of course, not all insurers are created equal. With all of the market fluctuations and complexities, finding an experienced and knowledgeable insurer for your cannabis business is absolutely critical. While the legal and compliance issues are all being sorted out, you definitely want to go with a broker who knows the business, understands the legal issues, is well connected throughout the industry, and offers enough coverage so you won’t have any gaps in your coverage.
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