The cannabis industry continues to experience growth in the U.S. and Canada. Medical and recreational marijuana sales are expected to reach nearly $30 billion in the U.S. by 2023, and sales have surged even during the COVID-19 crisis. The market’s rapidly changing landscape presents unique risk management considerations for those involved in the cultivation, production, dispensing and sale of cannabis and cannabis-derived products.
For a closer look at the cannabis industry, Crain’s Content Studio recently spoke with two experts: John Deneen, Underwriting Manager, Burns & Wilcox, Denver, Colorado; and Allison Sinha, Senior Underwriter, Property & Casualty, Burns & Wilcox, Toronto, Ontario.
How has the COVID-19 crisis impacted the cannabis industry?
Deneen: It has affected the cannabis industry in different ways, depending on the state. The most extreme example may be Massachusetts, where the governor classified recreational marijuana as non-essential. That spurred a significant spike in Massachusetts residents applying for medical marijuana cards. Most other states have designated both medical and recreational marijuana as essential services, so in most places cannabis stores and dispensaries have been able to continue operating via curbside pickup or with social distancing measures in place. We have also seen anecdotal evidence of consumers switching from smokeable to edible products due to concerns about COVID-19’s effects on the lungs.
Sinha: In terms of commercial growers in Canada, there has not been an impact because cannabis growers have been listed as an essential service, which illustrates a substantial change in how individuals view cannabis in Canada and the world in general. Individual dispensaries in Ontario were listed as an essential service initially, but in recent weeks the government has determined these businesses may remain open for curbside pickup or delivery. The only other impact has been on businesses seeking licensing — there had been holds placed on issuing new licenses for certain classes that have since been lifted.
What are some of the biggest risks facing cannabis companies today?
Deneen: The potential for large class-action lawsuits is a concern on the horizon that has not yet played out. The hope is that as long as individual businesses are following the rules and regulations that are set forth, properly testing products and selling quality products, they will be well-protected against litigation. Long-term profitability is another major risk for individual business owners. The perception that cannabis businesses are highly profitable is very outdated. Many businesses are operating with razor-thin profit margins, and smaller mom-and-pop operators are finding it increasingly difficult to compete with larger, multiple-location, multiple-state operators.
Sinha: One of the biggest risks that these companies are facing has to do with their financing. Some have filed for bankruptcy protection and others have had to lay off staff due to changes in the stock market in general and changes in the capital they have available to continue growing at such an exponential pace.
What should marijuana facility operators be aware of relative to these risks?
“It is critically important to follow all best practices and regulations very closely and do everything possible to keep customers and employees safe.” –John Deneen, Burns & Wilcox
Deneen: A major concern with low margins is that business owners may be tempted to cut corners. It is critically important to follow all best practices and regulations very closely and do everything possible to keep customers and employees safe. Where in-house compliance and legal teams aren’t viable, businesses should utilize consultants and law firms that specialize in compliance issues and helping companies ensure they are following all rules, regulations and recommendations.
Sinha: The businesses that are most successful focus on securing capital and not over-promising to investors, as well as building their properties in a very sustainable way, so that they are able to expand as needed.
What kinds of insurance policies can help businesses respond to their biggest threats?
“In the current environment, when companies are potentially making difficult decisions and letting employees go, Employment Practices Liability Insurance and Directors & Officers Insurance are very important. … An investment in insurance will pay dividends when they face a lawsuit.” – Deneen
Deneen: Every business should carry Commercial General Liability (CGL) and Products Liability Insurance so that if a product they manufacture or sell is alleged to cause bodily injury, they have help mitigating the associated costs. Coverage for vaporizer products is limited as a result of the health scare last year; nevertheless, there are still varying degrees of coverage available. Any dispensary or product manufacturer using products supplied by others should require Products Liability Insurance coverage and be named as an additional insured on their suppliers’ policies.
In the current environment, when companies are potentially making difficult decisions and letting employees go, Employment Practices Liability Insurance (EPLI) and Directors & Officers (D&O) Insurance are very important. These can help protect company leaders facing allegations of treating employees unfairly or putting a company in a precarious financial position through mismanagement. An investment in insurance will pay dividends when they face a lawsuit.
Sinha: Having adequate Commercial Property Insurance, as well as Crop and Business Interruption coverage as part of a Cannabis Insurance policy, is important in helping business owners protect themselves as well as their balance sheet. Having Product Recall coverage as part of a Cannabis Insurance policy is also important, in the event that a product causes harm or proves defective.
What kinds of scenarios have you seen that illustrate the risks inherent in operating a business in this industry?
Deneen: We have seen instances where dispensaries have sold edible products that were alleged to cause bodily injury to a customer and the customer’s first course of action was to file a lawsuit against the dispensary where the product was purchased. When dispensaries require their suppliers to carry Products Liability Insurance that names the dispensary as an additional insured party they can transfer at least part of the cost associated with any potential liability, if not all of it, to the supplier that manufactured the product.
Sinha: Marijuana crop growth relies heavily on electricity, which can be a fire hazard. If a fire broke out at a greenhouse, or a pipe burst and caused a significant amount of water damage, crops may be destroyed and operations reduced or halted while facilities are rebuilt. With Business Interruption coverage in place, any profits that businesses would have seen were it at full working capacity would be paid off. If product that has left the facility is deemed to be contaminated or not in compliance in some way, Product Recall coverage can pay to replace product and assist with the cost of any business interruption faced due to those products not being available for sale, as well as all consultant fees. The sooner a business can get products back on the shelf, the better. Without Product Recall coverage in place, businesses run the risk of paying out costs themselves, which can bankrupt them.
What are the advantages to working with insurance brokers and agents who are experts in the cannabis industry?
Deneen: The established players in this space have immersed themselves in the industry and know their way around it. The brokers and agents on the front lines in the cannabis industry truly understand their customers, their operations and the industry as a whole.
Sinha: Experienced brokers and agents are well-versed in the rules and regulations surrounding cannabis in Canada. Many provinces have their own requirements for insurance and being privy to that knowledge, and the kind of things that underwriters look for, is enormously beneficial. Expert brokers and agents not only know what insurance products are available, they are acquainted with the rapidly-shifting needs of high-growth operations that can face changes in requirements from one month to the next. They are an important touchpoint for business leaders, available and with a hand on the pulse of what is going to increase their success rate.
