Cannabis businesses don’t have many options when it comes to insurance, because major insurance players are staying out of the market until cannabis is reclassified under federal law. However, cannabis licensees are required to carry insurance by state law (discussed below), and often by landlords, lenders, customers or suppliers. Recent vaping-related bodily injuries have also highlighted both the need for products-liability coverage and the fact that most cannabis-liability policies contain significant exclusions - and below we provide a few ways to deal with these exclusions. Finally, we discuss some hope on the horizon in the form of increasing standardization of forms and federal crop insurance.
State Laws. These state-law requirements are not trivial: a licensee that fails to carry the proper coverage could lose its license.
Washington requires that “Marijuana licensees” carry general liability insurance with limits not less than $1 million, and the coverage must name the state, its employees, agents, and volunteers as additional insureds (WAC 314-55-082). A licensee’s failure to provide proof of insurance to the Washington Liquor and Cannabis Board with these requirements could result in license cancellation. The regulations specifically require that the insurance “cover bodily injury, including disease, illness and death, and property damage arising out of the licensee's premises/operations, products, and personal injury.” This language has given rise to a robust debate about whether the regulations require licensees to carry product-liability insurance. According to one source, the regulator’s response written response in 2018 was “no,” but according to brokers that we've talked to, the regulator is now saying that licenses will not be granted to those who do not carry products coverage.
California’s coverage requirements go beyond Washington’s, requiring that “distributor licensees” carry general liability insurance with limits of at least $1 million each, with loss and aggregate limits of at least $2 million (Cal. Code Regs. tit. 16, § 5308). Unlike Washington’s regulations, California does not appear to require additional insured coverage; however, licensees must provide notice to the regulator if a licensee’s coverage lapses.
Oregon law gives the Oregon Liquor Control Commission (“OLCC”) the authority to require a cannabis licensee to maintain general liability insurance in “an amount that the commission determines is reasonably affordable and available for the purpose of protecting the licensee against damages...” (ORS 475B.163). Vehicles used to transport marijuana must be insured at or above the general requirements, however, the OLCC does not appear to have created specific requirements for cannabis licensees (see OAR 845-025-7700(3)). Oregon’s insurance commissioner has addressed the issue of potential gaps in coverage for cannabis licensees.
Common Insurance Exclusions - Cannabis
Product-Liability Exclusions – a Major Problem. One very significant gap that has been thrown into high relief by the vaping-injury crisis is in products-liability coverage. We are seeing policies that simply exclude everything within the “products-completed operations hazard,” which means (due to the broad definition given to that “hazard”) that all injury claims arising from the insured’s product are likely to be excluded. We have written about this problem in the context of specialty policies before, here.
And even the policies that cover products liability will generally carry something like the “Cannabis Health Hazard” endorsement, excluding claims arising out of “respiratory disease” and many other problems, “as a result of the use” of the policyholder’s product, and excluding claims seeking costs for “medical services” arising out of use of the policyholder’s product, among other things. Another common endorsement excludes claims arising out of “Ingredients or Additives” such as caffeine or nicotine. And still, another common endorsement excludes coverage for bodily injury or property damage arising out of “intoxication or impairment.” The average cannabis licensee may well wonder whether the insurance they bought is worth the paper it is printed on with exclusions like that!
For more on what insurer-side lawyers are saying about potential grounds to deny coverage for vaping-illness claims, click here (subscription required).
How to Deal with Coverage Gaps. We are counseling clients who are concerned about these coverage gaps to use contractual indemnity and additional insured requirements in contracts as potential gap-fillers. Strong indemnity protection from suppliers (of oil, hardware, or other components of a product) and vendors (such as testing labs) can help in shifting risk from defective products onto those in the best position to avoid injuries in the first place. But effective indemnity clauses don’t just happen – they have to be carefully written, requiring time and attention. But of course indemnity rights are generally only as valuable as the company that is standing behind the promise of indemnity – which is where additional insured coverage (from vendors, suppliers, consultants, and others) comes in. We have discussed additional insured coverage in several prior posts, here.
Positive News on the Horizon
Standardized Forms – Good for Hemp. Most small businesses purchase insurance that is written on standardized forms. But in the cannabis world, use of standard forms is either impossible, or ineffective because of vague “contraband” and “illegality” exclusions. Now the Insurance Services Office (“ISO”), which publishes the most commonly used standardized policy forms, is offering cannabis-specific exclusionary endorsements that make standard forms potentially usable for hemp-only businesses. The forms exclude coverage for cannabis, but contain carve-outs for the fast-growing hemp sector through a “hemp exception.” One potential problem with the exceptions, however, is that while what is excluded is defined (cannabis with any amount of THC), what is excepted from that exclusion ("hemp") is not defined. This arguably creates a conflict between the exclusion and the exception, which may need to be resolved by resorting to state law on interpretation of conflicts.
The first batch of ISO forms only apply to business-owner package programs (which are only suitable for small businesses), but on the horizon for December 2019 roll-out are similar endorsements for standard property, inland marine, and other forms of coverage.
Why are these exclusionary forms good news? At least for the burgeoning CBD and hemp industry, standardized forms may bring greater competition, broader coverages, and lower prices.
Growers. Federal crop insurance has long been available to growers of most agricultural products. In 2020, the USDA is rolling out crop insurance for hemp farmers who are part of a state or university research pilot program or who have USDA-approved hemp growing plans under new regulations. The Whole-Farm Revenue Protection program, which will be the basis for this coverage, has been commonly used by organic or specialty growers. Notably, under the crop insurance if a crop's THC levels exceed state standards that will not be considered a “loss.”
Look for more coverage of cannabis and insurance, and particularly developments in product-liability coverage prompted by recently-filed vaping injury lawsuits, in upcoming blog posts.
Update February 12, 2020 re Crop Insurance: USDA has announced the availability of two programs for hemp growers' crop insurance, consisting of coverage fro loss of yield (the MPCI program) and overage for crop disaster including prevented planting and crop destruction (NAP). The deadline for applications is March 16, 2020.