David M. Kennedy, Esq. is the founder and CEO of Purple Risk Insurance Services, an NCRMA appointed broker. For inquiries about cannabis insurance or more information, contact David at [email protected] or visit https://purplerisk.com
Cannabis businesses have much to look forward to in 2020. The cannabis industry will continue its significant growth trajectory as markets mature and as many as 17 additional states vote on adult use and medical marijuana measures in the November 2020 elections, led by likely voter approvals of adult use in Arizona, Florida and New Jersey.
From a risk management standpoint, however, the industry may be in for a choppy ride as insurance carriers brace for more claims and wait for the industry to further stabilize and the federal position on cannabis to change. Here are five insurance coverage related predictions for the cannabis industry in 2020:
1. Product liability risk—and premium—increases. In 2019, the cannabis industry witnessed a spike in product liability claims and litigation related to vaping-associated lung injury, exploding vaporizer devices, product contamination, and THC and CBD labelling and compliance issues, to name a few. State regulators have already tightened regulations around product ingredients and are likely to put in place more comprehensive rules around vaporizers and other products entering the market.
Cannabis insurance carriers are monitoring the industry’s response to these issues and will be more rigorous about underwriting product related exposures. The industry can expect product liability insurance premium increases as a result. For cannabis businesses, exercising more care and supervision in all aspects of operations, including the selection of partners and vendors, is critical in 2020.
2. Flat capacity and coverage. Ongoing turbulence at the federal level will accelerate this year, stalling any meaningful progress towards passage of marijuana legislation such as the SAFE Banking Act (creating protections to enable banks and credit unions to serve the cannabis industry) or the CLAIM Act (increasing insurance options to the industry by creating a safe harbor for carriers and brokers providing services), among other bills. As a result, the industry will continue to face difficulties obtaining access to traditional banking, lending, and other financial services.
Similarly, significant expansion of admitted carrier participation in the cannabis market is unlikely this year, and existing cannabis insurance carriers are unlikely to offer additional capacity and broader coverage terms—and may seek to tighten exclusions—as they court reinsurance partners and continue to monitor emerging risks and the federal position on marijuana laws.
3. Focus on policy terms. “There is definitely a tendency for wishful thinking—younger [cannabis] companies buying whatever policy or package is available and within budget, and then just hoping it stands up when they need it to later. This results in most businesses being underinsured, or even completely uninsured, for a potentially ruinous loss or claim for liability,” Phillip Skaggs, assistant counsel of American Association of Insurance Services said to Insurance Journal following the recent MJBizCon.
Indeed, we have seen cannabis businesses unknowingly purchase insurance policies with broadly-worded cannabis exclusions, effectively removing most coverage granted by the policy. As the industry continues to stabilize, we expect companies to grow increasingly concerned with the need for adequate cannabis insurance terms to protect their businesses, and not just focus on price.
4. Focus on people and Management Liability insurance. There were 10,195 cannabis businesses in the U.S. at the end of 2018, rising up to over 23,000 by 2023 as new markets onboard, according to IBIS World. With about 200,000 full time employees currently, the industry saw a 34% jobs increase in 2019, and hundreds of thousands of new jobs are anticipated in the next several years. National Cannabis Risk Management Association (NCRMA) Chairman Rocco Petrilli says the “people issue”—more job openings than qualified candidates to grow businesses—is the top risk facing cannabis businesses in 2020.
Those businesses that fail to institute proper hiring processes, including background checks, as well as procedures for adequate security and theft prevention (among other things), will face challenges. Without Employment Practices Liability insurance, Crime insurance (coverage for exposures such as employee dishonesty, loss of money and fraud), and related Management Liability coverage (such as D&O, below) businesses are increasingly exposed to uninsured liabilities and losses as they expand operations.
5. Emergence of Directors & Officers (D&O) insurance. Leading cannabis and hemp attorney Rod Kight expects to see a wave of bankruptcy filings and insolvency proceedings by cannabis companies in 2020. Directors and officers that made poor investments or acquisitions, for example, are facing scrutiny by the SEC and investors. Simply put, without D&O insurance, board members and officers could expose their personal finances. Acquiring D&O insurance coverage, although costly, is increasingly a necessity for cannabis industry executives as the industry matures.
Purple Risk specializes in the cannabis insurance market and understands the challenges facing the growth of your business. We can help you properly safeguard your business with top-tier cannabis insurance solutions.