Production Insurance During & After COVID-19

By Nick DiUlio, insuranceQuotes senior writer

It has become painfully clear that the current Coronavirus pandemic has not left a single sector of American business untouched, and that includes the United States’ burgeoning legal cannabis industry. While many cannabis businesses across the country have remained open—a result of most states designating them as “essential”—industry experts say that everything from dispensaries to grow facilities are nonetheless feeling economic strain.

“Many cannabis companies of all sizes, from multi-state operators to smaller dispensaries, are shutting operations, laying off staff, and restructuring business models to cut costs and save cash in a bid to weather the crisis,” says Alex Hearding, chief risk management officer of the National Cannabis Risk Management Association (NCRMA). “And as more states issue stay-at-home orders, cultivation facilities are losing employees to quarantine. With fewer employees working in grow facilities, the supply of flower could also suffer, especially as the industry enters the growing season.”

These are only two potential problems within a much longer list of pitfalls for the industry right now. For instance, Hearding points out that many cannabis companies haven’t stored up the cash reserves needed to ride out a crisis like this one, they are concerned about long-term supply chain disruptions, and, critically, cannabis-related businesses are not eligible for Small Business Administration loans and other federal emergency relief under the $2.2 trillion CARES Act.

For an industry that employs more than 240,000 workers in 33 states—and generated $1.9 billion in state and local tax revenue in 2019—concern is merited. The question is, will insurance play any role in trying to help cannabis retailers and cultivators weather the economic storm?

The answer, say experts, is complicated.

Marijuana and insurance before the pandemic

Prior to the Coronavirus pandemic, the need for a comprehensive approach to insuring various aspects of the marijuana industry was becoming increasingly critical for everyone from growers to dispensary owners, and there were signs that the insurance industry was starting to pay attention.

However, according to NCRMA chairman Rocco Petrilli, the relationship between most cannabis businesses and insurance companies—and with insurance generally—was secondary for an emerging industry more focused on other critical areas such as startup operations, funding, licensing, regulations, and growth.

Furthermore, the federal government still considers cannabis an illegal substance under the Controlled Substances Act (CSA), which classifies it as a Schedule I drug and is stated “to have no currently accepted medical use in treatment in the United States.” And despite the fact that the majority of states have some form of marijuana legalization on the books, this federal classification has made insurers wary of covering marijuana-related losses for policyholders.

“It’s generally been a challenge for cannabis businesses to obtain adequate insurance coverage,” says attorney Frank Borger Gilligan, who is a member of the cannabis team at the Dickinson Wright law firm in Washington D.C. “Part of the problem has been the reluctance by the insurance industry due to federal banking restrictions and the illegality of marijuana under federal law. That said, there has been a great deal of progress in the last couple of years. The relationship is mutually beneficial. The cannabis industry needs insurance, and the insurance industry understands the opportunities that exist in the emerging cannabis markets.”

Whether the Coronavirus pandemic will strengthen the relationship between the insurance and U.S. cannabis industries is a difficult question to answer.

“A key impact on the cannabis industry, and those who work to insure cannabis companies, is the broad recognition that cannabis is a legitimate, mainstream, and essential business that may be worth the risk of insuring,” says Petrilli. “However, larger-scale admitted carrier participation in the industry still likely won’t happen until federal legalization or broader federal protections, such as the SAFE Banking Act, are passed.”

Even though he’s uncertain about the details, Gilligan says he’s optimistic.

“It’s impossible to say what things are going to look like when we get through this and come out on the other side,” says Gilligan. “The economy is getting hit hard—hopefully we recover quickly. Some industries will likely never be the same. Some won’t survive. Others will thrive…and I’m optimistic that state and local governments will pave the way for the insurance industry to cover cannabis businesses moving forward.”

Will business interruption insurance come to the rescue?

Despite the historically shaky relationship between legal marijuana and insurance, many cannabis business owners—from growers to dispensary owners—have some form of coverage. Whether or not those policies will play a role in stemming the tide of economic turmoil is anyone’s guess.

According to Brian Evans, CEO of the New York-based Eastern Public Adjusters, a business owners insurance policy may provide coverage through what’s known as business interruption insurance, which is meant to provide financial reimbursement for businesses that lose revenue due to some kind of “damaging even” like a fire or storm. But when it comes to the current pandemic, there are a few notable catches.

First of all, Evans points out that not all business owners carry a business interruption insurance policy. According to the Insurance Information Institute, only about one-third of U.S. small businesses have this type of insurance. And given the challenges mentioned above, the percentage of marijuana business owners who have this type of coverage is probably smaller than other sectors of retail.

What’s more, most business interruption insurance policies will state that there must be a “direct physical loss” to the property resulting from an insured event in order for the business owner to receive reimbursement.

“Insurance carriers will fiercely battle any attempt to trigger business interruption coverage since it is questionable whether coronavirus causes ‘direct physical loss,’” says David M. Kennedy, founder and CEO of Purple Risk Management Services, which provides insurance and risk management solutions to the legal cannabis industry.

According to Kennedy, a fire in a cultivation facility, for example, would result in a claim for property damage as well as for the business income lost during the time needed to repair and restore the property. And there are instances where courts have found that gas or other airborne hazards constitute “physical damage” to an insured property, resulting in covered claims for lost business income.

“But, the millions of businesses across the country that have been shuttered is more likely due to local or state orders, not physical damage by the virus,” says Kennedy. “Lawsuits will challenge the applicability of business interruption insurance.”

What’s more, Kennedy points out that most property insurance policies—under which business interruption is found—include a virus exclusion, which became ubiquitous in most policies following the 2003 SARS outbreak.

“The only way business interruption comes into play on a broader scale is if federal and/or state legislatures mandate payment by insurers of business interruption claims retroactively by creating new laws regardless of the virus exclusion,” says Kennedy. “But this would result in months, maybe years, of litigation and no payments to any companies in the short term.”

According to Gary Smith, founder and president of the Arizona Cannabis Bar Association, cannabis business owners should request a complete copy of their insurance policies.Make the request in writing from an insurance broker or insurer, and ask for a certified copy of the policy, including all endorsements.

“Do it today, because your claim is subject to notice obligations and deadlines. Delay in filing a claim could prove costly,” says Smith. “Then, look for the clauses or sections labeled something like ‘cause of loss to trigger coverage.’ Read those sections in their entirety. If you do not have complete understanding of what you read, call your lawyer. Insurance policies are written very deliberately by armies of insurance industry lawyers whose interest is to look out for the insurance industry. There is no shame in saying that you do not understand your insurance policy. Most people don’t. Get help if you need it.”

The pivot to hand sanitizers

When the demand for hand sanitizers spiked and supplies started taking a hit in early March, several U.S. marijuana businesses began using their production process to manufacture and donate sanitizing gels to places that needed them most. The transition is apparently easy and comes with no significant costs, but there may be some insurance implications to consider.

According to Josh Horn and Bill Bogot—co-chairs of the Cannabis Law Practice at Fox Rothschild—the first thing a cannabis business owner should do is review any existing policies to see if this new activity is already covered. If not, then they should contact their insurer.

“I expect an insurer would find hand sanitizer a more benign, lower risk offering relative to consumable cannabis products,” says Horn. “In addition, cannabis companies pivoting to include the production of hand sanitizer should follow the U.S. Department of Health and Human Services new temporary policy for the preparation of certain alcohol-based hand sanitizer products and register with the FDA. This is exactly what our client CannaCraft did recently, and they are donating hand sanitizer to first responders, health care facilities, and dispensaries. Following these steps should satisfy many insurers and greatly reduce any putative liability issues.”

Nick DiUlio is an analyst and reporter for — which publishes in-depth studies, data and analysis related to auto, home, health, life and business insurance—where he studies the insurance industry in order to direct and oversee the management of editorial content that provides trusted tips, advice and insights for consumers.

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