California cannabis licensees face a lot of risks, from business competition to regulatory uncertainty, to unforeseen disasters and lawsuits of all types. Cannabis companies can act to protect themselves from certain risk by obtaining specific types of insurance.
State-Mandated Insurance Requirements for Cannabis Businesses
While the state’s governing statute for commercial cannabis activity, MAUCRSA, does not require cannabis companies to obtain any type of insurance, the enforcing agencies implemented various requirements pertaining to insurance.
The Bureau of Cannabis Control (the “BCC”) requires that distributor licensees “shall at all times carry and maintain commercial general liability insurance in the aggregate in an amount no less than $2,000,000 and in an amount no less than $1,000,000 for each loss.” A distributor is able obtain coverage, under certain conditions that must be met, from non-admitted insurers, authorized insurers, and registered risk retention groups. Applicants for distributor licenses must provide the BCC with a certificate of insurance coverage. Furthermore, distributors must provide “[p]roof of insurance for each vehicle and trailer used to transport cannabis goods.”
All three agencies’ regulations (the BCC, along with CalCannabis, and the Department of Public Health) require that applicants provide proof of a surety bond of at least $5,000, to be used in certain events when the state needs to destruct cannabis goods if the licensee violates the law.
Optional (but Crucial) Insurance Coverage to Consider
While MAUCRSA and its regulations generally do not require insurance coverage (aside from requirements on distributor licensees and a general surety bond for all licensees), California cannabis licensees would be smart to obtain a variety of insurance coverages, as insurance coverage naturally reduces risk and can help protect against catastrophic events.
In addition to the $5,000 surety bond required by the state, all licensed cannabis businesses in California should look into workers’ compensation insurance if they have employees. General liability and product liability insurances would provide protection from a variety of potential lawsuits. Cultivators may want to obtain pollution coverage in case of environmental damage. Testing laboratories may want to obtain coverage for errors and omissions, including for bodily harm. Manufacturing licensees may consider product recall and equipment coverage. Distributors and retailers might also consider coverage for property in transit.
Read the Fine Print When Selecting Insurance for Cannabis Companies
Like any contract you enter into, reading and understanding the policy before signing is critical. Be aware of language that exempts the insurer from covering activities that are “illegal under federal law,” or “illegal under any law.” Insurance companies have avoided payments to cannabis operators, as cannabis remains a Schedule 1 drug under federal law, even though the insurance policy was wholly predicated on commercial cannabis activity. California courts have yet to weigh-in on the matter.
Be careful of any and all exclusions listed in the policy, and do not be afraid to ask questions. If you change insurance policies, make sure the new carrier will apply retroactive coverage, otherwise, past acts and products made in the past may not qualify for coverage.
At the time of this writing, there are very few “admitted” insurance carriers in California that offer cannabis-related insurance.You can obtain insurance from a non-admitted insurer, but more due diligence may be required when reviewing the policy. (For a list of cannabis insurance providers – admitted and non-admitted – you can refer to the Cannabis and Insurance Initiative of the California Department of Insurance.)
In the end, an insurance policy is a type of contract between the insurer and the commercial cannabis licensee. Licensees who know what they want will be in a stronger position to negotiate and to obtain the terms they desire.