Anatomy of a Cannabis Insurance Policy: Exclusions
Previously I wrote about insurance generally (see here) and products liability insurance specifically (see here). Today I want to look at some policy exclusions to point out potentially problematic terms that you may notice when reviewing your insurance contract during your annual insurance audit.
First, I need to mention some truths that I believe are accurate in the insurance context, based upon my many years of interacting with business clients:
Many business owners never read their policies. Insurance contracts are often dozens or hundreds of pages long. They are complicated, and they are not written like other contracts, which makes them worse to read than a normal business contract. This results in many business owners meaning to read the contract but rarely getting beyond the coverage jacket on the first page of the policy.
Many business owners never have anyone on their team read their policies. Business owners generally intend to (and do) delegate the insurance review and renewal to someone on their executive team, but that rarely results in anyone reading the contract beyond the first page of the policy. Many insurance owners do not want to pay their lawyer to review their policies, so they will often rely on their broker to assure them as to what coverage they have. Because insurance claims arise only intermittently, the importance of the insurance contract seemingly pales when compared to supply and customer contracts that are the lifeblood of the business, so these tend to fall by the wayside until the next annual renewal.
The right insurance broker or agent can be your ally. First, some terminology. An insurance broker represents an insurance buyer, and an insurance agent represents one or more insurance companies. If you are familiar with real estate, you can analogize to the commercial insurance context. An insurance broker is similar to a real estate buyer’s agent, while an insurance agent is similar to a real estate dual agent who represents both the buyer and the seller in a transaction. Each of these individuals can be helpful to you in the right context with the right motivation. An insurance broker will always be your ally because they work for you and can shop your needs around to various insurance companies. An insurance agent is generally “captive” to the company or companies they represent and has to sell you insurance products offered by those companies, but they are still motivated to sell you a good product to keep your recurring business year after year. In both scenarios, you will not know all of the types of policies that are available, even if you are familiar with the basic insurance policies: commercial general liability, employment practices, workers’ compensation, directors & officers, property casualty, product liability, commercial vehicle, business interruption, and key person insurance. It is better to rely on someone within the industry than try to decipher the purchasing process by yourself.
Insurance companies are not your friends. I know many insurance agents and brokers, and many are good people who are motivated to provide good service, but there is a reason why companies hire good, experienced law firms to help negotiate with insurance companies when they want to make a claim for a loss against their policy. I also know many lawyers who work for insurance companies doing “insurance defense work” where they fight hard to help their insurance company clients avoid paying out funds to their insured. It is not pretty to be on either side of the table. But you do not want to try to navigate the technical and complex morass by yourself.
Let’s shift from these general points to the topic of insurance riders:
Insurance riders explained. A cannabis company growing hemp or marijuana will typically obtain a commercial general liability policy in response to a statutory requirement to carry insurance, like this language from Washington:
The licensee shall at all times carry and maintain commercial general liability insurance or commercial umbrella insurance for bodily injury and property damage arising out of licensed activities. The limits of liability insurance shall not be less than one million dollars.
(a) This insurance shall cover such claims as may be caused by any act, omission, or negligence of the licensee or its officers, agents, representatives, assigns, or servants.
(b) The insurance shall also cover bodily injury, including disease, illness and death, and property damage arising out of the licensee’s premises/operations, products, and personal injury.
These broad categories above are, in theory, the items that will arise in the life of a cannabis company, but the ubiquitous insurance riders (contract amendments) chip away at this protection. Your policy will not cover every event on purpose, even if you try to buy the most comprehensive policy you can find. And if you do want to procure a policy that covers every potential event, it will almost always be too expensive for your budget. It is to your benefit to audit your policies and understand what events are and are not covered and know your business well enough to know what events are most likely to arise based upon your business plan.
When auditing your insurance coverage, pay close attention to the insurance riders that appear at the end of most sections of an insurance contract. After reviewing hundreds of pages of insurance policies as part of my due diligence for a recent M&A transaction, I point out the following language from actual insurance policies that may cause the typical cannabis business owner to pause:
- This policy does not cover seeds, seedlings, vegetative plants, flowering plants, or harvested material that is not yet finished stock.
- This insurance does not apply to bodily injury and property damage arising directly or indirectly from alcoholic beverages.
- This [workers’ compensation] policy excludes volunteers and employment practices liability.
- This [workers’ compensation] policy does not cover business owners.
- This policy excludes nutraceutical substances such as essential oils.
- This policy excludes vaporizing devices.
- The insured must notify the company regarding a change of ownership. (This is not, strictly speaking, an exclusion like the others above, but it was significant enough that I wanted to include it here.) This clause becomes relevant in the M&A context and is different from the standard change of control language in other contracts (like bank financing agreements) that could impact whether you decide to do a stock deal or asset deal. A change of ownership impacts the covered company’s experience rating, and insurance companies love any excuse to reassess a company’s risk profile, find increased risk, and raise a premium as a result.
Attorneys get paid to deal in details. Often business owners believe they are covered by an event when they really are not, but you have to look beyond the insurance coverage jacket and diagram the effect of your insurance riders. This is why we always recommend a comprehensive insurance audit at least once per year.
For more information on the twists and turns of insurance policies, see the following posts: