As a nascent industry subject to a patchwork of state and federal regulations, there are many factors that can impact the insurance costs for cannabis businesses.
In this article, we’ll cover the main ones to consider and an approximate premiums cost for different segments of the cannabis industry.
Cannabis business insurance legislation at the state and federal level
The lack of federal cannabis reform legislation to facilitate banks, insurance providers, and other financial institutions to service the state-legal cannabis industry means many cannabis businesses have been operating at a disadvantage compared to companies in traditional industries.
This looks set to change in the new future with two bills currently in Congress. The Secure and Fair Enforcement (SAFE) Banking Act would allow banks to work with marijuana businesses without the threat of federal intervention. The Clarifying Law Around Insurance of Marijuana (CLAIM) Act includes many similar provisions to the SAFE Banking Act but goes further in including insurance companies and other “support businesses” as being in need of this protection as well.
In the absence of federal marijuana reform on Capitol Hill, some states that have legalized adult-use marijuana have taken the initiative in enacting legislation that ensures financial institutions servicing cannabis businesses won’t face repercussions for doing so.
What does industry stabilization mean for cannabis business insurance?
Legislative action to better integrate the cannabis industry into traditional financial markets means more stabilization. This not only benefits marijuana entrepreneurs and investors, it is also beneficial to marijuana insurers.
A stabilized cannabis industry allows insurers to standardize risk-assessment processes, provide more forms of coverage, price competitively, and specialize into a niche.
Currently, many insurers are put off by the perceived risk of dealing with an industry that still largely operates in cash, among other concerns. Moving away from this to a more stable model should mean lower premiums for cannabis businesses going forward.
What are the recommended cannabis business insurance policies to have?
The National Association of Insurance Commissioners (NAIC) recently published a report outlining the types of insurance coverage recommended for cannabis businesses.
The report – Regulatory Guide: Understanding the Market for Cannabis Insurance – also considers various characteristics of the cannabis business, such as the number of licenses it holds, its experience, and its use of blockchain technology, to estimate insurance costs.
It finds that cannabis businesses will typically need a combination of cannabis-specific coverage on top of traditional insurance policies. As a baseline, here are the policies most cannabis companies are advised to get:
- Commercial General liability
- Commercial Auto Insurance
- Crime Insurance
- Directors and Officers
- Product Liability
- Property Insurance
- Employment Practices Liability
- Technology E&O
- Workers Compensation
The NAIC further notes that the needs of each marijuana business are highly specific, and recommends cannabis entrepreneurs to seek the counsel of an insurance agent with cannabis industry expertise.
Cannabis business insurance costs for companies by market segment
After these baseline insurance policies, the type of coverage a cannabis business should obtain depends on the market segment it occupies in the marijuana industry. The risks of a hemp grower are very different to that of a distributor, after all.
Hemp growers
Thanks to the 2018 Farm Bill, hemp growers have access to federal crop insurance. This is not sufficient though. On top of those mentioned, it is necessary to take out inventory coverage.
In total, a $1 million policy could cost as much as $150,000 annually.
Medical marijuana
The main difference between medical marijuana businesses and others in the cannabis industry is the threat of malpractice or medical negligence lawsuits.
Insurance coverage for this is expensive as medical cannabis practitioners require limits as high as $10 million. As such, you need to budget for a six-figure yearly premium.
Retail dispensaries
The baseline insurance policies cover most of the needs of a marijuana dispensary, but it could be a good idea to get Technology and Cyber Insurance since many retailers handle sensitive customer information and run seed-to-sale tracking software. The cost of this coverage can vary considerably, with the gross sales of the retailer being a big factor in the final price.
Marijuana cultivators
Marijuana cultivators do not have access to federal crop insurance as cannabis remains federally illegal. Obtaining similar coverage is a priority and, in addition, cannabis growers should consider Equipment Breakdown, Sprinkler Leakage, and Earthquake/Volcanic Eruption policies.
Premiums in the tens of thousands annually will generally provide protection for up to $1 million in losses, though the size of the farm largely determines the ultimate cost.
Distributors
As well as the baseline policies, cannabis distributors should consider Automobile Liability and Cargo Insurance. Other than this, insurance for cannabis distributors is generally more straightforward and premiums are broadly similar to those paid by distributors of other goods.
What are your company’s cannabis business insurance costs?
It is impossible to say without speaking in-depth with an insurance provider that has cannabis industry expertise. Premiums remain high in the cannabis industry, but hopefully legislation like the SAFE Banking and CLAIM Acts will stabilize the industry to the point where these start to come down.