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By: Christopher Knight
Just like any other new business, organizations planning to enter Pennsylvania’s newly legalized medical marijuana market need a plan to manage and transfer risks and liabilities associated with their operations. An insurance or risk-management scheme is necessary for the responsible operation of any business, but for medical marijuana organization applicants, it is a mandatory component of planning required under Pennsylvania’s new regulatory scheme.[1]
On one hand, managing risks and liabilities for licensed marijuana businesses is no different than other businesses. Protection is needed for property and equipment losses due to fire, water damage and other perils, as well as business interruption losses. Inventory or crop loss exposures need to be managed and transferred. Liability coverage is needed in case of accidents and injuries. Auto coverage and worker’s compensation insurance are required by state law. Protection from product liability claims is a needed component. Sounds about the same as the risk management and insurance needs of other manufacturing and retail operations, right?
But, like most other aspects of entering the medical marijuana business, insuring those business risks and liabilities can be a bit more complicated than in other industries, with fewer options available in the marketplace. Why are there fewer options? The most obvious reason probably arises from the fact that, although medical marijuana is now state-legal in Pennsylvania, we are all keenly aware that it remains prohibited under federal law. And, while there is some comfort that the Feds have been restrained in enforcing this prohibition against state-legal marijuana operations as suggested in the Department of Justice’s enforcement policies, including those set forth in the well-known “Cole Memo” of 2013,[2] uncertainty and some unease about that legal conflict and how it might play out in the future still remains. After all, under a strict interpretation of the law, some insurers may even perceive a small risk that the insurance companies themselves could be exposed to potential criminal prosecution for aiding and abetting federally prohibited criminal business activity. So, while insurance companies are inherently in the risk business, the vast majority of them have thus far stayed away from insuring medical marijuana businesses – whether the federal laws are vigorously enforced or not. And while some insurers are willing to offer coverage, many have seemed to essentially price themselves out of the market by quoting uncompetitive or unaffordable premiums, calculated as necessary to protect their own business interests and risk tolerance.
So where can prospective medical marijuana organizations turn to find options in seeking required coverage and protect their business interests? One possible solution pursued by some highly-sophisticated and well-established organizations is to establish their own self-insurance or “captive” insurance company plans. But even well-funded medical marijuana start-ups may not be in a position to undertake forming a scheme that costly or complex. Instead, for most prospective grower/processors, dispensaries, and their ancillary service providers in Pennsylvania, the best place to turn – particularly while the Pennsylvania medical marijuana industry is just getting established – is to call upon the expertise of insurance professionals from other medical marijuana legal states who already have years of experience finding coverage for state-legal marijuana businesses. And, because Cannabis Law PA attorneys are experienced insurance regulatory lawyers who regularly provide legal advice to insurance companies and agents, we have a keen understanding of the insurance industry and a network of contacts to help our clients find the best-qualified insurance professionals to guide them in exploring the best insurance options.
One such agent is Kathy Francis with Specialty Insurance Partners, an agency which has specialized for many years in helping marijuana businesses operating in legal states throughout the country to find coverage. Kathy and her colleagues understand the unique issues involved in obtaining insurance for their clients in the cannabis industry and while it is not always easy, they thrive on the challenges of finding the best options to suit the particular needs of each client. Kathy and her agency are licensed to sell insurance in Pennsylvania and have relationships with several trusted insurance companies who regularly offer coverage to their clients and can quote coverage options for businesses in our state.
“There are a limited number of markets available who are offering coverage – but there are markets,” Kathy says. Addressing security concerns to the satisfaction of the insurance companies is one key component to finding affordable coverage, or coverage at all, for grow operations and dispensaries. “Security demands of the insurance companies are extensive, but coverage is available for indoor grow operations if security requirements are met,” according to Kathy. Availability of insurance coverage is also a consideration in selecting a viable location for any medical marijuana business, because the location can be a significant factor in whether insurers will offer coverage.
Vendors and ancillary businesses operating in support of medical marijuana businesses also may face similar challenges in finding insurance coverage. According to Kathy, if more than 10% of a vendor’s business derives from the medical marijuana industry, coverage availability starts to become more limited than for other comparable businesses, especially for transportation businesses, which are perceived to have a higher risk of losses.
Kathy’s best advice for finding insurance coverage for a medical marijuana business is the same as the clients of Cannabis Law PA hear from our lawyers about other aspects of their business planning: start early. Although applying for and obtaining insurance quotes may have to wait until a license application is pending or approved, it is never too early to start building a relationship with insurance professionals and to add them to your planning team to spot and address issues at an early stage of the business development process.
While there are some unique challenges involved in protecting a marijuana organization’s business risks through insurance coverage, it is far from impossible – with the right legal and insurance advice.
[1] Pa. Dept. of Health, Draft Proposed Regulations (not yet enacted), provide at § 1151.46: Each grower/processor shall have appropriate insurance coverage of the buildings and equipment and adequate comprehensive liability insurance, or an equivalent self-insurance plan, covering principals, officers and employees.
[2] Memorandum from James M. Cole, Deputy Att’y Gen., U.S. Dept. of Justice, Guidance Regarding Marijuana Enforcement (Aug. 29, 2013).
