Green Risk: Cannabis Insurance Trends and Concerns

Cannabis Culture writes

CANNABIS CULTURE – As the legal cannabis industry enters its fourth year in Canada, the industry is finding its footing. The last year created some new openings for the commercial cannabis industry, with growth in the edibles market and the emergence of farm-gate cannabis retail.Sales are growing, with monthly record sales of $319 million in June 2021. For 2021, Canadian sales are projected to reach US$4 billion, and US$6.7 billion by 2026.

Yet a growing industry is also prone to challenges, especially when it comes to insurance. Individuals growing their own plants at home need to be aware of the impact that has on their homeowner’s insurance. In the commercial realm, cyber coverage is expected to rise 30% or more, as cyber risks explode and more businesses seek coverage. Cannabis Property-Casualty coverage is also expected to increase by at least 10% – although businesses in catastrophe-prone areas may see increases of 20% and up.

Homeowner’s insurance offers limited coverage

Now that cannabis is legal, an individual can grow the plants at home without problems – if you keep it simple. The first part of that equation is keeping the number of plants within the legal limit, but just growing plants is unlikely to trigger any changes in insurance, especially since insurance carriers are unlikely to ask if you’re growing marijuana at home.

But that doesn’t mean there are no ripple effects. If you purchase special equipment to create an ideal growing environment – such as heat lamps, hydroponic equipment or humidifiers – you may need to make changes to your coverage. In addition to the risk of theft, specialty equipment can increase risk of fire, flood or even mould growth in a home, which can increase insurance premiums or make the owner a less attractive risk to insurers. Take steps to manage the risks, such as ensuring proper ventilation to the space. It may be worthwhile considering whether the equipment is worthwhile.

Commercial cannabis coverage remains limited

Reality check: The cannabis industry is still young and immature. And when it comes to insurance carriers, an immature market means less available coverage at a higher price.

On the ground, this means Canadian cannabis businesses are fighting for the limited insurance coverage that’s available – and shouldering the burden of the risk on their own if they can’t secure coverage.

The majority of the carriers offering coverage to Canadian cannabis businesses are located outside the country. Domestic carriers are staying away from the industry because of the immaturity of the market, but also because of a lack of data integrity and the stigma around the product. Markets are hardening and prices are going up. A cannabis company’s best friend may be the experienced cannabis insurance broker, well versed in industry standards and able to guide the company toward the right choices.

M&As increase risks to the industry

Despite the growth in the industry, many cannabis operations remain unprofitable. Some of these companies are looking for a way out of the red, either through mergers and acquisitions or some form of partnership. In fact, the first half of 2021 brought a record number of mergers and acquisitions in Canada.

Yet any major business change comes with risk management issues. For example, there’s the risk a desperate organization will cut corners or overstate results to make itself more attractive to potential buyers. These risks make it essential to secure adequate risk management measures and insurance, including Reps & Warranties (R&W) and Directors & Officers (D&O) coverage, ahead of time.

Manage risk in the growing edibles market

Cannabis organizations expanding into edibles may find a number of unexpected risk management challenges. Edibles are two products in one: cannabis and food. As such, producers must follow regulations for food manufacturing, which are different than the regulations governing cannabis products. Cannabis companies have struggled with these regulations. As a result, although sales surpassed $100 million in 2020, there were a number of recalls due to mould or incorrect labelling.

Organizations looking to expand need strong risk management in place. Audit the manufacturing process to minimize the risk of product mislabelling and other recalls. And securing product recall insurance and general liability go a long way toward protecting cannabis companies from risk in the event of a major loss.

“Farm-Gate” sales bring growers closer to their buyers

In a step toward a more open retail cannabis market, several provinces have approved farm-gate, allowing a licensed cannabis grower to sell their cannabis products directly to consumers.

Farm-gate sales may create an opening for smaller growers to attract a larger base of support.

Any grower or producer that opens a farm-gate operation should contact a broker to make sure they have appropriate coverage for a retail outlet, including product recall, cyber and crime insurance.

Looking Toward 2022

In 2022, cannabis organizations will be better prepared if they look to their brokers and insurance professionals for guidance and best practices. A broker with the right industry expertise can help identify appropriate coverage options, advise on workplace safety and help point operations in the right direction.

* PUBLISHER”S NOTE – everyone’s situation is different. The above text should be only used as general knowledge from a learned source. This article does not constitute legal advice. Consult with an insurance professional to properly address your needs.