Cannabis Operators: The Insurance Conundrum

As new state and local regulatory regimes have sprouted all over California and other states with legal cannabis markets, one question that has arisen is whether, and to what extent, regulators should require cannabis operators to carry liability insurance. In its statewide legislation and regulations, California has opted to require only that those holding distributor licenses must carry general liability insurance. (16 C.C.R. § 5308.) The state did not include any requirement that companies carry products liability coverage, and non-distributor licensees are not required to carry any liability insurance at all. In passing its own much-anticipated cannabis regulations last month, Los Angeles will now require that every permitted cannabis operator in the City carries products liability insurance. (Los Angeles Rules and Regulations for Cannabis Procedures, Regulation No. 3.6.) It may seem that the greatest downside to this decision is a local industry with a bit of additional expense and a lot more stability. Unless operators are cautious as they purchase this coverage, however, they could end up paying a whole lot for very little protection. 

The insurance markets for the cannabis industry are still relatively new, and the fact that cannabis remains a controlled substance under federal law has kept most carriers out of these markets entirely. This is especially true for “plant-touching" lines of coverage such as general liability, products liability, and property insurance. Accessibility to and quality of these insurance products lag well behind comparable industries. Of all the lines of cannabis insurance, products liability coverage, by far, is both the most important to operators and the most fraught from the perspective of policyholders hoping their carriers will defend them and pay out when products liability lawsuits hit. Now, it appears, every operator in the City of Los Angeles, both large and small, will be compelled to purchase products liability coverage. While this is not inherently a bad thing—any business directly involved in putting products out into the market should strongly consider obtaining products coverage—operators will have to be diligent to ensure that this requirement does not lead to additional overhead with little practical value.

Nothing in the Los Angeles regulations requires heightened transparency from insurers regarding whether, and to what extent, cannabis operations are covered under their policies. Ambiguities on this question are prevalent not only in policies not specifically written for the cannabis industry, but also in many of the policies marketed toward and issued to cannabis businesses. For precisely this reason, regulators in Oregon have required that its property and casualty carriers state in clear terms whether their policies cover cannabis. Many industry operators still harbor the misconception that cannabis-specific insurance coverage is unavailable. It is. And, if operators obtain coverage that is not written specifically to cover cannabis-related risk, it is a virtual certainty that the losses they incur will not be covered. 

Depending on the products liability policy that an operator purchases, however, the likelihood of actually getting coverage under a cannabis-specific policy may not be much greater. Insurers recognize that for a number of self-evident reasons products liability represents the greatest risk exposure for cannabis businesses. As a result of this recognition and a dearth of competition, the deficiencies in cannabis products liability coverage often render them largely, if not entirely, illusory. The only admitted products liability policy designed for the industry, for example, excludes any bodily injuries or property damage allegedly caused by cannabis impairment, pesticides, and any violation of Proposition 65, as well as any illness or disease whatsoever. Other "cannabis products policies" either contain controlled substances exclusions or define the scope of coverage in a way that calls into question whether any products are covered at all. In sum, cannabis businesses face an uphill batted in attempting to recover under their products liability coverage.

Companies can, however, increase their likelihood of recovery by being diligent as they purchase their insurance policies. Some policies are stronger than others, and even those typically offered with problematic language can often be improved significantly by offering a few simple changes. For this reason, it is critical that cannabuisnesses push their insurance brokers to fully explain the details of their policies and even consider consulting a knowledgeable attorney in determining which policy provides them with the greatest protection.

It should be noted that there is some ambiguity in Los Angeles’ final ordinance. Under these regulations, cannabis operators must provide proof of insurance, "including product liability insurance, as required by the State of California and the [Department of Cannabis Regulation].” Strictly interpreted, this language would appear to require proof of only that insurance required by both the State and the City. California requires distribution licensees to carry general liability coverage, but does not require any operators to purchase products liability insurance. Nonetheless, Los Angeles operators should not eschew products liability coverage based on this ambiguity. The City undoubtedly understood the State’s insurance requirements when it drafted its rules and intended to ask for proof of insurance required by California or Los Angeles. It is, therefore, a virtual certainty that the City will take adverse action against any operator that does not provide proof of products liability coverage, and so saving a bit of money in the short term is simply not worth that risk. 

Indeed, insurance is about managing risk, and effective products liability coverage is an important risk management tool for cannabis businesses. To use this tool effectively, however, these businesses need to take care to understand what is, and is not, getting covered.