Insurance and Risk Management Challenges for Cannabis Business Owners
CannaBlog Written by Cory Parnell, CPA, Chief Operating Officer
Bridge West CPAs & Advisors to the Cannabis Industry
Veteran cannabis business owners can attest that among the many hurdles to running a successful cannabis company, business insurance, and risk management services have proven costly, when available. Insurance providers experience similar challenges as other financial service providers when it comes to doing business with the cannabis industry. Any business conducted with cannabis companies in state-legal markets poses the risk of fines and other punitive actions from the federal government. This is due in large part to cannabis being classified as a schedule one drug according to the Controlled Substances Act. This designation has a wide range of ramifications, including issues with standard business deductions, banking, insurance, and even paying taxes.
Cost and Availability
In a Reuters interview cited earlier this year, cannabis businesses reported paying 20-30% more for insurance services, when the services were available at all. Many cannabis businesses reported being underinsured either because the insurance provider could not offer them more coverage or because the businesses could not afford it. The availability of coverage is often tied to the maturity of the market as well. In more mature cannabis markets, it is easier to determine the risk of claims and lawsuits based on the historical data available for businesses that have been operating longer. This data makes it easier for insurance providers to more accurately predict the impact of certain risk factors.
Risks Involved in Operating a Cannabis Business and the Probability Scale
All companies have risks in their operations and some cannabis companies can obtain limited business insurance. However, these policies can either prove costly or lack coverage due to budgetary concerns. Below are some examples of operational risks that cannabis businesses should keep in mind when seeking business insurance. These risks are typically ranked according to the likeliness of occurrence from very likely to very little chance. As with any goods or services, it is important to meet with an experienced cannabis industry professional who can help identify the potential risks and determine how to best address them.
Cannabis business owners should keep physical and building-related risks in mind. These include events such as fires, floods from broken pipes or water lines, and explosions. This also includes hazardous material risks from gas leaks, toxic fumes, poisonous liquids, or waste. The location of a cannabis business can also pose risks. These risks could come from the environment like natural disasters or storm damage, or due to the location within a given municipality like a potential for break-in or robbery. Human risks posed to a cannabis business can take the form of employees that abuse substances, theft or embezzlement, diversion of product, and illness or injury.
Cannabis companies are heavily reliant upon technology for their daily operations and compliance. Risks to this digital infrastructure can impact many areas within a cannabis business’ operations. In a recent interview with Max Meade, an Insurance Advisor with Brown & Brown Insurance, [link to blog post] this area of risk was highlighted, and recommendations were offered to address it.
When developing a risk management plan and identifying necessary insurance coverage, cannabis business owners should also consider less advanced technical risks such as power and communications failures.
Product and Crop Risks
Depending on the type of cannabis company in operation, additional insurance may be needed. For example, crops and unfinished flower products or extracted materials, and finished manufactured products are insurance and risk considerations. A crop failure or contaminated batch of infused products can be very costly and detrimental to a cannabis company. It is essential to identify an experienced industry service provider to address these potential issues.
While finding business insurance providers has been a challenge, especially in newer markets, a resolution to this hurdle has been proposed. In March 2021, the Clarifying Law Around Insurance of Marijuana or CLAIM Act was introduced to both the U.S. House of Representatives and the Senate. Its intention was to accomplish for the insurance sector what the SAFE Banking Act intends to do for financial services. Unlike the SAFE Banking Act, this bill has yet to leave the committee or reach a vote. However, its introduction signals a growing desire to remove obstacles from the compliant and efficient operations of state-legal cannabis companies. This is as the federal government considers any shift in its official position on cannabis.
The importance of a cannabis-focused ancillary firm to identify insurance and risk management issues cannot be understated. For entrepreneurs entering the legal cannabis industry, the task of securing business insurance can be daunting. For experienced cannabis business owners, identifying insurance providers with significant industry-specific experience can be challenging. The key is to maximize coverage in a budget-friendly manner to increase profitability or allocate financial resources to be invested in other areas to help the business grow and thrive. Reach out to our team with any questions and look for an invitation to our upcoming webinar about insurance and risk management in the cannabis industry coming soon.