The cannabis industry has been growing steadily for the last several years, with many states taking the initiative to legalize medical use, recreational use, or a combination of the two. Several legislative bodies are recognizing the potential of the industry, not only as a way to help individuals with chronic health conditions but also as a boost to tax revenues and economic growth. However, legal cannabis businesses have long faced one significant challenge above and beyond public and government perception – their ability to secure crucial insurance to protect themselves from financial loss.
Licensed cannabis businesses are predicted to grow annual sales to an impressive $57 billion throughout the world over the next ten years, with recreational use making up 67% of the market share. While these numbers are promising for business owners and industry experts, the lack of insurance coverage available in the industry puts it all at risk. Here are several points to know about the cannabis insurance market currently, and where it is headed in the years to come.
Available Coverage for Licensed Cannabis Businesses
Even though several states have moved forward in legitimizing cannabis and the companies behind its growth, distribution, and sales, the federal illegality of marijuana leaves many lines blurred. The ability to get affordable insurance is not simply a challenge for cannabis businesses; it is often not available at all. Insurance companies have previously viewed the risk in cannabis as far too high to provide even minimal coverage, but that negative perception is starting to shift.
In a notable decision in California, the state’s Insurance Commissioner worked diligently from 2017 to encourage a variety of insurance providers tooffer a range of policies to licensed cannabis businesses. After this more than year-long push, the state has approved the first business owner policy for cannabis companies, consisting of property and liability insurance for dispensaries, processors, manufacturers, distributors, storage facilities, and other related businesses in the state. The good news is that many other insurance companies are following suit, offering the following coverage based on the type of cannabis business applying for a new policy:
Dispensaries – the risk faced by dispensaries focuses mainly on the threat of theft in the business, but damage to the product or building, or injuries on the job may also take place. The few insurance companies offering coverage to dispensaries do so by way of general and product liability insurance, property and medicine insurance, or business income/overhead expenses insurance.
Growers – cannabis growers are an essential part of the business landscape, but they often are exposed to a higher risk than other companies in the industry. The potential loss of inventory means a grower could be out of business in a hurry, so insurance companies provide coverage for living plant material, harvested plant material, and finished stock. Coverage typically protects against water and fire damage, theft, and explosions.
Hemp and CBD Production – the manufacturing of legal hemp and CBD products for sale to the consuming public also comes with high risks. Insurance companies offering coverage to these businesses do so through product liability policies, and in some cases, general liability.
Surety Bonds to Fill the Gap
Conventional insurance is often the route many small businesses take to cover their inventory, their overhead expenses, and their ability to generate revenue even when a disaster takes place. However, licensed cannabis businesses may not always have access to an affordable insurance policy to cover these significant needs.Surety bonds for licensed cannabis companies are one method to fill in this gap. A surety bond is not pure insurance, but instead, it provides some level of guarantee that the business will operate in-line with state laws and regulations. Securing a surety bond is not a requirement for all cannabis businesses, but it is becoming more common as states firm up legal necessities for licensed companies that grow, distribute, or sell cannabis products.
At the same time California announced its insurance company partnerships, the state also made it mandatory for licensed cannabis businesses to have a surety bond of at least $5,000 in order to keep their license valid. These bonds guarantee payments related to the financial loss of the destruction of goods and materials when a violation of state regulation takes place. Other states have followed this path and made surety bonds a requirement for receiving a cannabis business license, helping protect both consumers and the state from potential loss. Fortunately, when a surety bond is required, cannabis businesses are not on the hook for the entire bond amount but instead pay a small percentage of the total dollar amount of the bond.
The combination of business insurance coverage and surety bonds lays a strong foundation for cannabis-related businesses to thrive as the market continues to grow.
About the Author: Eric Weisbrot is the Chief Marketing Officer of JW Surety Bonds. With years of experience in the surety industry under several different roles within the company, he is also a contributing author to the surety bond blog.
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