The cannabis business landscape has come into the limelight over the last several years, with some states making historic moves to legalize its production, distribution, and consumption. However, many eager cannabis entrepreneurs and prospective business owners still face an uphill battle. The federal stance on cannabis makes any activities surrounding the drug illegal, and this muddies the waters for companies trying to get started or remain in the industry.
Many states, however, have taken away the illegality of some cannabis products and their use, including medical marijuana, small recreational use, and hemp and CBD businesses.
Unfortunately, the insurance industry has been slow to embrace the growing marketplace for these products, given the state of federal regulations. Companies involved in cannabis need to understand what their options – and limitations – are as it relates to getting appropriate insurance coverage, and how that impacts their business operations and licensing both now and in the future.
Types of Insurance Available by Niche
As the cannabis industry continues to grow, more insurance providers are coming to the table with coverage options for specific business types. Based on the products created and sold, the following niche markets within cannabis may find insurance solutions to meet their needs.
Distributors of medical marijuana, such as licensed dispensaries, have the most access to insurance compared to other business lines. This is mainly due to the fact that legalizing the use of medical marijuana is often the first step states will take to ease laws surrounding cannabis products. Also, medical marijuana dispensaries are required to obtain a valid license in order to operate in states where these types of businesses are legal. One component of the licensing process is securing a surety bond.
A marijuana surety bond provides some guarantee that a dispensary will operate in line with state rules and regulations. Depending on the licensing process imposed in the state where the business is located, the bond may guarantee a dispensary pays taxes on products sold to consumers in a timely fashion. In addition to marijuana surety bonds, medical marijuana companies may also have access to general liability insurance, commercial property insurance, and product insurance in some states.
Similar to medical marijuana businesses, recreational dispensaries are required to have a valid license in the state where they operate, which means a surety bond may also be necessary. Surety bonds work in the same manner for recreational dispensaries as they do for medical marijuana companies, and they are available from similar surety companies. However, recreational cannabis businesses may not have access to general liability insurance coverage or product-specific insurance. Commercial insurance may be available depending on the ownership and location of the dispensary itself.
Legal Hemp and CBD Products
The legal hemp industry, driven mostly by Cannabidiol or CBD, is growing at a rapid rate, projected to reach a staggering $22 billion by 2022. Licensing may be required for legal hemp and CBD businesses, as does a surety bond requirement. Many CBD and hemp businesses do have access to other types of insurance, including general liability, product coverage, and commercial property insurance. However, the number of insurance providers offering coverage has not kept up with the impressive growth in the industry.
The Process for Getting Insured or Bonded
The good news for cannabis businesses is that insurance companies are beginning to expand what coverage options they offer in several different states. However, that does not mean the process of obtaining the right insurance policy is an easy task. First, businesses need to have a business license which requires submitting an application to the state’s licensing authority. Within that application, companies in cannabis may be asked to provide detailed information about the owners of the company, its financials, and submit to a background check.
Once a license is in place, then insurance coverage or a surety bond can be pursued. The insurance provider will need to know the type of cannabis business that is in operation, the location, and the type of coverage necessary. The insurer may ask for verifying information such as financial documentation, credit history, and licensing details to approve an application. After these details are reviewed and approved, the cannabis business is provided proof of insurance via a certificate. The premium must be paid before a certificate is sent to the company, and it is typically renewed each year.
Although the task of obtaining adequate insurance coverage as a cannabis business is not a simple one, it is becoming less daunting as more states legalize cannabis from a medical and recreational perspective. Business owners and entrepreneurs joining the industry need to recognize that insurance and bonding is a necessary component of operating a sound business, and understanding what coverage is available is part of the process.
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.