The cannabis and hemp industries have undergone huge growth in the last few years, largely due to the changes in state and/or federal law. Growing hemp is now perfectly legal and is becoming a profitable crop for farmers. Growers in the Midwest are beginning to view hemp as a viable alternative to the traditional crops of soybeans, wheat and corn. In fact, the recent trade war with China may influence more farmers to make the switch. The cannabis industry is also expanding, although its legal status is still negatively impacting profits. No one is doubting that the industry will be an important one for decades to come, however. But since cannabis growth and distribution are still illegal under federal law, those in the business are forced into risky business practices, making insurance vitally important. Finding that insurance still poses some problems for these entrepreneurs.
Federal Law Complications
Federal law makes growing and distributing cannabis in the United States difficult. Business people might be located in a state that legalizes the practice, such as Colorado or California, but the state law and federal law are in conflict. That means that mainstream banks covered by federal insurance (FDIC) cannot offer loans or even bank accounts to these companies without facing potential legal action. Cannabis businesses could also be considered money launderers if they were to put their money in an FDIC regulated bank.
Not surprisingly, these facts frighten entrepreneurs who have trouble finding a safe place to keep their money. As a result, those in the cannabis industry often end up dealing in large amounts of cash, forcing them to keep too much money on site. This practice leaves them quite vulnerable to theft. Their cannabis shipments are also extremely tempting to thieves who know that a small truck of cannabis is highly valuable. Owners have to take extreme measures to disguise their cargo. Dispensaries of cannabis have to worry about their the amount of cash on hand and a robbery-tempting inventory. These risk factors make getting proper insurance coverage vital, but the process can be difficult.
Insurance companies are leery of insuring the cannabis industry due to all the legal exposure involved. Those in this sector have the same liability issues as other businesses, including workplace safety, crop failures, storm and fire damage. In fact, they are more susceptible to fires than many other businesses since the product is quite flammable. But, in addition to the usual business risks, the industry also offers some daunting product liability issues.
Cannabis, CBD oil and edible products such as gummies offer a high product liability risk. Customers can easily claim they suffered ill effects from ingesting or smoking these products. The potential for expensive lawsuits is certainly there, which worries insurance companies. Of course, the same can be said for other sectors, including the pharmaceutical industry. Still, the legal exposure involved with cannabis gives many insurance companies pause.
Despite the difficulties in getting insurance, experts recommend that those in the cannabis industry work to acquire a variety of coverages, including crop insurance, general liability insurance, product liability insurance, director and officer insurance, pollution insurance and cyber/privacy insurance. Company needs differ, of course, but the premiums for these policies can add up. Getting at least some insurance is not an option for many since some states now require a certain amount of coverage for those in the cannabis business.
Some carriers may only offer a minimal amount of coverage, as well. Companies may want a million dollar policy but only be able to get a $500,000 one or less. That means that a dispensary may end up being less protected than the restaurant next door.
Some insurance companies do specialize in cannabis coverage. Those in the business need to carefully dissect any offered coverage to make certain that it will pay off when needed. Some policy holders have been disappointed when their policy was put to the test.
Until recently, hemp growers and distributors had the same issues as cannabis producers. However, the 2018 Farm Bill completely changed the landscape. It legalized hemp on the federal level, which made getting insurance coverage much easier. Farmers can now get their hemp crops covered by federal crop insurance, which should translate into more insurance options from mainstream carriers. While hemp has never had all the liability issues of cannabis, it is used to produce CBD oil, which carries some product liability exposure. Overall, this federal bill removed many of the insurance obstacles that had previously faced farmers, transporters and distributors of hemp. Hemp businesses are also now completely free to use federally insured banks for their checking accounts and other financial business including loans. This legitimacy can only help their cause with cautious insurance providers. Conditions for hemp insurance should only improve in the coming year.
Sadly, the cannabis industry is being harmed by the federal government’s failure to make cannabis legal. Dozens of states have made medical marijuana legal, and around a dozen states have granted the same status to recreational marijuana. Nationwide, there is a strong movement to decriminalize cannabis. The trend toward legalization is certainly strong, and producers and sellers should have hope that legalization is on the horizon.
At this point, those in the cannabis business do have to worry about finding the right insurance policies so that they will be protected against product liability claims as well as general liability issues. They also have to worry about insurance for transportation and cargo. Shipments of marijuana are still highly vulnerable to theft as are dispensaries. States where cannabis has been legal for a while have more insurance options. Still, a thriving niche market exists, and those in need of insurance can find at least a level of protection.