Canada: Canadian Companies And The Legalisation Of Marijuana

Last Updated: May 18 2018
Article by Roderic McLauchlan and Tahsin Najam

Canada's federal Cannabis Act is expected to come into force late in the summer of 2018, effectively decriminalising recreational use of marijuana. Insurers face a number of novel questions with regard to the risks to be accounted for in providing coverage to Canadian companies in the cannabis industry.

Currently, there are 94 licensed producers of medical marijuana across Canada, with 51 of the license-holders located in Ontario. The four largest publicly-traded cannabis companies, Canopy Growth Corp., Aurora Cannabis Inc., Aphria Inc. and MedReleaf Corp. have market values of more than CAD 1 billion. Investment in "grow-ops" has become extremely popular. Cannabis companies have a combined market value of CAD 32 billion on Canadian exchanges. Market values will likely increase with the addition of new non-medical marijuana producing companies.

However, profits will likely be volatile at the outset as uncertainties about the regulatory regime may affect company performance. Overly optimistic forecasts by cannabis production companies may lead to claims by investors later on.

Company Personnel

Proposed Ontario legislation stipulates that personnel associated with certain licenses issued under the proposed Ontario Cannabis Act be required to hold valid security clearances issued by the Minister of Health. This would enable the Minister to refuse to grant clearances to individuals with associations to organised crime, or with past convictions for, or an association with, drug trafficking, corruption or violent offences.

This may be pertinent information to insurers in the course of policy applications; producers with valid security clearances could obtain favourable coverage in comparison to cannabis companies retaining individuals unable to obtain a clearance but remaining employed with the company. Insurers offering D&O coverage may need to account for the industry's past proclivity towards association with criminal enterprises when accounting for policy coverage and the risks involved.

Small-Scale Licensing

Licensing for cannabis producers will be regulated both federally and provincially. Licenses will likely be separated into four classes, the most prevalent of which will be standard and micro-licenses. The new micro-licenses would allow smaller producers to cultivate cannabis without having to abide by the onerous guidelines under the Access to Cannabis for Medical Purposes Regulations.

Under the proposed legislation, only producers that are authorised to produce and sell to the public may sell or provide dried marijuana, fresh marijuana, and cannabis oil to eligible persons. Such producers will require property and equipment insurance, including coverage for living plant material and final cannabis products constituting stock.

Applicants for small-scale cannabis licenses in Ontario will likely need to include financial information (including information about investors) as part of the application process. Projected scopes of the two types of proposed licenses to be held by small-scale producers are:

  1. Micro-cultivation license that would authorise the cultivation of a plant canopy area of no more than 200 square meters (approximately 2,150 square feet); and
  2. Micro-processing license that would authorise the processing of no more than 600 kilograms of dried cannabis (or equivalent) per year, or the entire output of a single micro-cultivation license.

It is likely that insurers can provide lower-limit coverage for micro-producers to match the diminished output of such manufacturers.

Financing

Lenders are expected to exercise a thorough due diligence process in determining whether to participate in the financing of cannabis companies. Lenders may require more security than usual in comparison to non-cannabis construction projects. Insurers providing coverage to lenders may be wise to determine if their insureds plan on entering into financing arrangements with cannabis companies.

Production Facilities

Cannabis producers will require insurance for their facilities, and insurers will need to design policies specific to the construction and operation of cannabis production facilities. Similarly, such facilities will have to be approved by municipal authorities who may not yet have any bylaws in place for cannabis production facilities. Cannabis producers will have to give consideration as to whether they want spaces for production to be newly constructed, or leased and used as is. Rented facilities must have leases specifying the allowance of a cannabis growing operation.

Facilities will need reliable, cheap, and possibly clean supplies of electricity and gas. As they will likely use significant amounts of water to feed plants, any waste-water will need to be contained or reprocessed in accordance with environmental regulations. There is also risk of mould so appropriate ventilation will need to be implemented into facilities. Inadequate ventilation could hinder plant growth and possibly be a health risk to workers. Architects and engineers may be necessary to help perfect the production process; i.e. optimising plant growth. Facilities will have to be built or constructed in accordance with building codes and bylaws. Plastic panels should be fire-rated and able to resist mould and moisture. Insurers should obtain all information with regard to a company's proposed production process in the policy application process in order to assess risk.

Proposed cannabis legislation would likely permit both outdoor and indoor cultivation of cannabis. Outdoor cultivation production entails large tracts of land and carries a greater risk of theft and diversion. Canopy Growth, for instance, operates two cannabis greenhouses in British Columbia with three million square feet of production space.

Transportation

The transportation of marijuana and cannabis products will allow insurers to offer new specialised products. Supplying marijuana to the soon-to-be-established "Ontario Cannabis Store(s)" will require the product to be transported in large quantities, allowing for an increased potential risk of theft and damage to the product while in transit. Specialised cargo coverage will accordingly be necessary.

It should be noted that while Ontario, British Columbia, and Quebec have opted for a government-run approach to cannabis, Alberta has decided to privatise cannabis retail. The Alberta Gaming and Liquor Commission will require applicants for a cannabis license to have a signed lease or at least a letter of intent. It is expected that cannabis retail will take up one-sixth of the commercial real estate of liquor. Nonetheless, privatised retailers will be highly susceptible to the threat of theft and will have to be accordingly insured.

In conclusion, legalisation of cannabis will have consequences on numerous insurance sectors.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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