Nearly all Americans live in a state where some form of cannabis is legal. Given that the cannabis industry is now valued in billions of dollars and has created hundreds of thousands of jobs across 39 of the 50 states, it requires the same range of insurance products that protect businesses in other sectors. As a result, many insurance carriers have begun issuing various types of insurance policies for different aspects of cannabis operations. For example, there are policies that insure cannabis dispensaries while still others insure manufacturing operations. Suffice it to say, each involves different risks that may require distinct types of policy language, security measures, and underwriting practices. This article discusses some recurring coverage and underwriting issues in connection with these policies.
SECURITY COMPLIANCE IN CANNABIS DISPENSARY POLICIES
A common question in connection with issuance of cannabis dispensary policies is whether the storage of on-site harvested cannabis or finished stock complies with the Locked Safe Warranty provision that most cannabis policies require. Policy language varies, but most require harvested plant material or stock to be stored in a secured cage, a safe, or a vault room.
The definitions and terms used within security safeguard warranties and exclusions in cannabis commercial property policies have evolved over the past few years to better align with insureds' business operations and should avoid ambiguity and unnecessary coverage disputes and litigation.
In this regard, examples of precise requirements for a compliant vault should include the following language:
- Located in an enclosed area constructed of steel and concrete with a single point of entry
- A minimum steel door thickness of one inch
- Continuously monitored by a central station alarm, motion sensors, and video surveillance
- A minimum of one-hour fire rating for all walls, floors, and ceilings
- Procedures that limit access to authorized personnel only.
Such detailed definitions are, needless to say, preferable over vague references to a “vault,” “vault room,” “safe,” or “secured cage” in order to avoid any ambiguity argument at a later time. Thus, it is imperative that a carrier be as precise as possible when detailing the type of security required under dispensary policies.
In addition, other common security safeguards required by the policy include specific requirements for what qualifies as a central station burglar alarm and the location of motion sensors and video surveillance equipment. Again, in this regard, it is imperative that language be as precise as possible to avoid coverage disputes later.
INSPECTIONS REQUIRED IN CANNABIS MANUFACTURING POLICIES TO AVOID FIRE RISK
As noted above, in addition to dispensary policies, there are many cannabis manufacturing policies that carry with them an entirely different risk than the foregoing, and therefore may require different underwriting requirements. Specifically, because such operations often use solvents and other substances that are highly flammable, it may be necessary to inspect such risks not only prior to the inception of the policy but also regularly throughout the policy term. Indeed, this will help ensure that an insured's operations comply with applicable law and are being conducted safely throughout the policy term. As a result, many carriers have incorporated rigorous inspection requirements, such as the foregoing, in connection with their cannabis manufacturing policies.
CONCLUSION
There are many opportunities for carriers to capitalize on the expanding cannabis market. In so doing, however, carriers should be precise in their policy language, as well as in their underwriting practices, in order to avoid later coverage disputes and minimize risk as much as possible.
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.
