Insurance Strategies for the Cannabis and Hemp Industries
July 21, 2022
In this episode of CannaCast, Eric Altstadter, Partner and leader of EisnerAmper’s Cannabis and Hemp Group, speaks with Wayne Marguilies, Cannabis & Hemp Insurance Specialist at HUB International.
Wayne, how did HUB first get into this market?
WM:So as you said, HUB is a top five insurance broker, and we have specialty focus teams who spend the majority of their time working in specific specialty groups. So like transportation, construction, healthcare, real estate, hospitality, agribusiness and food, financial institutions, entertainment and sports, not for profit education institutions, energy technology, and the reason why we're chatting today, cannabis. But even more specifically to your question, about 10 years ago, one of our cannabis west coast producers had a parent who was suffering from an illness and traditional medicine really didn't serve the parent very well. So he started to use cannabis as an alternative. Well, the producer saw... Producer in the insurance world means an insurance broker or insurance salesperson, just to clarify, when I used the word producer. So the producer had a vision that cannabis businesses would gradually legalize. And so he began identifying carriers who would write in the space, and he offered to help develop the insurance policies. So HUB was and continues to be much more than just an insurance broker, but we're an industry partner with the carriers and we help create and compose the policies. And as the sector matures and compliance changes, we'll continue to work with them.
EA:Why is insurance for the cannabis industry so difficult?
WM:So when people ask me that, I kind of say, it really depends on who you talk to. For me, it's not difficult. Cannabis is like every other business, and it's important to work with a specialist. You don't go to a hardware store to inquire about meat prices, and the same is true, you shouldn't go to a person line brokers, an insurance broker, to get advice on cannabis insurance. So many farm insurance brokers or the local street corner insurance broker have no idea where to turn to find coverage for cannabis organizations. And in addition to that, there are many different types of cannabis operations. So a specialist should be a required trusted partner. There are growers, manufacturers, processors, extractors, testing labs, delivery, dispensaries, lounges, cannabis-friendly events, hotels, restaurants, multi-state operator, specs, private equity investors, and there's probably a few more, but I needed to take a breath.
And each of them have some common risks. There are some very unique exposures for each operation. HUB provides risk management, which is a part of insurance and insurance solutions to currently over 700 cannabis organizations in the US and Canada. For us, we know the correct questions by different type of organization. We've developed a system and application process to simplify as much as possible, how we learn about each organization's operations, create a submission, catch the underwriter's attention, and as close to assuring as possible, they offer a premium quote. I'm part of a 200 member cannabis team who focuses the majority on cannabis related businesses.
Now, going back to that application that I mentioned, well, it's a detailed process and we need to provide our application and appropriate applications and working together with the insured, we develop a comprehensive risk management program so that we know what it is that they need to insure.
When we come up with a proposal, we present more than just what they think they were asking for. We propose what we see as risks, and then they decide whether or not they ensure they purchase insurance so that when a claim occurs, they get defense from an attorney. And if a payout is needed, the payout is basically covered to the limits of the policy. And they can also decide whether or not they feel it's not a risk that they need to insure for. And they do what's called self-insuring. But if a claim occurs, then they're going to have to hire attorney on their own. And that, as you know, is an expensive endeavor.
EA:Is insurance for a hemp or a CBD company different than a cannabis company?
WM:We, we do it all here at HUB, and we say cannabis is hemp and hemp is cannabis. And the real difference is where hemp is classified as a product with less than 0.3 THC, with THC being the component that creates the buzz. So if you're going to grow, extract, sell, manufacture hemp or hemp byproducts, like gummies, oils, bombs, tinctures, flour. Hemp organizations, like cannabis organizations need state-issued licenses. To the insurance markets, they're very similar entities. We just need to clarify what it is that they need to insure.
EA:What is the biggest area of exposure for a cannabis company as far as insurance goes?
WM:It really depends on what type of business the organization is. Whether it's a dispensary, or grower, an extractor like we were talking about before, but in my mind, the biggest exposure is the product liability exposure, because everyone up and down the supply chain needs to have product liability coverage. And I think, in a later question, I can go a little deeper into what that covers.
EA:Is the market different in New York, as opposed to New Jersey or California or Colorado?
WM:Our take is until the markets have the same levels of legality, that's the main difference. And I'm really talking about, for the most part, dispensaries. So whether they are medicinal or recreational, and there'll be some states where there is no level of legality. For us from an insurance standpoint, they're basically the same. They're in the same category.
EA:What's the biggest challenge an underwriter faces when trying to price risk in this space?
WM:Policy limits are the biggest issue. So if you think about startups, smaller growers, fledgling dispensaries, what's about to happen in New York and New Jersey. The limits that are needed are pretty manageable, but when full licenses become available, and instead of like in New York where you're able to grow one acre of outdoor crop or a specific number in an indoor facility, when they start growing 50, 500 or thousands of acres, that'll be the biggest concern and how they will have to figure out how to offer higher limits of coverage. One acre you can get, depending on how it's grown, you can get anywhere from four to 8 million dollars from one acre. All the stars have to align. So just think about what 5,500 or thousand. Are the carriers ready to jump in and offer 50 million, a hundred million, 500 million if a loss occurred? Well, there's ways to go about it.
EA:Are those the kind of aspects this industry that pose the biggest risks?
WM:Partially. Regulation, compliance, risk management, which most immature sectors ignore. So I'm speaking about things like safety and training program development, operational hazard and site security assessments, behavior based safety, fleet and equipment safety, program development, driver accountability of programs, emergency response and business continuity planning, security and workplace violence, cyber risk management and information, security services, claims reporting and advocacy, advocacy, loss analysis and trending, and workforce management, all things that mature sectors have teams of folks looking at. We not only advise and help create these programs, but we can also provide testing just so that the C-suite can learn about these and experience what to do when something happens. Just think about a hack where if someone thinks they've been hacked and their computer freezes a person on the left looks to the person on the right, who do I call? What do I do? So we create a program to help them with that, and as with all these other things.
EA:You spoke about how the industry has matured. What other changes have occurred over the past few years as this industry has matured?
WM:More and more states keep legalizing at different levels. The insurance carriers that write in the space are providing higher limits, better terms and conditions with their policies, but things like investing in cannabis stocks, I'm not a financial advisor. It's just like any other investment. There are risks. And it's a bit of a bumpy ride. There have been some amazing growths and remarkable reductions. So I think that will level out, as I think the really big players will eventually get into the market. I believe major drug companies will get into it. I believe food and beverage. I believe tobacco will get into this space. So they will absolutely push how this market goes.
EA:Right now, cannabis is listed as a schedule one drug. How will the insurance landscape change if cannabis is deschedulized?
WM:So I'm very interested to watch what happens, but if it deschedulizes more and more insurance carriers will get into the space, they'll offer better terms and conditions, but it's essential to have a specialist be your trusted partner because each insurance policy has been written by each carrier's own attorneys. And one of the most important things that laymans don't do, is they look at those first couple of pages, which are the declarations pages, which says the term of the policy, what the limits are, what type of exposures are covered, but they really don't look at the most important section, which are what's excluded from being covered. And that could potentially, you could just be buying a policy that you think is appropriate. And for the things that are potential to happen to your organization are the things that are excluded. Well, you don't want that to happen.
EA:Yeah. Right now, as we spoke about cannabis as a schedule one drug, the federal government has kind of allowed the states to kind of chart their own path with respect to cannabis. So, Wayne, my last question for you is do you see the legality of cannabis changing in the near or far future?
WM:I think the rules and regulations are going to be changing dramatically daily with each state having their own regulatory boards, opening up different areas and sectors of the canna business world. Each time they approve something, they hear from the sector and find out, "Oh, we didn't really think about what the ramifications are." So there is no crystal ball, but there just will be ongoing change, I think, even through the early years of federal legality.
EA:Well, thank you for joining me here today, Wayne, and thanks for listening to CannaCast as part of the EisnerAmper podcast series. Visit EisnerAmper.com/cannabis for more information and podcasts. Join us for our next can cast podcast where we'll discuss other budding issues.
Transcribed by Rev.com