Insurance and the Cannabis Industry

EA: James, why don't you tell everyone how you got into the cannabis space?
JJ: Yeah, so for me, after graduating college, I always had interest in the medicinal properties and the alternative treatment of cannabis. Worked on the operator side for some time, got my certification in horticulture and cultivation, worked with a few vertically integrated companies in the Denver market, learning everything from seed to sale. Did that for about three years prior to jumping back on the corporate side. I've worked in a number of different industries, all in the financial services and insurance side, so I was, for a while, with PNC Bank, was a virtual wallet sales manager for the DC, Maryland, Virginia area. Ended up then moving back to New Jersey, where I'm from originally, and becoming a sales executive at ADP.

Did that for about six years prior to moving over to Aon where, after starting at Aon, I heard mumblings that they were going to allow us to start offering insurance to cannabis operators. This is probably about three and a half, almost four years ago. And in that process, I figured hey, this is something I should take a hold of. I have pretty good knowledge of this. And out of the 60,000 employee company that Aon is, I'm pretty sure that I'd probably have the deepest knowledge on cannabis and how it ultimately could relate to insurance. So essentially found the couple insurers at the time that were willing to offer coverage, the one premium finance company at the time that was willing to help these operators actually be able to stretch out these payments and not have to pay a large sum of premium at one time, and started bringing over companies to Aon.

After doing that for about a year and a half, I had a better opportunity to come over to Mark Edward Partners. We are a global international brokerage firm, have deep experience in cannabis even prior to me coming over about a year ago, I just brought some more expertise to the team. And honestly, moving over to Mark Edward Partners, which is more of a boutique firm, a little bit more agile in the space, we're able to get creative, and do a lot of things, and help a spectrum of clients, from startup to middle market all the way to your large publicly traded multi-state operators. So that's my track and I'm here now, the global head of cannabis, running all things cannabis for our firm.
EA: What aspects of the cannabis industry post the biggest risks to companies?
JJ: So that's a little bit of a loaded question, but I would say listen, in general, it's looked at as a pretty risky industry. You have to think about the fact that it's not federally legal. Fortunately, because of the way that insurance is essentially ran, because essentially insurance is state mandated is the reason that a lot of these companies are able to even offer policies to a lot of these cannabis operators. But I mean, it truly depends on really what vertical within the vertical of cannabis that you're in. So if you're a vertically integrated operator, meaning you do everything from seed to sale, obviously your risk is much more vast than somebody who's maybe just on the retail side or just on the cultivation side.

But I think to start, any cannabis company that obviously is raising funds, which is mostly done privately because there's not a lot of institutional money in the cannabis space right now, is a lot of management liability, which is directors and officers insurance. Anytime you're raising funds, making sure that D&O insurance is in place. And moving forward, if you're a vertically integrated operator, you have to be able to ensure not only your retail arm, not only your cultivation, but you also have to be able to ensure your manufacturing and processing operations as well. I know we're going to take a little bit deeper dive into some of the more specifics, but I would say first to start, when you're raising funds, which is to start all startups, specifically cannabis companies, is the management and professional liability.
EA:You had mentioned federal legality. Do you see the legality of cannabis changing in the near future?
JJ: I wish I had a crystal ball to be able to say yes. I would say I'm optimistic. I see federal legalization probably happening in the next three to five years. As we see more states, I believe 35 medical programs and now almost 16 adult use programs around the country, more and more southern states, who frankly I thought would take a little bit longer to come around, are making a lot of strides and legalizing specifically on the medical side. I think the ball is pushing. I think things are pushing forward. I don't know how immediate things are going to change, but I think that the first thing that would help is the pass of the SAFE Banking Act, which would help companies like insurance companies, and banks, and these operators to be able to move freely within federally insured banks to be able to have somewhere for their funds to go.
EA:The two big pieces of legislation, you mentioned one of them, which is the SAFE Banking Act, the other one is the MORE Act, and the MORE Act would tend to deschedule cannabis. What impact would that have on the insurance landscape for the companies?
JJ: So SAFE Banking Act I think has a much larger impact specifically to insurance, because as funding opens up, as institutional money is going to be able to come into the space, as federally insured banks are going to be able to do day-to-day banking as well as loans, specifically directly to cannabis operators, that's going to obviously open up the insurance market. I think that's going to allow, a hard market on the cannabis side right now. I'm not going to say very expensive, but more expensive than outside cannabis industry. I think you're going to see the rates become fair, and a lot of those premiums come back down and maybe start to rightsize over time as the SAFE Banking Act passes. The MORE Act is a little bit trickier just because there are some specific mandates in the MORE Act that make it a little bit more difficult for those that have been charged with previous crimes in cannabis to be involved in the industry. And that's something that I don't think anybody wants to see.
EA:Right. And you had mentioned that insurance could be different based on what type of cannabis company you're talking to. So how would insurance or how does it differ between say a grower versus a dispensary? Focus on those two areas of the industry to start with.
JJ: Sure, so let's start with a dispensary. So dispensary, essentially you're thinking about a retail storefront. A lot of risk with storefront retail, specifically on the cannabis side, is you're worried more about things like burglary, vandalism, fire, theft. So you want to make sure that you have obviously coverage to be able to cover those types of perils. I think another thing to be cognizant about and think about is also to have a product liability policy. Even though you're not maybe creating or finishing the end product that you are ultimately selling or retailing to either patients or consumers, I think it's important that if there is somebody that has an adverse reaction or somebody that tries to claim something happened from consuming, as a retailer, you'll absolutely being named in that type of suit, and I think it's important to have that type of coverage as well.

I think also on the retail side, depending on state, a lot of retailers have the ability to be able to also offer delivery. So I think it's important to understand that risk and make sure that there is some type of higher non-owner auto or business auto in place to be able to support that type of risk from transporting cannabis from point A, being the retail dispensary, to the cannabis consumer's doorstep. And also, obviously anytime you have employees, workers comp, EPLI. Those things are important. Also, thinking about, again, raising funds, having professional and management liability is also an important part of the insurance mix or what the portfolio should look like for a dispensary specifically.

Now, when you speak about cultivation, there's a little bit more risks that start to rise. You have to make sure that outside of obviously covering the building, that you are covering your equipment, making sure that equipment breakdown is covered, just in case there is something that happens to either your grow equipment, humidify, anything that's helping you create that atmosphere to grow your cannabis indoor is important to cover. Also, something to think about, along with product liability, because you're creating a product that people ultimately are going to be inhaling or consuming, you have to also think about covering your actual living plant, actual indoor crop coverage while you're cultivating. It's important to cover those things because there is things like light bulbs bursting, and fires happening, and different perils that can cause you to lose part of your crop or your entire crop.

So it's important that each of your plants are valued to the correct value to make sure that you are reimbursed if there is a loss that happens. And also coverage on your finished stock. So after your product is harvested, prior to it being sold to a distributor direct to a retailer, that stock is sitting there, and it's important that that is covered because that's ultimately the lifeblood of the business. Lastly, one of the things to then cover is business interruption coverage. I think that's very important for specifically cultivators who, if they do experience a loss, it could take them up to four months to replant and have another successful harvest to make up what they've lost. And it's integral to make sure that they are given back or compensated for not only the loss of time, the loss of product, but the amount of time that's going to take them to get back up to full scale because of that said loss.
EA: Great. Well, that's great. And James, thank you for joining us this morning, and thank you for listening to CannaCast, as part of the EisnerAmper podcast series. Please visit eisneramper.com/cannabis for more information on podcasts and join us at our next CannaCast podcast, where we'll discuss other budding issues. Thank you.