Buying Insurance is a standard business practice for every industry

A recent article in the Marijuana Business Daily entitled “Finding right insurance is key to any marijuana company’s business plan” discusses how insurance is an important area of compliance and prudent for cannabis businesses to protect themselves from the Department of Justice.   The article indicates more states are requiring cannabis insurance and went further by interviewing Cannasure Insurance Services’ Patrick McManamon who stated “Being in compliance is the main thing that we want to show the Department of Justice, and part of that is going to be insurance.”  McManamon shares an interesting perspective that insurance is about compliance and may fend off the Department of Justice. In our opinion, cannabis companies who buy insurance are simply being normal and responsible business owners.  It would be difficult to imagine the Department of Justice deciding if they should enforce federal marijuana laws to consider the procurement of insurance as a reason not to exercise their rights.  Regardless of the industry, every business buys insurance as a standard procedure.  Perhaps, the message to the cannabis industry is be responsible and buy insurance in order to meet the obligations to others.  Those others may include a state regulatory agency, landlords, employees, vendors, and the general public. 

 Will the insurance company pay out

The article indicates situations when insurance companies have sold policies only to result in claims not being paid citing Green Earth Wellness (“Green Earth”) versus Atain Specialty Insurance Company.  The  Green Earth lawsuit did result in Atain Specialty Insurance Company (“Atain”) raising the argument cannabis is federally illegal as one of the reasons to the deny the claim. Aside from the Green Earth lawsuit, there are policy exclusions mentioned in the article citing two as being the most common:  “Schedule 1,” “federally illegal” and “health hazard.” We reviewed cannabis insurance policies for these particular exclusions.  The “federally illegal” is most likely referencing the Business Personal Property policy excluding “Contraband, or property in the course of illegal transportation or trade.”   Essentially, the carrier has the right to not cover your property because of this exclusion.  The problem for insurance carriers who decide to use this as a reason to deny a claim may find themselves in litigation.  The Colorado court in Green Earth v. Atain recognized the ambiguity of the contraband exclusion, but relied on the mutual intentions by both Green Earth and Atain they were in the transaction together to buy insurance for a medical marijuana company.  In other words, there was no surprise by either party a contractual relationship is formed knowing one of the parties is distributing, manufacturing, and cultivating a controlled substance. Regarding the Health Hazard exclusion, there are product liability policies sold in the cannabis industry with a health hazard exclusion.  Below is a sample of the Health Hazard exclusion.  In our opinion, the inclusion of this language on a product liability insurance policy could result in coverage being denied based on a given set of facts or circumstances.  We don’t believe every product liability claim will be denied, but it does appear if cannabis is being used to contribute toward a health hazard, then coverage may be in jeopardy.

Sample Health Hazard Exclusion

Lastly, McManamon states when buying insurance “Vet that person like you would your attorney, your accountant. Once you find that agent, you really work with him and stick with him.” We couldn’t agree more.

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