Eight Risk Management and Insurance Issues Cannabis Companies Must Reckon With

The cannabis industry is growing exponentially, driven by legalization in large states and by a surge of venture capital. As a result, the global cannabis market is expected to reach upwards of $149 billion by 2031.

However, there are many insurance and risk management issues that cannabis operators must contend with. New cannabis-related businesses (CRBs) tend to focus on core operations initially, often neglecting critical areas of risk mitigation such as product liability, employment practices liability (EPLI), and cybersecurity insurance, any of which can save a young company from ruin.

In this post, we will review eight prime categories of risks that affect CRBs and discuss the proper insurance strategies to manage them.

The Need for Managing Cannabis Risk and Proper Insurance Coverage

Cannabis is a somewhat new vertical for the global market (in legitimate business, anyway). For this reason, insurers do not yet have the risk assessment frameworks that are well-established in other industries. Therefore, determining appropriate coverage levels and pricing premiums is a challenge, even for experienced insurance professionals.

The banking industry adds a further wrinkle to the management of risks and insurance policies. Insurance providers rely on banks for a wide range of services. However, a vast majority of banks refuse to do business with cannabis businesses, primarily due to cannabis’ status as a federally banned substance. Because of this, CBRs struggle to secure the basic assurances that firms in other industries enjoy, like bankruptcy filing protection, credit card payments, and access to FDIC-insured bank accounts.

That is why cannabis companies must take charge of risk management and take the initiative to work with experienced insurance specialists with deep experience in covering cannabis companies.

Learn more: An Introduction to McGowan Wholesale Cannabis Insurance

Key Cannabis Risk Management Factors

Our experts at McGowan Wholesale have identified eight categories of risk on which we routinely provide insurance advice.

1. Crime and theft

CRBs must operate on a cash basis, primarily due to state regulations and the lack of banking support. Cash always presents a risk of employee or external theft. Zoning laws present further challenges to cannabis businesses, with CRBs forced into higher crime districts in some cities.

Many robberies at cannabis companies come from employees who have intimate knowledge of a cannabis company’s security procedures. A stock of valuable inventory and vast amounts of cash are compelling temptations. But external theft is also a concern. Thieves may target vulnerable points during transportation from the growhouse to the dispensary.

Some theft may be unavoidable for a business forced to operate in cash. However, CRB owners and stakeholders can mitigate risks through staff training programs, physical security measures, thoughtful store layouts with surveillance, and appropriate insurance coverage.

2. Managing an excessive harvest

An overly successful harvest should be a good thing, but it can cause price drops or inventory overstock when unexpected. Cultivators face a tough decision in this scenario–hold onto inventory and risk losing potency or take a hit and sell off the crop at a reduced rate.

Growers can invest in various resources that give them flexibility with a bumper crop. They might be looking into high-capacity, humidity-controlled storage that can preserve inventory for long periods. Cultivators can also seek non-consumer customers, such as manufacturers of cannabis products who buy in bulk. This type of arrangement can stabilize cash flow and be mutually beneficial for all parties.

Additionally, cannabis crop insurance provides peace of mind for cultivators struggling with challenging market conditions.

3. Cybersecurity

Cannabis companies face an elevated risk of cyberattack for several reasons:

Compliance laws in some states mandate seed-to-sale tracking, including personal identifying information (PII) such as addresses and payment information. Threat actors can target this data in ransomware attacks or auction it off on the dark web. Internet of Things (IoT) devices that track plants and products create additional endpoints for hackers to manipulate if unsecured.
Startup cannabis businesses are not always focused on cybersecurity. According to a recent poll by MJBiz Daily, nearly 60% of respondents had “not taken steps to prevent cyberattacks”.
“Activist” hackers could target cannabis companies because of a moral disagreement with cannabis legalization.
Corporate espionage is also a threat, with valuable intellectual property such as recipes, cannabis strain information, and cultivation techniques being targeted by threat actors.

Cybersecurity investments and basic security hygiene (MFA, phishing training, password best practices, etc.) go a long way in mitigating the risk of breaches. In addition, a cyber liability policy tailored for a cannabis business further mitigates the almost inevitable risk of cyberattack. An experienced agent can advise your business on security steps to take to qualify for a cyber liability policy.

4. Inventory and property loss

A fire, vandalism, or natural disaster can temporarily or even permanently shut down a CRB. A damaged CRB must manage repairs and maintain physical security, all while prioritizing reopening.

Lost crops are another considerable risk. Crop insurance should include coverage for fire, theft, and sprinkler malfunction. However, crop insurance may not cover other common crop issues like plant disease, root rot and mold, fertilization issues, and climate change-related damages. An experienced agent can help customize a policy to a grower’s specific risk profile.

5. Employee safety

CRBs have unique safety concerns. Many states have regulations regarding cash handling, safes, camera placement, and money transfer. Unique to cannabis are the tools for harvesting and managing plants, drying and storing inventory, and safely handling products. Cannabis workers face risks from repetitive motion injuries, exposure to harmful chemicals, and injuries sustained from tools or heavy equipment. Cannabis employers must provide the tools, equipment, and software to not only stay compliant, but to protect employees from harm.

Properly screening employees for age and criminal records is essential during onboarding to ensure your workforce is dependable.

Also read: Employment Practices Liability Insurance (EPLI) for Dispensaries

6. Product liability

Product liability is an enormous risk in the cannabis space. Cannabis consumers could have an adverse reaction or ingest a contaminated product. Take a CRB that inadvertently sells a contaminated batch of gummies. The company could face legal action, compliance repercussions, and a damaged reputation. In addition, the company could face product liability claims.

A product liability policy helps cover damages sustained by businesses subject to legal actions from contaminated products or adverse customer reactions.

7. Supply chain disruptions

Seed-to-sale is a complex process involving growers, manufacturers, distributors, and finally, retailers. Due to federal regulations, cannabis cannot be moved across state lines (it’s considered drug trafficking on the federal level). That means that cannabis supply chains are hyperlocal and in-state only. Any disturbances to the supply chain, such as a crop failure, pose significant risks. A supply chain failure might lead to product shortages, price spikes, or ultimately lost revenue.

8. Evolving compliance rules

State regulations on cannabis vary. However, state regulators are often strict about demanding compliance. The success or failure of a CRB sometimes comes down to its ability to follow the rules. Noncompliance can result in fines or even license suspension or loss in the worst-case scenario.

Insurance is Integral to Cannabis Risk Management

There’s no one-size-fits-all solution for managing risks in the cannabis industry. Companies should leverage the expertise of seasoned risk managers to craft effective mitigation strategies and decide on a level of risk acceptable to investors and stakeholders.

With extensive experience in the cannabis sector, the team at McGowan Wholesale is well-acquainted with the challenges faced by dispensaries, cultivators, wholesalers, and other cannabis-related businesses. We are here to assist you in obtaining the right cannabis insurance coverage to safeguard your enterprise.