A guest post by Ryan Ascenzo, Senior Broker, Professional
Liability, Burns & Wilcox Brokerage
Last year, Connecticut legalized cannabis for residents who are 21 and older. This year, some key milestones will arrive for the state, including the opening of recreational stores in permitting towns.
With the passage of an Act Concerning Responsible and Equitable Regulation of Adult-Use Cannabis (“RERACA"), many are looking to seize the opportunity to participate in this new commercialization in anticipation of what could potentially be a rapidly growing industry.
The lottery for anyone wanting to participate in Connecticut's cannabis industry as a retailer closed at midnight on May 4, 2022. The Department of Consumer Protection (“DCP"), at the time of this article, reported a surge in applications submitted—exceeding 15,000—with the majority applying for Retailer, Hybrid Retailer or Micro-Cultivator.
Before sales can begin, a supply chain must be established and entirely licensed. This includes stores, testing labs, and growers that must have enough capacity to supply the retail market. The DCP is responsible for licensing and regulating medical and adult-use cannabis establishments in Connecticut.
There are 14 different cannabis licenses and registrations issued by DCP as follows:
- Growing: Cultivator, Micro-Cultivator, Producer
- Manufacturing: Product Manufacturer, Food and Beverage Manufacturer, Product Packager
- Sales: Retailer, Hybrid Retailer, Dispensary Facility
- Deliver & Transportation: Delivery Service, Transporter
- Individual Licenses and Registrations: Backer, Key Employee, Employee
As with any new foray, insurance should be a consideration
On January 1, 2022 the Connecticut Insurance Department (“CID") published (here) a Report on Access to Insurance by Connecticut Insurance Establishments. In summary, the report acknowledges that like other businesses the cannabis industry faces a variety of risks which would require access to insurance to mitigate these exposures.
One of the most complex issues facing the cannabis industry is that despite being legal in many states cannabis is still illegal at the federal level. As a result of the federal law, many financial institutions including insurance companies are hesitant to work with cannabis companies. Compounding this reluctancy is that many carriers have hesitated to enter the admitted market due to little data and unknown risk factors of the young industry.
Given these unknown factors, coverage is mostly available on a non-admitted basis where surplus lines insurers mainly focus on the development of new coverages and products. At this time the CID has spoken with other states with developed cannabis markets who have indicated the cannabis industry does have access to the necessary insurance coverages in the open market to operate their businesses.
Management and professional liability insurance
In the report the CID provides a framework of insurance coverages that are important for businesses that choose to operate in the cannabis industry of which financial lines of insurance are mentioned.
Below is a focus on the financial lines of insurance that protect individual insured persons and the business' balance sheets from claims arising out of business decisions made by individuals on behalf of the organization.
Other types of insurance considerations include Commercial General Liability, Property, Workers Compensation and Agricultural coverages.
Directors & Officers Liability (D&O): D&O insurance coverage provides defense costs, settlement and other damage payments to preserve the personal assets of individual directors, officers and corporate assets of a company. Even a single owner's assets can be at risk for allegations of mismanagement of their company (Side A coverage). If a company's by-laws provide indemnification to a director or officer the company's assets would be at risk to provide such indemnification (Side B coverage). For claims made against the entity, Side C coverage would apply but note for publicly traded companies' coverage only applies for securities claims. Any private, public or non-profit company can benefit from a D&O policy as allegations can arise from employee whistleblowers, vendors, competitors, investors, customers, or bankruptcy trustees. A D&O policy can also help attract top C-level executives and board members.
Employment Practices Liability (EPL): Any company that has at least 1 employee should consider EPL insurance. The coverage provides any private, public or non-profit company with defense costs, settlement or other damage losses from claims brought by employees or non-employee third parties for allegations that their legal rights have been violated. Allegations can include discrimination, harassment, wrongful termination or retaliation. These allegations can be disruptive, harmful to reputations and financially draining.
Fiduciary Liability: In order to attract and retain top talent from top to bottom of the organization it may offer generous benefit and retirement plan options to employees. With this offering comes potential liabilities imposed by the Employee Retirement Income Security Act of 1974 (ERISA) and other regulations that establish standards of conduct and liabilities for deemed fiduciaries. A Fiduciary Liability policy can cover defense costs, settlements or damage payments for claims by plan participants, regulators or other parties for failure to act in the best interest of a plan.
Cyber Liability/Security: Any company that has an online presence whether it be an informative website or retail platform can be exposed to the perils of cyber threats. This insurance coverage provides 1st and 3rd party coverages to company to help resolve and mitigate a cyber threat. 1st party coverage covers costs incurred by a company to respond to a cyber attack such as ransomware payments, notification costs, costs to hire experts, costs to replace damaged data or hardware and any lost business income. 3rd party coverage covers the defense costs, settlements or financial loss from lawsuits or regulatory fines and penalties. The coverage also offers policyholders access to cyber security professional to help improve their cyber security.
Professional Liability/Errors & Omissions (E&O): Not all cannabis companies will need a Professional Liability/Errors & Omissions policy. A simple way to determine whether or not there is a need for one is if your company provides a cannabis related to others in exchange for a fee. Cannabis related delivery services may need to consider such a policy. Manufacturers may also consider a Manufacturer's E&O policy in the event their manufacturing of product causes financial harm to an affected party. The insurance coverage provides defense costs, settlements and damage payments to claims from parties who feel that the services was not performed or was negligently performed and as a consequence the alleging party suffered a financial loss.
Crime/Fidelity: To round out a comprehensive Management and Professional Liability program the addition of Crime/Fidelity insurance is a first party non-liability coverage that protects a business from the unfortunate event of a crime resulting in loss of money, securities or property of the insured. The most common threat to any business continues to be employee theft/dishonesty/embezzlement, robbery, burglary or counterfeit currency but more modern, sophisticated crimes such as social engineering fraud are increasing and can be potentially covered.
Partnering with a trusted advisor is essential for success
In conclusion, the CID article outlined the insurance coverages that cannabis related businesses should consider along with the risks within and resulting from a still evolving industry. Some states, vendors or clients have indicated insurance as a requirement for licensing or to act as counterparty necessitating the need for some of these coverages to meet those requirements.
Commercial carriers can leave gaps such as exclusions, different limits, and terms and conditions that make it necessary to partner with a trusted insurance advisor who understands these products and their limitations.
Burns & Wilcox Brokerage provides specialized expertise for large, complex, and difficult-to-place risks including cannabis related companies. Leveraging the full expertise of its organization, Burns & Wilcox Brokerage delivers seamless access to global market centers on an admitted and non-admitted basis and offers comprehensive solutions and expertise for difficult-to-place risks, including Property, General Liability, Excess Casualty, Professional Liability, Transportation and Marine.
Please visit www.burnsandwilcox.com to learn more about our full complement of services offered.