Costly, but critical: five painful truths about cannabis insurance

Insurance is a complicated subject at the best of times. Add the evolving patchwork of insurance-related regulations in legal cannabis markets around the world and the subject becomes downright stressful.

Yet for cannabis entrepreneurs, avoiding that stress is not an option. Most jurisdictions require specific policies and failure to comply can put your license - and your entire business along with it - in jeopardy. With options low and prices high, The Rise offers five (not-so-fun) facts about cannabis insurance below that every entrepreneur in the space needs to know.

1. Brace for six-figure premiums

Cannabis insurance is expensive, but many entrepreneurs still experience sticker shock when they see quoted premiums with their own eyes.

In December 2019, Tim Conder, chief operating officer of multi-state U.S. operator Tilt Holdings, gave the trade publication Insurance Journal a sobering example: “the baseline measure for cannabis D&O [directors and officers insurance] is US$200,000 in premium for every US$1-million in primary coverage.”

“It is expensive, there is no question,” said David Kennedy, founder and CEO of Purple Risk Insurance Services, a New York City-based cannabis-focused provider.

“It is like when you’re planning a wedding, how as soon as you put the word ‘wedding’ on something the flowers somehow become more expensive, the venue somehow becomes more expensive, everything becomes more expensive. It is the same thing in cannabis” Mr. Kennedy said. “Everything becomes more expensive.

2. Don’t expect much data to justify that premium pricing

Insurance companies usually justify their rates with actuarial tables containing decades - sometimes even centuries - of historical data. Rates for wheat farmers, for example, are based on the likelihood of any given wheat crop being damaged or destroyed, which is determined by analyzing hundreds of years of information on global wheat production.

“Our whole industry is based on actuarial data and there is none for cannabis businesses right now,” said Matthew Doty, an account executive at Whitley Insurance and Financial Services focused on the firm’s cannabis clients. “That means providers really don’t know how to base their rates.”

Because only a handful of insurance providers are willing to work with cannabis clients, Mr. Doty said cannabis entrepreneurs “are pretty much handcuffed in terms of who they can go to get insurance.” 

Combined with the lack of historical data, that limited supply has also pushed costs higher, Mr. Doty said.

“Our whole industry is based on actuarial data and there is none for cannabis businesses right now. That means providers really don’t know how to base their rates.”

“Even the insurance companies themselves don’t like the position they’re in since the ones that are in cannabis right now are the ones taking all the risk,” he said. “And because there are not a lot of companies doing [cannabis insurance] right now, that means any kind of loss is hard to sustain since they’re not able to spread out that risk at all. It just ends up piling on to a small group of companies.”

3. That very expensive policy might not be expensive enough

Even among the small group of providers willing to work with cannabis clients, Kelli Hunt warns many will insert loopholes into their policies large enough to escape paying claims.

“From a product liability standpoint there is usually a hefty health hazard exclusion” in cannabis insurance, Ms. Hunt, vice president of the cannabis division at Next Wave Insurance, said in an interview. Such an exclusion would allow insurance providers to deny claims attributed to any product deemed a health hazard, she explained.

Next Wave does not put a health hazard exclusion on its cannabis policies, Ms. Hunt said, because “we believe in the cannabis product and we do not think it is going to be the next big, bad tobacco.”

When her competitors try to undercut her prices, Ms. Hunt usually tells prospective clients “guys, I understand someone else has put a price tag in front of you that is five thousand dollars cheaper, but you need to understand they are not going to pay your claim. [Those policies] are just a very expensive piece of paper.”

“From a product liability standpoint there is usually a hefty health hazard exclusion in cannabis insurance.”

4. If you consider yourself a cannabis entrepreneur, so does your insurance provider

“I am not actually in the cannabis industry at all,” said Purple Risk’s Mr. Kennedy. “I am in the insurance industry but I happen to be a small business owner focused exclusively on the legal marijuana and hemp spaces, yet even I had a huge problem getting insurance for my small business of two people.”

“I went from a $1,200 per year policy that I had to quotes of around $5,800 and more just because I was providing services to the cannabis industry.”

Mr. Kennedy secured “simple, plain vanilla insurance coverage like your home or renters or auto insurance” from Hiscox in spring of 2019. Three months later, he sent Hiscox “an email saying ‘hey just so we are crystal clear’ that my business was specifically tailored to serving the legal cannabis sector in the United States [and] within two days I got a call from a Hiscox representative cancelling my policy. I am nowhere near a cannabis plant, but it is just that striking.”

“I went from a $1,200 per year policy that I had to quotes of around $5,800 and more just because I was providing services to the cannabis industry,” Mr. Kennedy said. “Five or six times as much. Talk about the stigma and fear of the unknown. That is it right there in the numbers.”

5. Meeting government requirements is not the same as meeting your own needs 

Next Wave’s Ms. Hunt does have one single piece of advice she thinks every cannabis entrepreneur should heed as early as possible: consider your insurance requirements and your insurance needs as two separate questions.

Some jurisdictions require operators to have multimillion-dollar product recall insurance, Ms. Hunt said, despite the fact that “many of these producers might not produce millions of dollars [of cannabis] in five years.” Other policies that some might consider essential - such as D&O coverage or business interruption insurance - are not broadly required by governments, Ms. Hunt said.

“One of the things I always try and tell people there is ‘do not send me your board presentation’,” Ms. Hunt said. “I’m sure it sounds great to shareholders and you’re going to make bajillions of dollars, but I am your realistic insurance person. Tell me what is really going to happen because you are going to get charged based on that.”

This is not an offer to sell or a recommendation to trade in any securities. This information is provided as of the date hereof. This document contains data obtained from third parties that Canopy Rivers has not independently verified. This document also contains forward-looking information within the meaning of Canadian securities law, which is based on certain assumptions. While management believes these assumptions are reasonable based on information available as of the current date, they may prove to be incorrect. Many assumptions are based on factors outside of Canopy Rivers’ control and actual results may differ materially from current expectations. Forward-looking information involves risks, including, but not limited to, the risk factors set out in Canopy Rivers’ most recent Management’s Discussion and Analysis and Annual Information Form. You should not place undue reliance on forward-looking information. Except as required by applicable law, Canopy Rivers assumes no obligation to update or revise any forward-looking information to reflect new events or circumstances.