Cannabis Retailers Want Manufacturers to Cover them from Liability through Insurance

Cannabis stores may not realize most carriers are saying no coverage for vape pen batteries

The latest insurance trend in the cannabis industry has to do with cannabis stores requiring their manufacturers to include them as additional insureds for product liability.  Additional insured means the store is listed on the policy for liability protection.  Even more interesting for insurance geeks are stores are asking the batteries for vape pens must be covered.

A typical scenario is the manufacturer of the vape pen and battery sells these products to a variety of retail cannabis stores.  A store requests their business must be covered on the manufacturers insurance policy for product liability.  The evidence comes in the form of a Certificate of Insurance without any real verification the batteries are indeed covered on the manufacturers policy.

Why are cannabis retailers requesting this type of coverage for batteries?

 

Cannabis Insurance Company making certain requirements

 

We don’t see any evidence of retailers or manufacturers considering this type of obligation in their relationships or contracts.  It may be the cannabis insurance companies forcing their store clients to request the coverage from the manufacturer as a condition of their insurance.  This is a method we strongly are against for a variety of reasons, if its true.

For example, a cannabis store is buying product liability insurance from an agent.  The agents tells the cannabis store they must be added as additional insured on the manufacturers policy or else they may not be able to buy insurance according to the carrier’s underwriter.

The other scenario could be some cannabis store became concerned with exploding batteries and decided to request coverage from their manufacturers in case something went wrong. 

The truth is cannabis insurance companies are not covering most batteries

 

No insurance coverage for vape pens

 

Based on current market conditions certain product liability insurance policies are covering the vape pens.  However, they seem to be running away from batteries.

We reviewed several product liability insurance policies to determine if batteries are being covered. 

Here’s what we discovered:

No Coverage of Batteries on Insurance Policies

Cannabis Insurance Carrier ACannabis Insurance Carrier BCannabis Insurance Carrier C
EXCLUSIONS BATTERIES

This insurance does not apply to "bodily injury", "property damage", or "personal and advertising" arising out of batteries. This exclusion applies regardless of whether:

A. Said batteries were manufactured, sold, handled, distributed or disposed of by your or others trading under your name or on your behalf; or
b. "Your work" or
VAPORIZING EQUIPMENT AND COMPONENTS EXCLUSION

In consideration of the premium charged for the policy, it is hereby understood and agreed that coverage under this policy does not apply to any claim arising out of the use, handling or ownership of vaporizing equipment, or any part of the accessories attached or used with the vaporizing equipment including pens, cartridges, mouth pieces, batteries, chargers, coils and any miscellaneous products used with, or attached to, vaporizing equipment.
DESIGNATED PRODUCTS EXCLUSION--PRODUCT RELATED TO ELECTRONIC CIGARETTES, VAPORIZERS AND SIMILAR DEVICES.

Batteries manufactured, distributed or sold by, or disposed of by, or in any way used or handled by, or sold under the label of :

a. ShenZhen Fest Technology, Co., Ltd
b. ShenZhen E-Young Technology Co., Ltd
c. EFEST
d. ShenZhen Mxjo Technology Co., Ltd
e. MXJO
f. MXJO Tech

In our table, Carrier B is excluding batteries and vape pens from coverage.  Carrier C has a list of batteries they believe are the most dangerous. 

If you’re a store requesting this coverage from your infused product manufacturer it would be prudent to be certain its even offered.  More importantly, cannabis retailers through their agents may want to question the insurance company if this is indeed a requirement of buying and maintaining insurance. 

Number of Insurance Carriers Decrease by Product Type

Cannabis Insurance Carrier Graph by Product Type

Limited Number of Cannabis Insurance Companies

If you’re wondering if there’s a lot of insurance companies serving the cannabis industry this graph may help give you a different perspective. 

The number of insurance carriers providing the primary coverages such as general liability and business property are more readily available throughout the United States.  The reason is the risks appear more predictable to the insurance industry.  As you move on the graph from left to right, the number of carriers offering a particular type of cannabis insurance will decrease dramatically. 

Less options means inability to comparison shop your insurance

Cannabis Insurance Proposal Banner

For example, the Directors & Officers, Commercial Auto, and Workers Compensation may be 2 or 3 companies serving each product segment.  The less number of carriers offering coverage is indicator the risks are not as predictable.  The limited supply of insurance companies doesn’t mean the pricing will be inflated.  It will mean the insurance buyer will not have the ability to comparison shop.

If you’re a cannabis or hemp/cbd licensee it will be important as your shop for insurance to keep this in mind as you’re contemplating your insurance needs.

Are Insurance Carriers Violating the Constitutional Rights of the Cannabis Industry?

Cannabis Insurance Application

Questionable Questions Asked by Insurance Carriers

Applying for business Insurance through the use of applications produced by the insurance company is a normal business practice regardless of the industry.  What isn’t normal and seemingly unique with the insurance industry are questions to cannabis applicants if they are operating illegally and conducting criminal activity.

Below are the exact questions currently used by a major insurance carrier we’ll keep anonymous at this time. 

  • Do you distribute your cannabis product to minors? 

Answering yes would potentially mean the applicant is violating state and federal law for selling cannabis to a minor.  One exception could be if the applicant is a medical marijuana licensee whose patient has a prescription from an MD who happens to be a minor. 

  • Do you transport or distribute your product across state lines? 

Answering would be an admission the applicant is distributing cannabis across state lines would be a violation of state and federal law.

  • Do you either grow marijuana on public lands or purchase any marijuana grown on public lands? 

Once again, a potential violation of federal and state law by answering in the affirmative and self incrimination. 

These questions became part of a supplemental application for business property. This is insurance coverage for buildings, equipment, tenant improvements, and loss of income.  As if the insurance process isn’t lengthy enough, the supplemental application is four pages totaling 31 questions with a sub-set of approximately 40 more questions.   

Apparently, the insurance industry has forgotten certain provisions within the US Constitution affording citizens of rights.  More specifically, the Fifth and Sixth Amendment protects the rights of individuals from self incrimination and allows due process to be performed before an individual is denied their freedom.

Amendment V

No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a grand jury, except in cases arising in the land or naval forces, or in the militia, when in actual service in time of war or public danger; nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.

Source: Cornell Law School

Amendment VI

In all criminal prosecutions, the accused shall enjoy the right to a speedy and public trial, by an impartial jury of the state and district wherein the crime shall have been committed, which district shall have been previously ascertained by law, and to be informed of the nature and cause of the accusation; to be confronted with the witnesses against him; to have compulsory process for obtaining witnesses in his favor, and to have the assistance of counsel for his defense.

Source: Cornell Law School

Most people have heard to plead the fifth or being given their Miranda rights.  The sixth amendment gives everyone the opportunity have their day in court. 

What about other industries?  Are similar questions being asked in the Pharmaceutical and Liquor Industry?

NoNot even remotely close. 

We reviewed other insurance applications used for the Pharmaceutical Industry offered through CNA Insurance and Kinsale Insurance Company to determine the scope of their questions.   Neither of these two applications asked questions that would place a person(s) in legal jeopardy.

How about the liquor industry? 

Those Insurance applications don’t question an applicants ongoing criminal violations either.   One application asked if the insured had been convicted of a felony.  A conviction of a felony is different from conducting a felony.

Properly Underwrite Risk without Violating the Rights of Others 

Cannabis Insurance Police

Photo by Vincent Chan on Unsplash

Most insurance brokers and underwriters will  not object to the proper underwriting and evaluation of risk by the insurance industry before coverage is offered and purchased.  This would include being in compliance with all laws. 

However, it would not be appropriate and possibly illegal for insurance companies to continue with this line of questioning as a business practice.  If the applicant indicates yes to providing cannabis to minors would the insurance company deny the application and notify law enforcement? 

Insurance companies are not members of the law enforcement community and should leave it to the professionals.

Insurance Application Questions

Cannabis Grower Wins Rico Lawsuit

Go Fund Me Page Started to Pay for Legal Expense

One of the oldest lawsuits against a cannabis licensee facing Racketeer Influenced Corrupt Organization Act (“RICO”) has finally gone to trial this week in Denver. 

The lawsuit  between SAFE STREETS ALLIANCE, PHILLIS WINDY HOPE REILLY, and MICHAEL P. REILLY, Plaintiffs, v. ALTERNATIVE HOLISTIC HEALING, LLC, d/b/a Rocky Mountain Organic, JOSEPH R. LICATA, JASON M. LICATA, 6480 PICKNEY, LLC, PARKER WALTON, CAMP FEEL GOOD, LLC, et al. was decided in favor of the cannabis licensee according to Fox 31 Denver.

Help with Legal Expenses is Needed

The legal expenses have been enormous for the defendants. 

As such, a Go Fund Me page has been established to pay for the $100,000 needed to defend this lawsuit.  The favorable decision of this lawsuit will silent other lawsuits attempting to use RICO as their choice of legal action to shut down the cannabis industry.

Go Fund Me for Rico Lawsuit

Go Fund Me Page

  

The Insurance Industry Escaped a Big Catastrophe and Dodged a Bullet

In addition, the cannabis insurance industry is breathing a sigh of relief wondering if RICO would have been a claim they needed to indemnify across the United States.  One of our carriers had 8 different RICO claims in Oregon alone.  After the announcement of the Colorado case, the carrier representative stated “we dodged a bullet!”

We’ve reported extensively the policy language being used on most liability policies could have triggered the insurance carrier to respond to these types of claims with legal representation for the insured at a minimum.

 

 

 

 

 

 

 

 

RICO Lawsuit Targets Cannabis Insurance Providers

Message to Cannabis Insurance Carriers:  “That is racketeering activity under 18 U.S.C. § 1961(1)(D).”

Rico Lawsuits and Insurance Targets

A lawsuit filed in Massachusetts on September 7, 2017 demonstrates just how far attorneys will go to seek recovery for damages from other businesses when filing lawsuits against cannabis licensees.

The case (CRIMSON GALERIA LIMITED PARTNERSHIP, RAJ & RAJ, LLC, HARVARD SQUARE HOLDINGS LLC, and CHARLES RIVER HOLDINGS LLC Plaintiffs, v. HEALTHY PHARMS, INC.; et. al.) is about neighbors who weren’t happy to have a store selling pot and decided to file a lawsuit. 

Their choice of legal action is tied to a federal statute originally used for organized crime known as Racketeer Influenced and Corrupt Organization Act or “RICO” as their means to seek legal justice. 

Marijuana businesses attract undesirable individuals according the the lawsuit

The legal documents harshly describe those who visit Healthy Pharms  as being less than desirable.  “Marijuana businesses make bad neighbors, which include and without limitation, emitting pungent odors, attracting undesirable individuals, increasing criminal activity, driving down property values, and limiting the rental of premises.”

Plaintiff’s lawyers cast a wide net to include insurance “providers”

The list of those being sued or named as defendants include the City of Cambridge, Massachusetts Department of Health, Century Bank and Trust Company and a list of “John Doe’s.”  Attorneys will use a fictitious name like John Doe when parties to a lawsuit are unknown at the time of filing the lawsuit, but would like the option to add those parties as the case develops.

In this circumstance, John Doe 2 and John Doe 3 are both providers of insurance to the various cannabis related companies. John Doe 2 is the insurance provider of general liability insurance to Healthy Pharms, 3 Brothers, or Red Line for a marijuana cultivation facility.  John Doe 3 is the provider of property insurance to Healthy Pharms, Timbuktu, or Red Line for the medical marijuana dispensary.

The entry point to include insurance providers references the insurance obligations from the lease agreement between Healthy Pharms and Timbuktu that require meeting liability limits of $1,000,000 per occurrence and $2,000,000 per aggregate.   By meeting those limits of liability through a insurance contract, the insurance carriers have further the RICO activity the lawsuit alleges.

Upon information and belief, John Does 1, 2, 3, and 4 issued insurance policies with the intent to further Healthy Pharms, Timbuktu, 3 Brothers, Red Line, and their respective
officers, directors, managers, investors, assigns, nominees, and/or affiliated persons to commit crimes under the CSA in violation of 21. U.S.C. § 846.

That is racketeering activity under 18 U.S.C. § 1961(1)(D).

The plaintiff lawyers did not specify if insurance provider is broader term to include the insurance broker or retail agent who sold the policy, underwriters and surplus lines brokers involved in underwriting, and inspection companies who may have been involved in some manner. 

If it means all of the above, this lawsuit is a strong message to the cannabis insurance industry that plaintiff’s lawyers are seeking deeper pockets to pay for these lawsuits.

Rico Lawsuit Naming Cannabis Insurance Carriers

Who is John Doe Insurance Provider?

Has Healthy Pharms Et al. tendered defense to their cannabis insurance carrier?

If they haven’t, it would be prudent to notify their insurance broker and carrier of the legal circumstances as required by most insurance policies under Duties in the Event of Loss or Damages.  The failure to notify the insurance carrier within a reasonable time frame may result in the claim being denied.

The insurance carrier wallet is now wide open

Plantiff’s lawyers will appreciate the National Cannabis Industry Association insurance committee white paper released on the subject to indicate RICO is a claim that would be covered on the commercial liability insurance.  This  acknowledgement is likely to lead to further litigation in every state with medical or recreational marijuana laws.

The cannabis insurance carriers will have a negative attitude on the subject as they evaluate how they could have foreseen this type of legal action, while thanking the insurance committee for identifying the exposure.

Resource: 

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS Case 1:17-cv-11696-ADB

CRIMSON GALERIA LIMITED PARTNERSHIP, RAJ & RAJ, LLC, HARVARD SQUARE HOLDINGS LLC, and CHARLES RIVER HOLDINGS LLC Plaintiffs,

v.

HEALTHY PHARMS, INC.;TIMBUKTU REAL ESTATE, LLC; PAUL OVERGAAG, an individual; NATHANIEL AVERILL, an individual; 4FRONT ADVISORS, LLC; 4FRONT HOLDINGS LLC; KRISTOPHER T. KRANE, an individual; 3 BROTHERS REAL ESTATE, LLC; RED LINE MANAGEMENT, LLC; JOHN DOES 1 THROUGH 4; TOMOLLY, INC.; CITY OF CAMBRIDGE, a body politic; TOWN OF GEORGETOWN, a body politic; MASSACHUSETTS DEPARTMENT OF PUBLIC HEALTH; CENTURY BANK AND TRUST COMPANY; MAURA T. HEALEY, in her official capacity as Attorney General of the Commonwealth of Massachusetts
Defendants