Deaths and Respiratory Issues from Vaping Devices will cause Insurance Carriers to Contemplate Product Liability Coverage

Could the Use of Cannabis Vaping Devices be the Next Wave of Insurance Claims?

Today, the California’s Cannabis Industry Association (CCIA) issued a statement responding to recent respiratory issues caused by vaping devices.  There have been 60 reported cases in California, but no cases have been associated with products purchased from California cannabis licensees.  There has been one death in California according to SF Gate

The CCIA may be responding to a recent death that occurred in Oregon connected to a cannabis device purchased from an Oregon cannabis licensee.  The Oregon Health Authority issued a statement on September 3, 2019 indicating the following:

Investigators at the OHA Public Health Division say they received reports that the individual, who died in July, had recently used an e-cigarette or vaping device containing cannabis purchased from a cannabis dispensary.

This investigation is ongoing, but may be the first death linked to a cannabis vaping device purchased from a licensee in the history of the United States. 

Black Market THC devices

Source: New York Department of Health

The State of New York has also insured a warning to the public.  Their focus is on unregulated cannabis devices bought in New York illegally with preliminary indications of high levels of vitamin E acetate.

Laboratory test results showed very high levels of vitamin E acetate in nearly all cannabis-containing samples analyzed by the Wadsworth Center as part of this investigation. At least one vitamin E acetate containing vape product has been linked to each patient who submitted a product for testing. Vitamin E acetate is not an approved additive for New York State Medical Marijuana Program-authorized vape products and was not seen in the
nicotine-based products that were tested.

The State of New York has provided product images from black market devices that can be viewed here.

Expect Product Liability Insurance Carriers to Take Immediate Action through Policy Modifications

The cannabis insurance industry will likely evaluate the potential impact of these events on products being offered and bought by licensees.  At this stage it would appear vitamin E acetate has been isolated with illegal cannabis vaping devices. If the product purchased in Oregon has the same ingredient, then insurance carriers might not react as quickly.

The type of insurance most likely to pay for claims and lawsuits is product liability coverage.  These policies were designed to provide liability protection for cannabis products like vaping devices when they enter the stream of commerce and consumed by a third party.

If a respiratory illness or death was to occur using a cannabis vaping device, then insurance of this nature will respond to any claims or lawsuits that could arise.  These policies offer starting limits of $1,000,000 with legal defense included for bodily injury damages.  The respiratory illness or death would fall under the category of bodily injury as defined by the policy terms.  

The Oregon death related to a cannabis vaping device could trigger the few product liability carriers to immediately modify their policy terms through an exclusion to eliminate this threat or cause certain insurance carriers to exit the industry.  That exclusion may be a simple removal of vitamin E acetate also known as alpha-Tocopherol acetate or Tocopherol acetate to an outright ban on any type of vaping device.

Cannabis licensees should review their product liability insurance coverage

Determine if you have product liability insurance.  Most commercial general liability policies will remove the coverage.  The insurance term to indicate coverage is typically “Products & Completed Operations.”

If you have product liability insurance review if vape pens or vaporizing devices are excluded on your policy or included on your list of products to be covered.  This modification is most likely to show up as a separate page and might require a review from your attorney. 

A recent blog article comparing product liability insurance carriers graphically indicated four insurance companies are covering vaporizing devices. 

Below is an example from a policy indicating devices used for vaping must be covered 

Vaporing devices product liability included

Vaporizing devices has been included on the list of products being sold by this licensee

Vaporizing Devices Exclusion

Specific policy exclusion for vaporizing devices

CCIA Statement on Vape Pen Illness

Letter-to-Legislature-re_-vape-products

Oregon Public Health Statement

Oregon DPH Cannabis Vaping

New York Department of Health

NY Public Health Statement Vaping Vitamin E Warning

Cannabinoid Hyperemesis Syndrome Illness Leaves Industry Wondering about Insurance Protection

Cannabis Customers Experience Abdominal Pain and Vomitting

We investigate the world of insurance to determine if product liability insurance would protect cannabis stores, growers, and manufacturers from Cannabinoid Hyperemesis Syndrome (“CHS”).   In case you’re unfamiliar with CHS, it apparently affects certain cannabis users causing nausea, repeated vomiting, abdominal pain, decreased appetite, and fluid loss. 

The people effected by this illness can end up in the hospital emergency room due to the vomiting. Does not sound like a fun illness to have especially if the person ends up with medical bills, out of work, and in rare cases seizures have apparently been reported.

Cannabis companies question if they have a potential liability 

We don’t have access to every insurance company offering product liability protection to the cannabis industry.  That is our disclaimer.  Therefore, we limit our review to insurance carriers typically represented by our office for these types of transactions. 

If you’re a cannabis licensee, the first task is to look at your current insurance policies to determine if you even have product liability. 

Why is this important? 

The insurance companies rely heavily on the policies they’ve produced when determining if a claim is covered. The adjusters in the majority of cannabis insurance claims will review the wording in the policy language to determine if coverage is available or not.

Most cannabis business insurance policies will exclude or remove coverage for “Products and Completed Operations.”  If you see this term excluded, then it means you have no coverage on that policy.   It might be prudent to determine if other policies exists because it may have been purchased separately.

 

Product Liability Exclusions on a PolicyThe insuring agreement is standard in every insurance policy. Its the insurance carrier’s acknowledgement of their agreement with an insured.  In this example, the insurance carriers are using standardized industry forms or policy language:

 

 

1. Insuring Agreement
a. We will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” included within the “products-completed operations hazard” to which this insurance applies.

The insured is the cannabis store, grower, or manufacturing company. 

The bodily injury in quotes means it has been defined or a specific definition exists within the policy.  For example:

2. “Bodily injury” means bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time.

It would be difficult for an insurance carrier to argue CHS is not a sickness.

Lastly we reviewed if the insurance policy excludes or removes coverage for CHS.  The word exclusion is a commonly used insurance industry term.  Many insurance claims are denied because of exclusions meaning no coverage.  Insurance companies will commonly specify their intention to exclude by creating a separate page from the main body of the insurance policy to indicate the level of importance.

Can I Expect Insurance Companies to Pay for CHS Claims?

Depending on the circumstances such as the claim and type of policy, CHS is likely to be covered on most product liability insurance policies.  The reason for our opinion is based on the insuring agreement, definition of bodily injury, and lack of any exclusions in the policies we reviewed. 

 

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. 

Directors & Officers Insurance to Attract Better Talent at your Cannabis Company

Corporate Executives Want Protection from Personal Liability before Working at Cannabis Companies

In this article we discuss how important it is for cannabis companies to purchase Directors & Officers Insurance to attract talented and highly skilled cannabis business executives.  These individuals have no desire to risk their personal assets by working in the cannabis industry.

The cannabis industry wants to attract the best talent particularly at the executive and directorship level. Different types of cannabis insurance productsThe roles for these corporate individuals will include the board, president, vice president, CEO, risk manager, CFO, controllers, and human resource directors. 

One of the biggest obstacles for these executives cannabis employers must recognize is protecting them from personal liability. 

No corporate executive wants the risk of being sued personally for their actions representing a cannabis company.  They simply don’t want to put their personal assets at risk. 

Unfortunately, many of these executives don’t have a solid understanding on how they would be protected should they be sued while working at the company in some capacity or the process for seeking recovery from the company itself.

By purchasing a Directors and Officers or “D&O” Insurance, cannabis companies can offer further reassurance to prospective executives who may be considering a role at the company they’ll be indemnified and protected by insurance. 

The insurance protects officers and directors from personal liability involving the failure to meet corporate responsibilities, not acting with the best of intentions, or simply being negligent by making a mistake or error even if its been alleged.

Types of Claims that could Trigger a D&O Lawsuit against a Cannabis Business Executive

The cannabis industry is complicated with many uncertainties or regulations that must be interpreted and executed leaving it to the directors and officers to solve these problems.  Below are examples that could lead to a claim or lawsuit against a corporate executive: 

  • Failure to follow corporate by laws and operating agreements
  • Negligence while performing duties at the company
  • Misrepresentations in corporate dealings
  • Error in judgement while negotiating important contracts
  • Failure to implement and execute a plan to meet cannabis statutory rules and regulations
  • Issues with human resources and employment law

Cannabis companies who purchase D&O Insurance will attract better talent

The procurement of D&O insurance is a competitive advantage.  Highly educated executives who worked in other industries are accustomed to having proper protection.  If cannabis companies want to effectively compete in order to attract this talent, they must be prepared to purchase this type of coverage. 

Do you need help purchasing D&O Insurance?  Feel free to contact us as we can help you recruit the right kind of talent and remove some of the complexity when purchasing this type of insurance. 

Budtenders Must Consider Liabilities Colorado MED’s Morning Sickness Bulletin

Recommendation Could Trigger Liability Claim for Negligence

The Colorado Marijuana Enforcement Division’s (“MED”) recent bulletin 18-06 REPORTS OF LICENSEES MAKING RECOMMENDATIONS FOR PREGNANCY-RELATED MORNING SICKNESS could result in other issues for those allegedly making these types of claims–professional liability.  According to the bulletin, budtenders and store personnel have been allegedly providing information on marijuana use to pregnant women experiencing morning sickness. 

Buying medical and recreational cannabis

Buying medical and recreational cannabis to help with morning sickness

In order to protect consumers, the MED reminds licensees of warning labels used by the industry to address this specific topic:

“There may be long term physical or mental health risks from use of marijuana including additional risks for women who are or may become pregnant or are breast feeding. Use of marijuana may impair your ability to drive a car or operate machinery.”

When budtenders or store personnel make recommendations to the public, they may be held to a different standard due to their experience and expertise.  Particularly medical marijuana establishments whose patients rely more heavily on advice for treating certain illnesses.  Consequently, a customer who relied on the employee to use cannabis during pregnancy to help with morning sickness may file a lawsuit seeking damages. 

As a result, the cannabis company may turn to their insurance carrier seeking coverage for this type of claim. 

Is coverage available for this type of claim on a commercial general liability policy?

Most likely not.  The reason is certain exclusions could be invoked by the insurance carrier such as a professional liability exclusion.  Below is an example from a cannabis general liability insurance policy:

COMMERCIAL GENERAL LIABILITY COVERAGE PART
It is agreed that this policy shall not apply to liability arising out of the rendering of or failure to render professional services, or any error or omission, malpractice or mistake of a professional nature committed by or on behalf of the “Insured” in the conduct of any of the “Insured’s” business activities.

The insurance carrier may claim a budtender or store employee advising customers who are pregnant that cannabis will help or cure morning sickness is a liability not covered by a standard general liability policy.  The insurance carrier is likely to consider this a failure to render professional services along with malpractice.  In addition, if the Marijuana Enforcement Division was to determine this type of act was a statutory violation would further support the insurance carrier’s denial of the claim. 

What type of insurance would cover this type of claim?

Possibly a professional liability or product liability insurance policy might cover this type of claim.  However, certain exclusions may  be invoked by the insurance carrier. 

Budtenders and Store Employees must avoid making these recommendations.  Owners need to train their personnel.

The bottom line for budtenders and store employees is don’t make these types of claims as it will lead to numerous problems statutorily and legally most likely not covered by insurance.  Cannabis licensees are encouraged to properly train their employees and document this process in their standard operating procedures. 

Here was the study that prompted the MED bulletin that resulted in 70% of dispensaries recommending cannabis for women who are pregnant:

Denver Health Marijuana Pregnancy Study(1)

RICO Lawsuit Covered on Cannabis General Liability Insurance?

Insurance Committee Indicates RICO Covered by General Liability Insurance

A recent report issued by the National Cannabis Industry Association Finance and Insurance Committee (“committee”) indicates lawsuits filed under Racketeer Influenced and CorruptNCIA Insurance Committee Organizations Act (“RICO”) by a third party against a dispensary would be an example of a claim covered by a commercial general liability policy

These committees are a opportunity for members with particular expertise to volunteer and effect change. In April of 2018, the committee released their publication entitled “Protecting Your Cannabis Business: A Commercial Insurance Review” to educate the cannabis industry on types of coverages available, purpose of those coverages, and citing examples of when coverage would be offered.

Besides the RICO lawsuit, the committee cited other examples covered by general liability insurance include a customer who slips and falls, repairman bitten by a dog, and product disparagement claim brought by a competitor.

What is RICO?

RICO is a violation of United States Federal law enacted under U.S. Code Title 18 Chapter 96 of the Organized Crime Control Act of 1970.  There is a criminal and civil component to the statute.  The law specifies offenses known racketeering activities such as arson, bribery, extortion, gambling, murder, kidnapping, and dealing in a controlled substance such as marijuana that is part of ongoing criminal enterprise.

The party claiming RICO must be able to prove damages exist in addition to other important elements.  The injured party may sue in federal court and collect three times the damages they have sustained including the cost of the lawsuit.

Is a RICO Lawsuit considered Accidental?

Generally speaking, the purpose of commercial general liability policy is to offer coverage for the accidental, uncertain, and fortuitous losses to a third party.  This purpose has evolved over time, but remains a foundation to the history of insurance.  The cannabis licensee purchasing insurance is knowingly and intentionally operating a business in violation of federal law.  The RICO lawsuit will be a response by a third party due to the licensee’s conduct and does not appear accidental.

If the cannabis licensee’s conduct is certain and intentional, then cannabis insurance carriers might deny the claim based on this fact. 

Does a RICO lawsuit meet the Definition of an Occurrence?

In our experience, the sections below from a cannabis insurance policy may provide additional insight on how a RICO claim or lawsuit would be treated from a policy perspective.

The typical insuring agreement will state the following:

Insuring Agreement

a. We will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies. We will have the right and duty to defend the insured against any “suit” seeking those damages. However, we will have no duty to defend the insured against any “suit” seeking damages for “bodily injury” or “property damage” to which this insurance does not apply. We may, at our discretion, investigate any “occurrence” and settle any claim or “suit” that may result.

There are several key terms within the insuring agreement such as “for which this insurance applies” or “to which this insurance does not apply.”  This language seems insufficient to consider if a RICO claim would or would not be covered.

The insuring agreement does provide several conditions of which one condition would be noteworthy in our opinion as it pertains to this type of claim:

The “bodily injury” or “property damage” is caused by an “occurrence” that takes place in the “coverage territory”;

Many insurance policies define occurrence to mean “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”  The insurance carriers and courts may evaluate closely if RICO meets the definition of an occurrence with emphasis on the word accident.  Various sources define accident as being unforeseen, unplanned, and unexpected that can be associated with acts of God.  Using the example cited by the committee, the operating dispensary whose neighbor files a RICO claim is a consequence of their licensed distribution of cannabis.

For most people, a lawsuit of this nature would be difficult to quantify as being in the same category of a car accident or customer falling in the parking lot.  Both of these events were uncertain.  The filing of a lawsuit isn’t accidental, but a legal response by a party who believes they’ve suffered harm due to a known violation of federal law. 

Is RICO excluded on the cannabis insurance policy?

Exclusions are specific policy language meant to inform the policy holder when coverage is not offered.  The insurance carrier’s “carve out” the risk they don’t want to cover.  We’re unaware of commercial general liability policies excluding RICO lawsuits.

RICO has been excluded in other cannabis insurance policies such as product liability and directors & officers insurance.

Is RICO covered or not? 

Based on our experience, we don’t see a clear path exists through a commercial general liability policy to offer coverage for RICO claims and lawsuits unless the committee has insurance carriers offering this type of coverage with policy language to support their claim.  Furthermore, there are cannabis insurance policies that may require the customer to reimburse the insurance company for the cost of the claim as a result of the loss not being covered.  This would be a harsh consequence for the cannabis licensee.

If RICO lawsuits are filed, the insurance carrier responsible for the claim may issue a reservation of rights letter to initially defend the lawsuit, while they determine if coverage should be offered through trial or settlement.   Reservation of rights letter are common practice used by claims departments to temporarily investigate a claim, while providing the carrier the right to terminate their obligations at any time. 

The first hurdle will be the insurance industry determining if a RICO lawsuit is an insurable risk due to the certainty of a cannabis licensee violating federal law. The second hurdle will be meeting the definition of an occurrence and accident.

NCIA Cannabis Insurance Overview