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

Buying Insurance in order to repel the Department of Justice

Buying insurance is a standard business practice for every industry

Cannasure Patrick McManamon

McManamon Source National Cannabis Industry Association

A recent article in the Marijuana Business Daily entitled “Finding right insurance is key to any marijuana company’s business plan” discusses how insurance is an important area of compliance and prudent for cannabis businesses to protect themselves from the Department of Justice.   The article indicates more states are requiring cannabis insurance and went further by interviewing Cannasure Insurance Services’ Patrick McManamon who stated “Being in compliance is the main thing that we want to show the Department of Justice, and part of that is going to be insurance.”  McManamon shares an interesting perspective that insurance is about compliance and may fend off the Department of Justice. In our opinion, cannabis companies who buy insurance are simply being normal and responsible business owners.  It would be difficult to imagine the Department of Justice deciding if they should enforce federal marijuana laws to consider the procurement of insurance as a reason not to exercise their rights.  Regardless of the industry, every business buys insurance as a standard procedure.  Perhaps, the message to the cannabis industry is be responsible and buy insurance in order to meet the obligations to others.  Those others may include a state regulatory agency, landlords, employees, vendors, and the general public. 

 Will the insurance company pay out

The article indicates situations when insurance companies have sold policies only to result in claims not being paid citing Green Earth Wellness (“Green Earth”) versus Atain Specialty Insurance Company.  The  Green Earth lawsuit did result in Atain Specialty Insurance Company (“Atain”) raising the argument cannabis is federally illegal as one of the reasons to the deny the claim. Aside from the Green Earth lawsuit, there are policy exclusions mentioned in the article citing two as being the most common:  “Schedule 1,” “federally illegal” and “health hazard.” We reviewed cannabis insurance policies for these particular exclusions.  The “federally illegal” is most likely referencing the Business Personal Property policy excluding “Contraband, or property in the course of illegal transportation or trade.”   Essentially, the carrier has the right to not cover your property because of this exclusion.  The problem for insurance carriers who decide to use this as a reason to deny a claim may find themselves in litigation.  The Colorado court in Green Earth v. Atain recognized the ambiguity of the contraband exclusion, but relied on the mutual intentions by both Green Earth and Atain they were in the transaction together to buy insurance for a medical marijuana company.  In other words, there was no surprise by either party a contractual relationship is formed knowing one of the parties is distributing, manufacturing, and cultivating a controlled substance. Regarding the Health Hazard exclusion, there are product liability policies sold in the cannabis industry with a health hazard exclusion.  Below is a sample of the Health Hazard exclusion.  In our opinion, the inclusion of this language on a product liability insurance policy could result in coverage being denied based on a given set of facts or circumstances.  We don’t believe every product liability claim will be denied, but it does appear if cannabis is being used to contribute toward a health hazard, then coverage may be in jeopardy.

Sample Health Hazard Exclusion

Cannabis Health Hazard Exclusion

Health Hazard Exclusion–Possible Reason to Deny Coverage

Lastly, McManamon states when buying insurance “Vet that person like you would your attorney, your accountant. Once you find that agent, you really work with him and stick with him.” We couldn’t agree more.

D

New Cannabis Crop Insurance Program Now Offered by Existing Carrier

Great Opportunity to Secure Crop Insurance for your Cannabis Company

One of our existing cannabis insurance carriers has expanded their product line and started offering coverage protection for your living plants also known as crop insurance.  The coverage is being made available to Indoor grow only (warehouses, fully enclosed poly carbonate, or similar greenhouses).   Further good news is this insurance carrier has been stable and involved in the cannabis industry for several years.

Image of a marijuana plabnt

The Cannabis Plant

The definition of living plants means the following:

“Living Plant Material” means marijuana seeds, immature marijuana seedlings, marijuana plants in the vegetative growth stage and mature flowering marijuana plants rooted in growing medium.

Examples of the types of losses covered include Fire, Lightning, Explosion, Windstorm/Hail, and Vandalism.  Theft is also included, subject to all warranties attached to this policy. 

Currently, there are very few cannabis insurance companies offering crop insurance.  As such, Greenpoint Insurance Advisors, LLC is pleased to be able to offer this program.    If you’re are interested in a quote, please contact our agency below to discuss your particular circumstance: