Washington LCCB Appears Now to Require Product Liability Insurance for Cannabis Licensees

The Washington State Liquor and Cannabis Control Board (“LCCB”) seems to be reversing their initial opinion on whether product liability insurance was a requirement by statute (WAC 314-55-085) for its licensees.  Internal communication by the department seems to indicate product liability insurance will be understood as a being part of the statute.

We have consulted with internal staff, and would like to take this opportunity to clarify that commercial general liability insurance is required for all licensees under WAC 314-55-082. This coverage would cover instances of product liability claims. More information is also available at the Office of Insurance Commissioner’s website, here: https://www.insurance.wa.gov/your-insurance/business-insurance/marijuana/. If you have questions about that, please reach out to OIC.

Source:  Washington State LCCB Amanda Smith, Forms and Records Analyst 07-17-2018

Need to cover instances of product liability claims

While not clearly stated in the statute (WAC 314-55-085), this additional communication “This coverage would cover instances of product liability claims” (emphasis added) does appear the direction the LCCB is taking when defining the type of insurance they mandate upon their licensees. 

WAC 314-55-085 does provide an indication of the intentions of those who wrote this section. 

The intent of the required insurance is to protect the consumer should there be any claims, suits, actions, costs, damages or expenses arising from any negligent or intentional act or omission of the marijuana licensees. 

However, the statute would have been less ambiguous by naming the coverage lines such as “products and completed operations” or “product liability.”  The statute could be further interpreted to include “professional liability” based on the broad nature of protecting the consumer from “any claims.” 

Another issue with this wording is “intentional acts” are typically not the types of claims covered by insurance.   If someone is acting with intent to harm the consumer, then most claims of this nature are likely to be considered outside the scope of insurance due it be intentional as opposed to accidental.  Intentional acts should be removed from the statute. 

Regardless, this recent communication reverses and conflicts with a prior statutory opinion made on August 15, 2016, when the  LCCB clearly stated product liability was not required by statute as publicized in our article entitled Required or Not Required?  Washington Cannabis for Product Liability Insurance

Lack of pesticide testing is good reason to transfer this type of risk to the insurance industry

Cannabis Pesticide Caution Sign

In our opinion and clearly conjecture, the lack of any pesticide testing on cannabis products could be a strong reason the statutory opinion was astutely reversed to transfer any and all underlying risks to the insurance industry covering future product liability claims. 

If you’re the LCCB, then protecting the regulatory agency from pesticide lawsuits would be prudent.  These types of claims have not surfaced, but could be laying dormant for future insurance carriers to worry about.  Furthermore, the statutes require the LCCB is named as an additional insured, primary and non-contributory, and waiver of subrogration.   The LCCB will be protected by the insurance of their licensees.

In the future, the LCCB is likely to become vigilant with enforcing product liability insurance is not excluded, but a coverage line purchased by the licensee. 

Need to buy product liability insurance in Washington?

Product liability insurance is available in the marketplace by a small number of insurance carriers making it expensive for many licensees particularly those just starting up.  These are separate insurance policies from the primary commercial liability.  The price for this type of insurance is based on revenue along with other factors such as the type of operation and product mix. 

This additional expense is compounded by the fact the market price for cannabis is low in the State of Washington.  Many 502 producers are hanging by thread and additional insurance is not affordable. 

The 7 Worst Exclusions on Cannabis General Liability Insurance Policies

Look Inside your Cannabis Insurance Policy to Avoid Surprises

The following is a list of exclusions we’ve found on a variety of cannabis commercial general liability policies over the years, we had to publish because they can lead to harsh consequences or surprises for business owners. 

Typically, exclusions can be embeddedare separated from the main body of the commercial liability and meant to notify the policy holder of circumstances when coverage may not be offered.

Cannabis Insurance 7 Costly Exclusions

Cannabis business owners should look for these exclusions

  1. The Washington Changes to Defense Cost Exclusion: Perhaps the worst and most despicable exclusion we’ve seen on a cannabis general liability policy because it gives the right to the insurance carrier to seek reimbursement for claims that are not covered. The exclusion is in direct conflict with another policy condition that requires insured’s to notify their carrier of potential claims.  This exclusion will leave many cannabis companies with either a big dilemma or a bill they weren’t anticipating.
  2. The Products and Completed Operations exclusion: Many cannabis companies were never informed by their agent or broker the policy doesn’t cover your product liability. If someone gets sick off your weed, you need to buy a separate insurance policy to cover the risk of product liability.
  3. The Breach of Contract Exclusion:  Cannabis insurance companies want to be certain their insurance policies are not covering broken promises with other parties through written or oral agreements.  Don’t plan on using your insurance for claims involving money owed to other parties because it didn’t work out between you.
  4. The total mold, mildew, and other fungi exclusion: Cannabis companies who are being sued by landlords or other parties might not realize no coverage exists for grow sites covered with mold or mildew.
  5. The Protective Safeguard Exclusion:  The reason certain cannabis insurance policies add this exclusion is to notify their clients of conditions you must follow for covering the actual cannabis products.  One cannabis carrier requires the safe to be bolted to the ground if it weighs between 800 lbs. to 2,000 lbs.  Many cannabis business owners will question the need to bolt a 2,000 pound safe.  This same carrier requires a 1 hour fire rating for your safe.  Don’t bother filing a claim if the safe was suppose to only last 30 minutes in a fire.
  6. The Limitation to Designated Premises or Project Exclusion:  This exclusion makes our list because it surprises many cannabis companies when they realize their insurance is specific to the locations listed on the insurance policy.  If you need your insurance to cover an offsite event, then this exclusion doesn’t provide the protection you need.  Many insurance brokers fail to realize the certificate of insurance they issued for the 420 event holder could be meaningless.  Many cannabis event holders are probably sitting on certificates of insurance that could be worthless.
  7. The Skin Tanning Exclusion:  This is not the worst, but simply the dumbest exclusion we’ve seen included on a cannabis general liability policy.  What does a skin tanning exclusion have to do with a cannabis company remains a mystery to most?

New Insurance Products for the Cannabis Industry

Latest Update:  Existing Insurance Carrier Expanding their Product Lines

A recent product flyer from one of our established insurance carriers expanding their product offering to the cannabis industry despite the fact other insurance carriers are leaving. 

Coverage highlights include:

  • Living Plant or Crop Insurance: Insurance protection for your living plants from theft or fire.
  • High Limits for Cannabis Stock:  Need to protect your final product with high limits.
  • Equipment Breakdown:  The protection of valuable equipment due to a covered loss
  • Excess Liability up to $10,000,000:  Important for cannabis companies with multiple locations and numerous landlords requiring certificates of insurance.
  • Trade Show and Events Coverage:  Removes the premise only liability endorsement and provides coverage when you’re at the trade show.
  • Product Liability:  Adds coverage for your product being sold into the stream of commerce
  • Professional Liability:  Concern with providing advice to others that may be erroneous or negligent.
  • Hired and Non-Owned Auto Liability:  Insurance protection from when your employees are driving their own vehicles for company business.  Example would be those employees visiting customer who end up in a accident.  How is your business protected from the lawsuit by the third party? 

Insurance Carrier Product Update Sheet

List of Insurance Products for Marijuana Companies

The Aftermath of When a Cannabis Insurance Company Leaves the Industry

Changing insurance is time consuming and complicated for the customer and insurance broker

Throughout our history insuring cannabis companies, we’ve seen many insurance carriers enter and exit the industry.  It’s the same old story presented to us enthusiastically, we have a great new program to offer your clients.  Our time spent on the specifics of their program evaluating pricing, coverages, and policy forms only to result several months later the story has changed with them ending their program.

The reason is the same–cannabis is federally illegal or a recent change has spooked them in the opposite direction. 

Strange, how the realization of the program they built, not one person from the insurance carrier asked themselves should we insure a Schedule 1 drug listed on the Controlled Substance Act with customers selling, distributing and manufacturing it? 

If we do, what risks should we prepare for when insuring this segment.  When you think about, it’s really a risk management 101 question.

When insurance carriers decide to leave the cannabis industry many times they fail to consider the consequences of their decision on the companies they insure.  Those consequences include the hassle of securing a new insurance carrier, analyzing coverage differences, and understanding the differences between their former policy and new policy.   To properly buy insurance is time consuming not only for the client, but the retail insurance broker representing their interests.

A professional retail insurance broker can easily spend numerous hours evaluating with their client the risk and coverages.  The coverage analysis between insurance companies and their policies requires piecing together the intricate details of complicated terms to gain a understanding of potential deficiencies.

Commercial liability may have different exclusions and endorsements 

No two commercial liability policies will be exactly the same.  A former program offered by a insurance carrier not only offered a occurrence based Products and Completed Operations Aggregate, but extended liability with several endorsements below: 

  • Blanket Additional Insured When Required by Contract
  • Liberalization Included
  • Per Location and Per Project Aggregates Included
  • Waiver of Transfer of Rights of Recover Included

Obtaining these types of coverages with a new cannabis insurance carrier will be difficult if not impossible to achieve. Once again, the customer through their insurance broker are left to deal with this problem.

Business Property may have different deductibles and coinsurance penalties

Changing to a new insurance carrier may have different coinsurance penalties and deductibles on business property coverages. Property means building, tenant improvements, grow equipment, computers, cannabis, etc…. 

Coinsurance is a penalty for not being insured to value on your property.  A lower coinsurance percentage is better than a higher percentage because of the way the formula is calculated in the policy.  If a customer is being placed with a new insurance carrier at 90%, knowing they had a 80% coinsurance clause, then the new policy will be a disadvantage.

The deductibles may be different from old to new policy.  Some policies offer $1,000, while new policies may offer higher deductibles at $2,500 with special requirements for theft or hail.

Product liability can be a thorn to switch from carrier to carrier

A significant impact when a insurance carrier abandons their program is if the insured has a product liability.  Why? 

Depending on the type of insurance policy, the transition from claims made to occurrence based may have implications along with exclusions inside those policies that remove coverage.  Occurrence is a better policy because it takes away the relevance of time not having to be recognized past or future.  Claims made must recognize the past and future in order to properly indemnify the underlying risks that may be brewing.

Certain product liability insurance carriers have an exclusion for cannabis.   Essentially, these policies may be worthless in our opinion. Other carriers might exclude the certain portions of a product line such as their vape pens.  Both of these exclusions can have dramatic impact on how a claim may be settled.  The insurance broker with their client are left

Pricing from the old to the new policy likely to be higher

The insurance carrier exiting the cannabis industry will have likely procured a substantial number of new insurance customers due to competitive pricing.  We most recently saved a cannabis cultivation company a significant amount of premium changing them to a new program.  They will enjoy the savings for one year with improved coverages only to be notified their policy will be non-renewed at their policy anniversary.

Most likely, their new product liability insurance policy will be more expensive.  Once again, the insurance broker is forced to deliver the bad news your new insurance will be more expensive.



Required or Not-Required? Washington Cannabis Law for Product Liability Insurance

Cannabis licensees in the State of Washington continue to question if they must by law purchase product liability insurance to be considered compliant.   Let’s be honest, the process of reading and understanding marijuana laws can be complicated and arduous process.   Just like reading an insurance policy.

It is important to know the majority of cannabis oriented commercial general liability insurance policies exclude what is known as Products and Completed Operations.  Or, basically product liability coverage for your cannabis product.  To be more accurate, the coverage basically provides liability coverage for your work or your product occurring away from your premise.  As an example, if you’re a cannabis licensee selling flower to a retail store who then sells to a consumer, the original product is no longer located at the original licensee.  The products and completed operations is likely to provide coverage should a claim arise because of the product.

The Washington law is codified under WAC 314-5-082 Insurance Requirements.

WAC 314-55-082
Insurance requirements.
Marijuana licensees shall provide insurance coverage as set out in this section. The intent of the required insurance is to protect the consumer should there be any claims, suits, actions, costs, damages or expenses arising from any negligent or intentional act or omission of the marijuana licensees. Marijuana licensees shall furnish evidence in the form of a certificate of insurance satisfactory to the WSLCB that insurance, in the following kinds and minimum amounts, has been secured. Failure to provide proof of insurance, as required, may result in license cancellation.

(1) Commercial general liability insurance: The licensee shall at all times carry and maintain commercial general liability insurance and if necessary, commercial umbrella insurance for bodily injury and property damage arising out of licensed activities. This insurance shall cover such claims as may be caused by any act, omission, or negligence of the licensee or its officers, agents, representatives, assigns, or servants. The insurance shall also cover bodily injury, including disease, illness and death, and property damage arising out of the licensee’s premises/operations, products, and personal injury. The limits of liability insurance shall not be less than one million dollars.

(2) Insurance carrier rating: The insurance required in subsection (1) of this section shall be issued by an insurance company authorized to do business within the state of Washington. Insurance is to be placed with a carrier that has a rating of A – Class VII or better in the most recently published edition of Best’s Reports. If an insurer is not admitted, all insurance policies and procedures for issuing the insurance policies must comply with chapters 48.15 RCW and 284-15 WAC.

(3) Additional insured. The state and its employees, agents, and volunteers shall be named as an additional insured on all general liability, umbrella, and excess insurance policies. All policies shall be primary over any other valid and collectable insurance.

While it is clear, the statute states commercial general liability insurance or commercial umbrella insurance, it fails to express product liability insurance must be procured.  I wonder if the writers of this law recognized “products and completed operations” is excluded and must be purchased separately.  Probably not.  Most interestingly, the law does imply through Section 1 “bodily injury, including disease, illness and death…. arising out of the licensee’s premises, operations, products, and personal injury.”   The keywords “arising out of” and “products” would lead some to believe product liability insurance would be required.

As a result of the lack of clarity, we contacted the Washington Cannabis and Liquor Control Board seeking a statutory interpretation through email of WAC 314-5-082.   Below is the screen shot from the email response we received on August 15, 2016:

Washington Product Liability Insurance The Washington State Liquor and Cannabis Control Board indicated “The statutes do not require a marijuana business to have product liability insurance.”