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Underwriting & Loss Control
Legalized Recreational Marijuana Is a Growing Business With Insurance Challenges

Best’s Underwriting Reports and Best’s Loss Control Reports provide insights into the lines of coverage, exposures and loss control for recreational marijuana dispensaries.
  • Anthony Bellano
  • October 2022
(Photo by FREDERIC J. BROWN/AFP via Getty Images)

(Photo by FREDERIC J. BROWN/AFP via Getty Images)

The use of recreational marijuana has been legalized in 19 states and the District of Columbia, with more states considering the possibility, according to the National Organization for the Reform of Marijuana Laws. Voters in several states and cities are voting in referendums nationally to legalize the sale of recreational marijuana. Voters in Colorado Springs, Colorado, for example, will head to the polls to vote on the sale of recreational marijuana within city limits this fall.

But while sales of cannabis initially rocketed to millions of dollars in those states, others are seeing prices come down due to market saturation. Some states are having a hard time getting the legal cannabis industry off the ground, and insurance surrounding recreational marijuana continues to be an issue.

Many large insurers are avoiding insuring state-approved cannabis-related businesses, but for those who do, there are a number of risks and obstacles that need to be considered, according to Best's Underwriting and Loss Control Resources.

“Because it is still considered a Schedule 1 drug by the federal government, it's very hard to get bank accounts for these dispensaries, so most of the dispensaries are cash-only businesses,” Best's Underwriting and Loss Control Resources Senior Assistant Editor Suzanne LaCorte said.

Number of Dispensaries Is Growing

In Michigan, this year alone, the number of growers increased by 71% and the number of retailers has grown by 17%, according to The Oakland Press.

Legal sales of recreational marijuana in New Jersey began in April, according to dispensaries.com. In California, the Los Angeles Times writes that “high taxes, local bans and overregulation” are making it difficult for state-licensed vendors to compete with black market dealers.

As the number of recreational marijuana dispensaries has grown, Best's Underwriting Report has identified 10 lines of coverage for the businesses and has ranked the risk exposure associated with the challenges facing the industry.

Those lines are Automobile Liability; General Liability: Process and Operations; General Liability: Products-Completed Operations; Directors and Officers Liability; Employment Practices Liability; Workers' Compensation; Crime; Property; Business Interruption; and Inland Marine.

Best's Hazard Index ranks the risk exposure for the Lines of Business as Low (1-3), Medium (4-6), and High (7-9). Following are excerpts of the Lines of Coverage reports that have the highest hazard index rankings.

 

Best’s Hazard Index

Line of Coverage Best’s Hazard Index
Crime 7
General Liability: Process and Operations 6
General Liability: Products-Completed Operations: 6

Lines of Coverage


Crime

The crime exposure for medical marijuana dispensaries will be substantial due to the potential for robberies. Most American dispensaries will only accept cash for purchases because of U.S. federal banking laws that prohibit banks from doing business with companies that cultivate, process or sell marijuana. An employee dishonesty exposure in the form of pilferage of products and embezzlement could also exist.

General Liability: Process and Operations

The General Liability: Premises and Operations exposure for marijuana dispensaries will be significant due to the potentially large number of daily visitors. Visitors will include customers, delivery personnel, and government inspectors. Slips, trips, and falls will be the main exposure. A Cyber Insurance Liability exposure will exist if the dispensary stores customer information on a computer network that can be accessed through the Internet.

General Liability: Products-Completed Operations

The General Liability: Products — Completed Operations exposure for marijuana dispensaries will be significant due to the potential for mold, fungus, pesticides, and other contaminants in the products, which could make customers sick. Because there are no federal regulations regarding testing the quality of the cannabis products, states have developed their own regulations regarding testing, labeling, and packaging. However, some product labels might not identify the appropriate use or strength of the marijuana, which could result in claims. If the insured bakes or makes marijuana-infused edibles (e.g., brownies, cookies, gummy bears), then this exposure will be increased due to the potential for the food spoiling or for inaccurate dosages in each piece. Because there could be overlap between General Liability: Products — Completed Operations and Professional Liability, both lines of coverage should be written by the same insurer for the same limits if possible.

 

Loss Control


On-Site Inspection:

  • Does the insured have a vault equipped with several tool-, torch-, explosive-, water-, and fire-resistant, NRTL-listed, time-delay safes where cash and marijuana are stored?
  • Motion alarms and biometric locks installed throughout the premises
  • Security cameras placed throughout the premises, including near vaults
  • Layout of the premises
  • Are “Employees Only” signs posted outside of all storage areas from which visitors are prohibited, such as where cannabis products are stored?
  • Stock rooms equipped with self-locking doors
  • What types of marijuana does the insured sell?
  • Is there a kitchen on site where the insured prepares cookies, candies and other marijuana-infused edibles?
  • For edibles, are all ingredients, including nuts, wheat, and other allergens, clearly stated on all packages?

For more on this and other risk classifications, visit Best's Underwriting & Loss Control Resources.



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