1/29/20 By DAN ULLOA
CannaRisk Con 1.0 was a panel discussion forum held in Bridgewater that explained the nuances of cannabis insurance to an audience that might be held liable in a few worst-case scenarios.
Quite often, insurance is an afterthought of entrepreneurs. This can leave them in a difficult situation when things go wrong. Many entrepreneurs in California have been struggling to comply with the nuances of being in a legitimate market. Getting insurances is one of those.
“Thus, you need a long-term strategy,” said Andrew Linden, Co-Chair of the Cannabis Law Group at the law firm Norris McLaughlin which co-sponsored the event. Linden said that for any new business, you need to deal with the risk in the worst-case scenario. Thus, it was advised that start-ups need an attorney to make sure no one is using anything similar that would make them open to risk and a lawsuit.
“So you control or mitigate risk,” said Jack Palis, a Risk Advisor an Owner of New Ventures Consulting. “S.O.P.s, employee training, H.R., and the employee training manual exist to deal with these things.”
“Insurance protects you. It transfers risk to an insurance company by paying a premium, and insurance companies do the same thing,” Palis said. He advocated that people read the fine print of contracts and employee handbooks.
Because the devil is always in the details.
It was explained that in proper business planning, you need to set up a Limited Liability/ Company (LLC) so you’re not held personally liable. You also need to be savvy in your judgment in sizing up the people you’re working with to make sure they do not have any significant liabilities. Insurance was thus likened to a safety net.
Cannabis Insurance For a Rainy Day
Rodney Nubin, a Senior Vice President at Socius Insurance explained how insurance policies are set based on statistics gathered over a long time so that losses can be predicted. Because the industry is so new, that’s not really possible. Moreover, no insurance carrier wants to be one of the first ones to enter the industry and take risks. Thus, insurance in the cannabis industry is expensive.
Part of the issue with insurance is shareholder lawsuits are causing the price to drive up. For example, the cannabis company Cronos received got a government contract to grow cannabis for the Canadian government. They announced the deal and their stock soared. However, an investigative reporter looking into it and found holes in the contract. The stock then dropped 30 percent and the investors who had bought the sued. Cronos ultimately settled for $25 million. They were able to cope with the loss because they had Directors & Officers (D&O) insurance.
“There’s a lot of risk in the industry,” said Eric Alveraz, a commercial litigator with Norris McLaughlin, one of the hosts of the event. Alvarez recounted a story where a cop in Washinton state was using medical marijuana (or clinical cannabis) to cope with the stress of his job. He bought a vaping cartridge that led to lung damage so he decided to sue everyone company on the supply chain that led to it. Alvarez said ultimately the distributor was likely most liable.
You also need insurance to cope with the issues of a bad business partner.
“You need to know the liabilities of a third-party vendor and that could be difficult,” said Oren Chaplin, a lawyer with Norris McLaughlin. A bad contract can also cause a headache.
“Unclear language in investing can be a problem,” Palis said. He said firms should work with an attorney since online templates are often insufficient.
In general as cannabis legalization increases, the more insurance companies are going to get into it and pricing eventually will go down.
“Indemnification is very, very important,” said Chaplin. “What happens if some part of my supply chain breaks down?” Thus, he explained it’s not unusual for companies to have guarantees for product supply or obligations to cover if need to find an alternative source.
“Be careful with what you put on your labels,” said Stephanie Spangler, a lawyer specializing in Cannabis law. She added that testimonials posted on a website count as advertising. She added that someone else raving about your product on social media doesn’t make you liable.
“It could save your company, in the long run,” said Charlie Sturm, a Management Liability Broker with Socius Insurance regarding insurance. He explained that companies can be held liable if their products are not properly labeled. He gave an example was given whereby a product said infused gummies should be taken “once a day”. This was misinterpreted by a Spanish speaker as the number “11” since “once” looks similar to 11 spelled out in Spanish. Thus the person took 11 in one day and sued. In the end, Sturm said the company was held liable.
This is why there are bilingual warning labels.
For those who are professional ancillary businesses, if a professional who fails to deliver on services and you’re held liable, then that professional can be sued and bankrupted. By the same token, a company doing lab testing needs professional liability exposure as well.