Insurance can be a stressful and challenging topic for many individuals and businesses, but it’s another problem entirely for CBD, hemp, and cannabis companies. From a lack of carriers to prohibitive premiums, many hemp and cannabis operators may find themselves with flimsy protection for their assets, or, in some cases, no protection at all. So, we interviewed Aaron Cohen of HUB International, one of the largest insurance brokerages in the world, to shed some light on how hemp and cannabis companies can navigate this space.
Insurance and Risk Management in the Hemp and Cannabis Industries
Finding insurance in the hemp and cannabis industries is not an easy mission, especially as laws and regulations continue to be in flux.
To figure out what’s going in the space, we spoke to Aaron Cohen, a Commercial Broker at HUB International, the sixth largest insurance brokerage in the world.
The brokerage began providing insurance to hemp and cannabis companies in 2014.
In our interview with Mr. Cohen, we asked about the inherent risks for insurers with hemp and cannabis companies, which carriers are offering insurance to these businesses, how they can get the best coverage, and what HUB International provides.
Risks and Obstacles to Hemp Companies Getting Insurance
What are the biggest risks and obstacles facing CBD and hemp companies right now, in regard to obtaining insurance?
That’s a great question.
You have a lot of similar risks to an average business, like with theft, crime, and the standard perils, but it’s a bit more nuanced with hemp and cannabis.
For example, with hemp farmers, they run the risk of their crop coming in “hot,” or above the 0.3% THC limit.
This can happen if farmers are not actively pulling to the male seed to prevent cross-pollination.
Once it’s harvested and drying, the risk has decreased.
Having the right insurance coverage is equally important as having a sound risk mitigation process.
Cannabis, hemp, and CBD operations require a multi-faceted risk management approach with a varied mix of insurance: liability, property, employment practices, directors and officers, workers compensation, employee benefits, etc.
With these lines of coverage, insurance carriers differ in policy definitions, exclusions, and coverage language.
It’s important to work with a broker who understands the policy’s fine print.
Insurers Offering Services to Hemp, CBD Businesses
We know it’s a scary thing for insurers to offer their services to CBD and hemp companies.
So, who is currently offering insurance to these companies right now?
It’s probably only a handful of companies currently offering insurance on the hemp side, but I think more and more companies are starting to come into the fold.
This current lack of market availability is largely due to the emerging nature of the industry, and underwriters not yet having the actuarial data to anticipate the frequency and severity of potential claims.
Not to mention, the property and auto markets are increasing premiums, and fewer carriers are writing these lines for standard businesses; it’s only amplified within the cannabis and hemp industries.
To give you a contrast between what’s normal for insurance, take a cannabis manufacturer versus a widget manufacturer.
The widget manufacturer will have 15 to 30 carriers they can go to quote their business.
For the cannabis manufacturer, if you’re talking liability coverage, they may have only four to six.
It’s a lot more limiting in terms of potential carrier options, and even more so when you want to place coverage that doesn’t contain detrimental exclusionary language.
Many cannabis and hemp carriers have very limited policy forms, so it’s up to the broker to identify the right carrier.
How More Companies Can Get Insurance
What needs to happen to make it easier for hemp, CBD, and cannabis companies to get insurance?
From a compliance standpoint, legal cannabis and hemp operators need to make sure they’re doing their due diligence.
Carriers want to see that businesses are actively mitigating risk by implementing safety programs such as injury/illness prevention plans, vehicle loading/unloading procedures, driver selection programs, interior and exterior cameras, active alarm systems, fire sprinklers, etc.
Not to mention, if CBD and cannabis businesses are raising capital, they should also be formalizing cap tables, investor agreements, while placing the necessary coverage to make investors comfortable with investing in their companies.
We’re no longer in an era where handshake agreements will suffice.
Brokers have more leverage in negotiating with underwriters if we can make the case that CBD and cannabis businesses care about their risk management.
The Effect of the 2018 Farm Bill on Insurance
Since the 2018 Farm Bill has passed, what effects and differences have you seen on insurance for CBD and hemp?
In terms of market and carrier availability, we started to see additional carriers entering the market, but for the most part, it’s been pretty slow.
It’s really tough to say how quickly we’ll see more mainstream carriers coming into the hemp fold and the CBD marketplace.
There’s only one carrier doing hail insurance and zero carriers writing Federal Crop Insurance in 2019.
The division of the USDA that runs Crop Insurance didn’t have enough time to put out provisions and guidelines with a December change for the 2019 Crop Year.
Consequently, it left the marketplace flat-footed and under-resourced to make programmatic decisions.
Furthermore, it’s highly unlikely there will be enough data to put an effective program in place by spring 2020 when Crop Insurance decisions would have to be made.
There are a few private product crop coverage options for hemp farmers; however, some of them have a significant price point, which can make coverage cost-prohibitive for them.
A farm’s liability and property insurance are likely to be affected when adding industrialized hemp to their crop rotation.
Our carrier partners tell us they are fine when farm operations have hemp as a secondary crop in their rotation, but once it becomes the dominant field crop, they are no longer comfortable with the unknown risks.
It’s part of the attractive nuisance exposures we’re told.
It’s important to discuss all of the above with your insurance broker before planting.
USDA Regulations May Change Insurance Landscape
Is this space waiting on the USDA to issue regulations?
And after they’re implemented, do you think we will see a pickup in banking, insurance, and things like that?
I think a lot of farmers are waiting for that to come.
But from our understanding, even though the Farm Bill passed in 2018, that doesn’t necessarily mean that these regulations are going to be implemented in the near future.
It may take up to a year or two to see those regulations coming into place.
However, I have heard some anecdotal stories of hemp farmers being able to get bank accounts at standard, household name institutions, which is awesome.
On the cannabis side, there are a handful of credit unions and smaller banks that are willing to take on specific cannabis clients if they’re well-capitalized and their enterprise value is at a certain amount.
But from an insurance standpoint, it’s slow-moving to get to where we’ll see State Farm starting to write cannabis and hemp coverage.
Banking and Insurance in the Cannabis Industry
We’re watching the SAFE Banking Act begin to gain traction in Congress, which would protect banks from any federal prosecution for working with cannabis-related businesses although cannabis is still federally illegal.
What is the situation like for cannabis businesses right now?
With cannabis businesses, many of them don’t have formalized banking.
Larger cannabis operators can access the limited banking options available, but many times at high interest rates, making it cost-prohibitive for many.
Because of this issue, cannabis is one of the last industries that are cash-based, creating a significant exposure from a crime standpoint.
A lot of these operators are leaving themselves exposed by having that much cash.
It’s my recommendation that if they have that much cash on hand that they are insuring for it and making sure that the cash is well-secured and protected.
They need to be storing it in an approved safe or vault, while also making sure they’re limiting the employees who have direct access.
From an insurer’s standpoint, they want to make sure that the operators are doing their due diligence to protect the assets that the carriers are going to be insuring.
Not being thoughtful about managing risk is also one of the factors that can lead to increased premiums and claims.
Carriers are still getting comfortable with certain risks, so not only are they more apprehensive and have more underwriting criteria, but they also have a higher price tag.
The Cost of Insurance
After doing a little research, we’ve seen some minimum premiums as high as $10,000.
Is that what operators can expect to pay?
It’s all dependent on the line of coverage, anticipated revenue of the business, payroll, amongst other factors.
There are cost-effective options out there, and the coverage can be strong depending on where you go.
For the most part, especially for large operators, the insurance costs are high.
How Hemp and Cannabis Companies Can Get the Best Coverage
What should hemp and CBD companies look for when they’re seeking coverage?
Number one, they need to make sure they’re working with a broker that specializes in and knows the industry well.
When businesses are looking at an insurance policy, they should ensure there are no detrimental exclusions or warranties, anything that may limit or void coverage.
No policy is perfect, but you want to find one that is as close as you can get.
Further, businesses need to be transparent with the carrier as to their operations.
I’ve run into cases before where a cannabis operator may be hesitant to divulge that they’re a cannabis business.
If you, as a cannabis or hemp business, are not disclosing to the carrier the full scope of the risk they’re insuring, this can lead to carriers not only declining potential claims but also non-renewing policies.
HUB International and Hemp, Cannabis Insurance
Tell us about HUB International, what you have to offer, and how you operate.
HUB International is one of the largest insurance brokerages in the world with cannabis and hemp being a large focus of ours.
Our practice has teams in both the US and Canada.
From our perspective, we’re one of the only brokers in North America capable of handling a sizeable cross-border operation with one service team.
Unlike our competition, who would break a cross-border deal into two parts by assigning two separate teams, we build one team and can present the whole deal in a unified way.
This is a highly-valuable capability for HUB and our team of cannabis experts and is a differentiator in the marketplace.
What’s great about HUB is we’ve developed proprietary insurance programs for the hemp and cannabis industries, allowing us to offer our clients something unique.
As I mentioned, not a lot of carriers will write cannabis or hemp businesses, so being able to offer proprietary programs really speaks to the resources we’ve invested in the industry and the offerings we can provide to our clients.
I think if you’re dealing with a broker that doesn’t have the bandwidth to spend as much time in cannabis and hemp, they can’t provide the guidance you need.
Common Insurance Claims in the Industry
Regarding claims, what are some of the issues you’ve seen hemp and cannabis companies run into?
Fortunately, I haven’t seen a ton of claims, and that’s good.
I’ve heard anecdotes of attorneys filing class-action suits against dispensaries and brands for not displaying the Prop 65 warning properly.
But one big area where claims are starting to arise is with improperly ventilated growers.
For example, if you have indoor cultivation, you need to properly ventilate the rooms.
If you don’t, the THC residue that comes from the cannabis flower will stick to the walls, glow lights, and everything else, making them highly flammable.
So, if there’s a spark, maybe from someone tripping on a cord or an electrical surge, that could set the room off.
In terms of product liability, such as a consumer having an adverse reaction to products, there are a handful of landmark cases.
One place we’ve seen some claims is with vape pens.
It’s kind of similar to the Samsung phones that had the battery issues.
If a manufacturer is procuring their vape pen components outside the US, these components may not be made to the same standards.
There have been some instances of vape pens exploding, both on the CBD and cannabis side.
We’ve seen this result in damaging consumers’ faces and hands.
Fortunately, overall, it’s been pretty clean.
Thank you for all this information, Aaron, we really appreciate it.
Thank you, I appreciate the time. It was definitely fun.