Cannabis insurance Q&A with Michael Sampson | #cybersecurity | #conferences

Michael Sampson is a partner with Leech Tishman and co-leads the firm’s Cannabis Industry Group. Based in Pittsburgh, Sampson represents clients in a variety of civil and commercial litigation and other matters across the country. He recently spoke with Tom Wanamaker for New York Cannabis Insider about the cannabis insurance marketplace. This interview has been lightly edited for clarity.

What’s your advice to the new cannabis entrepreneur looking for commercial insurance coverage for their business?

Any business in the cannabis industry, like any business in any other industry, needs to make sure that they have the right types and right amounts of insurance.

If you’re manufacturing or processing a product, you may need product liability insurance. If you own property, you may need property insurance. If your business relies on computers and the internet and stores personally identifiable information, you may need to consider cyber liability insurance.

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For almost any cannabis-related business there is, generally speaking, a standard set of coverages that one is going to want to get. Not surprisingly, these coverages are not much different than any business. Like any business, you want to make sure that you’re accounting for all operational risks and potential exposures, and making sure that you’ve obtained insurance coverage and insurance policies that will respond in the event of one of those exposures coming to fruition.

The key is to understand what your policy covers and what it doesn’t cover because we’re seeing still a lot of policies with troubling exclusions. I understand that insurance is not sexy or fun – but it is really important, especially in this industry – business owners and operators really need to take the time to make sure they’ve identified their needs and to make sure they’re getting coverage that fits those needs.

What if a business owner expands into a new line of business?

Make sure you are covered for what you’re doing. A really good example is delivery service. If all of a sudden you’re in a state that is allowing delivery where it wasn’t before, or you’ve moved into delivery as a business when you weren’t doing it before, you can’t just assume that the insurance you had in place will continue to apply. Now you’re in your car and you’re driving cannabis to different places and [there may be] regulations applied to delivery vehicles requiring GPS in the vehicles, certain storage requirements in the vehicles, and the like.

So you need to be aware of those security requirements, as well as what insurance will and will not apply, as you move into new lines of business or new operations.

Does a cannabis business really need to insure itself against theft?

A crime policy is very important for cannabis-related businesses to cover theft in particular. A crime policy will often include subjectivities or conditions such as a safe of certain type, rating or size, or certain ingress and egress controls.

Additional safety measures may be a necessary precondition to having a crime policy; failure to maintain these safeguards can give an insurance company a basis to deny coverage.

To be clear, insurance is only one facet of how a business can mitigate risk. And especially when it comes to security you don’t want to rely just on insurance. You want to make sure that you have ingress and egress control, you want to make sure you have good lighting, you want to make sure you have video surveillance, you want to make sure you have storage in separate rooms with certain types of locks, doors, and/or glass. You want to make sure you have strong policies and procedures and that you educate your employees on them and what to do in the event of an adverse event. In many states these types of security precautions are required by state regulation.

What are some other ways by which a cannabis business owner might mitigate risk?

Risk mitigation takes all shapes, forms and sizes. Obviously, insurance [coverage] is a huge component of risk management and risk mitigation. Physical safety is also a huge component of risk management. Along with physical safety and security, I would add data privacy and security, and cyber security.

In 2022 cyber security is an absolute must when it comes to any risk mitigation protocol or practice, whether in the cannabis industry or otherwise.

Related: Cannabis businesses can’t afford to ignore cybersecurity – Guest column

There are other ways for a business to mitigate risk, in particular, contractual risk transfer. Every time a cannabis-related business enters into a contract with another entity, there is an opportunity to transfer or mitigate risk. There are various contractual provisions to do that, including indemnification provisions, waivers, releases, insurance provisions.

“What we often seek when representing a business is to include requirements in the contract that the counterparty have certain insurance in place and name the business as an insured or loss-payee on that counterparty’s insurance, such that the business now has the ability to access the counterparty’s insurance and not have to rely its own in the event of loss or claim.

There are many different provisions, including representations and warranties, that can be used in a commercial contract – sales contracts, service agreements, leases – that effectively limit or mitigate or reduce risk. All of these things – contractual risk transfer provisions, insurance, physical property safety, cyber security and many other considerations have to go into any cannabis-related business’ risk mitigation strategy or approach.

What is D&O insurance? Is it necessary?

Directors and Officers insurance is a very standard insurance that companies of all shapes and sizes, across all industries, have. It will generally provide different coverages for the individual directors and officers as well as the company itself, either if it has to indemnify its directors and officers or if it has individual entity exposure.

For larger operators looking to attract prominent individuals to their boards, those individuals are going to expect that the companies have D&O insurance because if the company is sued or those individuals are sued for actions they took in the capacity as directors and officers, they want to make sure they are covered.

The D&O market in the cannabis industry is terrible. It’s probably one of the most difficult markets to navigate because there are few insurers who are willing to write D&O coverage for the cannabis market and fewer still that write meaningful coverage for the cannabis industry. But it’s one that can be important as you’re trying to attract talent.


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