Risk Assessment for Cannabis Entrepreneurs: What Insurance Underwriters Want You to Know

by | Nov 21, 2023 | Cannabis Regulations | 0 comments

The bustling cannabis industry is attracting new entrepreneurs every day. As with any new venture, cannabis startups and small-business owners conduct risk assessments but may overlook crucial areas that directly affect cannabis licensees and operators.
Many of you know that running a successful cannabis business is more challenging than it appears. We know from first-hand experience that deciding which insurance coverage is nice-to-have, versus which is must-have coverage, can be confusing. It’s our job to advise clients and help them decide which insurance coverage is right for their specific operations. So, here’s our best advice to help you mitigate your cannabis operation risk according to industry standards.

What Should You Keep an Eye Out For?

The main threats to your cannabis business are twofold: 1) the areas of risk you’re unaware of, and 2) areas of risk that you disregard, believing that they won’t negatively affect your business. 

Here are five expert tips for risk management in your cannabis business:

Pay Strict Attention to Legal Compliance

If you are an entrepreneur in the cannabis industry, you’re likely familiar with the complexities of the rules and regulations that apply to your facility or facilities. The disconnect between cannabis being federally illegal, but legal in some form in most US states still causes confusion. Many operators who understand state and local regulations are unsure about which or whether any federal rules and regulations apply to their businesses. And then there are the cannabis operators who truly do not understand all of the state and local rules and regulations with which they must comply.
While you can get cannabis insurance to save yourself from business and industry risks, your insurance can’t protect you from federal or state repercussions. So, your priority must be to understand all of the laws and regulations set by your relevant state and local governing bodies.
Legal compliance with regulatory authorities saves time, effort, money, and most importantly, your hard-earned cannabis license.

Meet the State’s Business Insurance Requirements

The insurance needs of cannabis businesses slightly differ from other industries, but like all businesses, cannabis operations must comply with regulatory insurance requirements.

Government bodies most commonly require General Liability, (Commercial) Automobile Insurance, and Workers’ Compensation Insurance. They also specify each policy’s criteria and minimum coverage limits, which you can find on state websites. These insurance policies cover most of your business’s risks, but not all. 

Cutting corners is a dangerous decision when you’re in the cannabis industry. The smart move is to consult with your broker and protect your business from all angles.

Product Liability Cases Can Break Your Business

The most common lawsuits for cannabis businesses deal with product liability, but that’s no surprise. The most expensive and damaging recent cases were related to product-based problems. Whether it was a reaction or a mistake in production, it cost the responsible company a regrettable amount of money. The time to reconsider your SOPs and audit your operations to ensure safety and compliance – and to consider a product liability policy – is before your company is hit with an expensive lawsuit.

In such circumstances, the litigations are expensive, and fines and damages are tremendous. So, depending on the nature of your business, a product liability policy should be at the top of your list.

Secure a Reliable Supply Chain

One major limitation in the US cannabis industry is that there’s no interstate commerce. If a state over-produces or under-produces cannabis and cannabis products, the operators in that state are on their own to find an in-state solution.

As a product retailer, you’re at the end of the supply chain and dependent on the organizations before you to produce and deliver standardized and safe cannabis products in a timely manner. Engage with multiple reliable and experienced supply chain partners to minimize the inventory shortage risk. Watch that inventory levels don’t get too low; aim to keep a backstock of on-hand inventory in case of an unexpected shortage. Regarding excess stock, however, there’s a time limit for how long you can keep it so this strategy is always a balancing act. 

Theft Is More Common Than You Think

One high-risk factor with cannabis businesses is that you deal with high-value goods and registers full of cash. The challenges of banking and financing a cannabis business plays a significant role in how you choose to safeguard your business. 

Theft can happen by someone breaking into your store, meddling with your product in transit, or stealing cash and products right under your nose. To protect against the repercussions of theft, your insurance should have more than basic liability coverage. 

Commercial crime liability and commercial property insurance are integral to the safety of your cannabis business. The former helps you with any crime-related setbacks or business interruptions, and the latter protects your establishment, which is a high-risk target for crime.

The Bottom Line

The cannabis industry is slowly moving towards stable ground, but that doesn’t mean you can be complacent. Use the insider-based insight provided in this post to improve your risk mitigation and insurance decision-making and to get or stay ahead of the curve.

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