Marijuana Insurance -- The Next Frontier

NEW YORK (MainStreet) — Businesses involved in the marijuana market are facing few options when it comes to insuring their livelihood.

Premiums are higher for dispensaries and other cannabis businesses compared to other more traditional companies because of a lack of competition or alternatives, said Derek Peterson, CEO of Terra Tech (TRTC), a public company based in Irvine, Calif. which manufactures agricultural equipment.

Companies that do not touch the marijuana plant and operate on the periphery can buy insurance from traditional companies. Companies like Terra Tech, which manufactures equipment used in cannabis cultivation, can purchase umbrella policies and product liability coverage from traditional insurers such as Proven Insurance, he said.

If the company deals with the plant itself either in cultivation or retail dispensing, then the companies have to seek insurance coverage from specialty insurers who are willing to take on the additional risk.

Businesses need to ensure they are protecting themselves against liability and should insure themselves for the maximum amount of coverage available, especially for instances of general liability, employee theft, government action, medical malpractice and crop coverage, said Anne Myers, a partner at Kaufman Dolowich & Voluck, a law firm based in Blue Bell, Penn.

"Businesses and professionals should have as much insurance as they can afford to purchase," she said. "At this point with the industry newly up and running, a business owner can't be too cautious about protecting themselves from liability."

Specialty insurers like Lloyd's of London offers minimum coverage of $300,000 with a maximum of $2 million, but businesses can get an excess policy which provides coverage of up to $10 million.

"Legalized marijuana promises to be a good business opportunity for many segments of commerce," she said. "The insurance business is gearing up to provide as much insurance as these entities need. Most businesses probably do not have enough coverage. At this point, I don't think you can be over insured."

Owners should also discuss with an attorney how they should insulate their business from liability, such as forming the company as a corporation or a LLC, Myers said.

"As time goes on, it is only the sophisticated businessmen who will succeed in this sector since their business savvy will be necessary in order to negotiate these uncharted waters," she said.

Since insurance is regulated by each state, regional insurers would be the first ones to offer more mainstream insurance, Peterson said.

"It is really hard to tell when the federal government decides to formally change the laws," he said. "I think we will see smaller boutiques that see the value in the industry and begin to offer a broader range of coverage before we see large scale retailers."

Many legal marijuana businesses are obtaining the necessary insurance coverage that they need to protect against risks and mitigate their potential exposures, said Robert DiUbaldo, an insurance coverage partner in the New York office of Edwards Wildman Palmer.

The hesitation by the standard insurance market to insure these risks comes in part from a lack of experience, he said. A transition may occur as the legalization of marijuana gains traction and more information about these risks becomes available.

"Many of the brokers and producers who place this type of coverage are legitimate, knowledgeable and provide a service to these businesses," DiUbaldo said. "Going forward, it is likely that the insurance market will grow to the extent that other states follow the legalization path."

Insurers also offer coverage for any raids from law enforcement that may occur, said Elizabeth Sullivan, a vice president at E.G. Bowman Company, an insurance brokerage in New York City.

"If the business is later deemed legitimate, the owner will receive a payout for the raid coverage," she said. "I would recommend the typical coverage. Raid coverage would be a good safe haven in some states. It is important their assets and liability is protected just like any business."

—Written by Ellen Chang for MainStreet

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