Yes, Washington, You Really Need Cannabis Business Insurance
In a prior post I discussed some general insurance issues for cannabis business owners to consider. Today we’ll take a deep dive into Washington State insurance for cannabis businesses. As is the case with most emerging industries, the pace of marijuana business continues to outstrip the development of ancillary but crucial services (see California Approves First Commercial Cannabis Landlord Insurance Coverage from only a year ago). Insurance is an important component for companies that have significant risks and either cannot afford to self-insure or are not permitted to self-insure.
For those who enjoy a bit of historical grounding, the first business insurance policies in the U.S. were written during the Industrial Revolution (which started in the early- to mid-1800s). Insurance was initially state-specific and remained so for the next hundred years. After the U.S. Supreme Court ruled in 1944 that insurance should be a federal affair, Congress quickly returned control to the individual states in 1945 though the McCarran-Ferguson Act, and states continue to regulate insurance within their boundaries today.
Washington has been on the forefront of marijuana legalization among the states, in 1999 becoming the 4th state to legalize medical marijuana, and in 2012 becoming the 2nd state to legalize recreational marijuana. Washington’s primary legislation mandating insurance for the cannabis industry was implemented in 2013. There have been several iterations and refinements to those requirements since 2013. The insurance required today looks like this (click here for the entire statute):
- Marijuana licensees must obtain insurance coverage. “Licensees” refers to all cannabis retail stores, producers, and processors. This specific insurance legislation does not discuss ancillary businesses like landlords who rent to cannabis businesses or other companies who provide services to the cannabis industry, though those business owners should consider insurance specific to their particular business risks. Landlords with a mortgage will often be required to procure insurance for their real estate by their bank.
- The type of required insurance is called commercial general liability coverage or umbrella coverage. This insurance covers both bodily injury and property damage “caused by any act, omission, or negligence of the licensee or its officers, agents, representatives, assigns, or servants.” In plain speak, this means that the business and its affiliated people are covered for any harm caused to any person or property. That is the broadest interpretation of the perfect insurance world (that does not exist). In reality those insurance policies are full of holes (insurance riders) where the insurance company can and will deny coverage to the company. Do not take what is on the front page of the policy at face value. Someone with an extreme attention to detail and fortitude for digesting and processing lengthy mind-numbing sentences written in justified, 8-point text for dozens of pages on end (basically every lawyer’s job description) will need to read the policy to understand what events and circumstances are covered by the policy.
- Your coverage limits must be at least one million dollars ($1,000,000). Often insurance coverage is described as $X per occurrence and $Y in aggregate. X refers to the amount of coverage the insurance company will provide based on a single claim, and Y refers to the coverage for the policy in aggregate over the policy term, usually a 12-month period. Washington requires Y to be at least $1,000,000. The higher the coverage, the higher your premiums. If your policy contains a deductible, that is the amount you must pay toward making your business whole after a loss (a “covered event”) before the insurance company will start paying its portion of the loss.
- Marijuana licensees must provide evidence (a certificate of insurance) to the WSLCB. The Washington State Liquor and Cannabis Board – sometimes just called the LCB – requires proof of insurance coverage. Cannabis businesses risk having their license revoked if they do not provide this proof of coverage.
- The certificate of insurance must show WA, its employees, agents, and volunteers as additional insured. “Additional insured” is a term of art in the insurance industry, and if you tell your insurance agent that you need to add some additional insureds to your policy, that is a relatively straightforward and quick process. You should not need to give your insurer any additional information beyond the basic names and notice addresses for your additional insureds. The policy also needs to be primary over any other valid insurance policies. This is so that WA can be in charge of any future payouts and will not have to wrestle with more than one insurance company, potentially under a policy under which the state is not listed as an additional insured.
- The insurance carrier has to be authorized to do business in WA and have a rating of A – Class VII (that’s a 7) or better in the most recently published edition of Best’s Reports (AM Best’s Insurance Reports). If you really want to use a specific insurance company that does not fit that criteria, there are additional criteria the insurance company can fit into (see 15RCW and 284-15 WAC), but it should be the insurance company’s job to tell you whether they fit the criteria. Do not try to conduct that analysis yourself.
Those are the bare insurance requirements for your Washington marijuana business. However, I need to provide a caveat to help you understand that the bare legal requirements are probably not enough to cover your business interests. The stated purpose of your required insurance (from the Washington Insurance Commissioner’s and the legislature’s point of view) is not to protect your business per se but to protect consumers from your business and to ensure you remain solvent enough to pay your liabilities if you fail to do something (omissions) you should have done or you do something you should not have done (commissions). There are many other types of insurance available (e.g. D&O insurance, employment practices insurance, worker’s compensation insurance, products completed liability insurance) that you should consider, but they are topics for another day.
Procuring and maintaining insurance is something that most business owners want to delegate to someone else, and they can, as long as that other person understands the importance of securing and keeping the policy in place without letting it lapse. If you already have insurance, you may want your attorney or trusted right-hand person to prepare a summary matrix of your coverage so you can see at a glance where you are covered and where you may have gaps you need to fill. This should be done at least yearly and well in advance of your annual insurance renewal.