By Rae Guyse
Though coverage options have opened up to the hemp industry in recent years, hemp is still considered a high-risk industry with special insurance considerations that those in the hemp industry should be aware of. Whether you are a farmer, processor, manufacturer, or retailer, insurance is an important risk mitigation tool for you to have to in place. This article provides an overview of practical tips for securing the right insurance coverage for your business and includes other risk management issues to assess.
- Work with a knowledgeable broker and shop around when securing insurance – and be sure to secure all required coverage lines needed to protect your business.
A broker with experience securing coverage for hemp and cannabis businesses can help you negotiate the right coverage. However, its important to do your own due diligence as well. Shop various coverage lines with multiple insurers. Not all insurance companies in this space are offering a good product, and some sell insurance coverage with so many exclusions you may be left high and dry should an accident occur. A skilled coverage attorney can also help by reviewing any policy terms you have been offered, breaking down your scope of coverage, and spotting any terms you may want to negotiate to have added for your specific business needs. Often, we see companies that believe they had secured correct coverage, only to find out during an adverse event that the coverage they needed had been whittled away by an exclusion to the policy.
Be sure to do a full business analysis to understand all of the coverage lines you require to be protected in all disaster scenarios. Ensure all buildings, machinery, crop, and lots are covered, but don’t just focus on only the product, equipment, or store front–you will need all the traditional first-party and third-party insurance coverage that every other type of standard business should have. First-party coverage refers to insurance for harms that occur directly to your property or business, such as property and crop insurance, business interruption insurance, intellectual property infringement, data loss, cyber insurance, and crime insurance. Third-party coverage covers liabilities to a third-party you may become responsible for, the most common being commercial general liability insurance. Commercial general liability generally affords protection when people get injured on your property (think “slip and fall” scenarios). Other types of insurance you likely need include commercial automobile insurance, workers’ compensation or employer liability insurance, and product liability insurance.
Should an incident arise, make sure you know which policies are triggered. Sometimes you can find surprise coverage in a policy you would not normally think would be triggered by a certain incident, so it is good practice to give each policy a quick review each time you have a potential claim.
- Be familiar with your lease agreement and any included insurance requirements.
You should read and study your lease agreement cover to cover just like you would do with your insurance policy (and hire counsel to help you through it if resources allow). It is important that the landlord for any space you intend to rent for your hemp business understands the full purpose for which you plan to rent the space, especially any hemp cultivation or manufacturing activities. Your lease agreement governs the terms between the landlord and your business, and many of those terms relate to how risk is allocated between the parties. For example, your lease agreement should identify who is responsible for certain repairs, day to day maintenance of the building, and who owns improvements. It is also common for lease agreements to set forth certain minimum insurance requirements. Failure to adhere to the required insurance terms can put your lease at risk and reduce coverage availability. Make sure the “scope of use” terms of your agreement are broad enough to encompass your business activities. Also, take note of the renewal and termination terms, and whether and how much notice is required. Counsel may be able to help negotiate lease terms in your favor such as pushing the start date of your lease to after the date your business becomes fully operational, solidifying purchase options or the right of first refusal, or reducing certain obligations required of you under the proposed lease.
It is a good idea to have counsel in negotiating the terms of a lease agreement. It is relatively common for key terms to be missed in agreements drafted among parties, which can leave parties without much direction or recourse should something go wrong. It is smart to include terms that commit your landlord to complying with all rules and regulations needed to stay compliant for your businesses’ licensing or premises’ activities. Your landlord is equally likely to want to negotiate terms for legal “outs” for things such as illegal activity, bad grow years, lack of payment, and/or environmental violations. Landlords often also require indemnity from tenants for any liability or civil forfeiture issues.
- Watch out for broadly written exclusions, and see if key endorsements can be added to your coverage.
Insurance policies are written in a complicated and hard to decipher format, where coverage is granted by a relatively broad coverage form, and that same coverage is then slowly stripped away by numerous exclusions and policy endorsements listed in different places throughout the policy. This is why it is important to read closely or work with coverage counsel to determine the scope of coverage your policy truly affords. For example, a broadly drafted “health hazard” exclusion in a product liability policy could remove coverage for the types of third-party injuries you would be seeking coverage for if it voids coverage for “any type” of adverse health effect resulting from the any use of your hemp product. Another one to look out for is language that bars coverage for any delta-8 or other novel cannabinoid product – many carrier forms will define “hemp” based on total THC content, not distinguishing between delta-9 and other variants. Vape-related exclusions are also common.
On the flip side, coverage counsel may also be able to help identify key coverage endorsements you can negotiate to have added to your policy. For example, a retailer selling CBD and delta-8 products would be smart to negotiate an Advertising Injury Endorsement, which protects the business from parties that claim to have been injured by an advertising claim made by the business. Make sure to ask your broker if they consider any form of false advertising claim fraudulent. This is one of those tricky areas where hemp or cannabis businesses often believe they have secured coverage – only to later find out when served with a lawsuit that the insurer will deny coverage. It is also a good idea to have an Intellectual Property Endorsement, which protects against accidental intellectual property infringement, a strict liability claim that can be costly to defend without proper coverage. Depending on the extent of your e-commerce activities, data loss coverage may also be recommended.
- Understand the requirements of your insurance policies in the event you do need to make a claim.
All insurance policies will have specific terms within the policy you need to comply with in the event that you need to submit a claim. When an incident occurs that you think could be covered, don’t wait – most policies require you to provide prompt notice of a claim, and any significant delay could reduce or void coverage. Other terms explicitly require cooperation with the insurer’s investigation of the incident, and they will likely set forth numerous other policy conditions that must be satisfied for insurance to cover the incident. Compliance is also huge when it comes to ensuring you get the coverage you paid for – anywhere your business is out of compliance with federal, state, or local laws or regulations puts you at risk of losing coverage should an insurable event related to your business or product arise. You should also be mindful of what actions explicitly void coverage under your policy. Insurers will often dispute coverage and reserve their right to decline coverage when there is even a small chance that an exclusion may be found to apply to your claim. When communicating with your insurer, be sure to put everything in writing. Be sure to respond fully and promptly to all insurer requests. Also, be aware of privilege issues. Assume any communications with your broker will not be privileged in a later dispute over the claim should one arise, and do not forward any legal communications with your coverage counsel to another third party. In the event your insurer responds to your claim with a denial letter, skilled coverage counsel can review the basis for the denial and often find a legal basis for why coverage should be afforded. Where necessary, coverage counsel can escalate the denial to filing a demand or suit against your insurer.
While risk management is often the last thing a company wants to think about when getting started, it is essential to the long-term success of your business and one of the most important forward-facing steps you should cover from inception. It only takes one claim or lawsuit to put your business at severe financial risk. As the age old saying goes, an ounce of prevention is worth a pound of cure. Making sure you have a comprehensive insurance and risk management plan in place can help keep you protected.
Rae Guyse is an associate attorney with Ritter Spencer PLLC. Rae handles matters for companies in all sectors of the hemp, cannabis, and alternative medicine industries, including manufacturers, distributors, and retailers in matters related to compliance, licensing, insurance, trademarking and litigation. Prior to joining Ritter Spencer, Rae spent over two years as an insurance recovery attorney, helping companies maximize their insurance payout in claims against their insurers. As a skilled coverage attorney, Rae can assist you in reviewing your insurance policy before you sign the dotted line to ensure proper coverage. You can reach Rae at 214-295-5070, or email [email protected] to schedule a consultation with her.
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