Members of Wilson Elser’s Cannabis Law practice attended a teleconference led by California Insurance Commissioner Dave Jones with 63 insurance industry stakeholders on May 22, 2017, to discuss insurance requirements set forth in California’s proposed cannabis regulations. Commissioner Jones stated that his goal is to make sure all Californians, including emerging cannabis businesses, have insurance protection. By way of analogy, he compared the challenges of the emerging cannabis insurance market to those confronted by the rideshare and autonomous vehicle industries. “The department has an important role to play as new industries emerge and the market adapts to meet the changing needs of all insurance consumers,” he said.
The current proposed Bureau of Medical Cannabis Regulation (BMCR) insurance provisions state that a licensee “shall … maintain commercial general liability insurance and commercial umbrella insurance for bodily injury and property damage arising out of licensed activities,” with coverage for bodily injury, property damage and personal injury with limits of not less than $1 million. The proposed regulation also states that the licensee “shall maintain the insurance required … from an insurance company authorized to do business in California by the Secretary of State.”
As written, the BMCR regulation causes concern with surplus lines carriers that are currently writing coverage. Following the public comment period, which runs through mid-June 2017, it is expected that the proposed language will be amended substantially. However, Commissioner Jones made clear that the Department of Insurance encourages insurance carriers admitted in the state of California to offer product lines required by the new regulations: “Cannabis businesses need to insure property, crops, vehicles and employees, just like any other business. They have the same insurance needs.”
Product Liability Coverage
One significant concern raised by insurance industry stakeholders is the lack of product liability (PL) coverage required by the proposed regulations. The production, distribution and sale of an ingestible product that has psychoactive effects – accompanied by a wide range of anticipated labeling and marketing representations – will certainly result in robust PL litigation. Product recalls and consumer class actions often follow allegations of poor quality control, contamination or misleading product claims. For example, the number of cannabis-related product recalls mandated by the state of Colorado since September 2015 is significant. Between September 8, 2015, and April 26, 2017, Colorado authorities reported 66 cannabis recalls. A mature cannabis market in California is anticipated to be at least an order of magnitude larger than the market in Colorado. Prop 65 liability also is of significant concern for businesses that will manufacture or sell cannabis products in California.
Insurance carriers should be encouraged by the risk management protocols that the cannabis industry is adopting, including rigorous product testing, advanced “track and trace” programs, and the creation of standards by third-party organizations such as the American Society for Testing and Materials (ASTM). Nevertheless, cannabis businesses will continue to be confronted by substantial PL exposure as the market matures. The experience of the nutraceutical industry provides insight into the intensity of litigation that may be expected to arise out of the nascent cannabis industry.
In this new product environment, standard commercial general liability (CGL) insurance coverage is not adequate to protect a cannabis policyholder. Standard CGL policies contain common exclusions for Schedule 1 substances, banned substances or other substances that constitute a “health hazard,” in addition to pollution exclusions. Any such policy provided to a cannabis licensee would result in illusory coverage. To protect cannabis licensees and the public, numerous industry stakeholders recommend that the state licensing authorities consider mandating either a stand-alone PL insurance policy or a CGL policy with Product Completed Operations coverage. Policy exclusions also must be reviewed carefully to ensure that coverage is in place to protect the end consumer.
Finally, the proposed cannabis regulations also state that cannabis licensees shall obtain a surety bond of no less than $5,000. With up to 100,000 state licenses expected to be issued in California beginning in January 2018 (and additional licenses and possible bond requirements to be issued by local municipalities within the state), a large new bond market will soon exist, bringing a boon for fidelity/surety companies.
In sum, admitted insurance carriers should continue to proceed with caution as they enter the cannabis market, but opportunities are plentiful and carriers appear to have the full support of the California Department of Insurance. This should come as good news to the insurance and cannabis industries.