Insurance Loss Control Issues for the Cannabis Industry
The International Risk Management Institute defines loss control as a risk management technique that seeks to reduce the possibility that a loss will occur and/or reduce the severity of those that do occur. Loss control is also known safety or risk control. Driver training is an example of a loss control program that seeks to reduce the likelihood of accidents. Sprinkler systems are loss control devices that reduce the severity of loss by fire. Unfortunately, from an insurance perspective, the cannabis industry is not mature enough to identify all of the types of potential losses that a Cannabis Related Business (CRB) might experience.
One could assume that many of the risks in cannabis operations share the same risks as agriculture, food product manufacturing or retail operations. However, there are some nuances that make it very difficult for insurance underwriters to make informed decisions about CRB insurability. Thus, only Surplus or Excess lines insurance companies are willing to provide coverages that most businesses could obtain from a standard insurance company. Thus, CRBs have much higher insurance costs and limited availability.
Unlike most other industries, there are no established standards for the cannabis industry like ANSI or Underwriter Laboratories. However, there are companies who are beginning to develop standards.
One group is FOCUS, a non-profit in Arizona, that has already established the beginnings of cannabis standards. FOCUS (Foundation of Cannabis Unified Standards) is an independent, third-party organization, created to develop cannabis-specific standards to answer unmet needs in the marketplace to protect public health, consumer safety, and safeguard the environment. Through volunteer Standards Development Committee,s they have completed standards in the following areas: Cultivation, Retail/Dispensary, Extraction, Infused Products, Security, Laboratory, Packaging/Labeling and Sustainability.
Their web site states: “FOCUS Standards Development Committees are comprised of leaders in their vocations who bring expertise and diversity to produce the balanced input required to develop accredited international voluntary consensus standards. Each member signs a charter to willingly share their knowledge in the spirit of improving public health and consumer safety, protecting the environment and promoting integrity within the cannabis industry. By volunteering their knowledge and time generously, they instill impartiality, ensure comprehensive content and offer practical guidance.” Focus has applied to have their standards accepted by American National Standards Institute, (ANSI). While initially rejected by ANSI due to the federal laws, FOCUS has continued cannabis-related standards development in accordance with ANSI’s Essential Guidelines for Standards Development Organizations and are in ongoing discussions with ANSI.
Another major stumbling block for wider insurance industry acceptance, is compliance with state and local regulations. Such regulations are complex and change frequently, as state agencies scramble to promulgate new cannabis regulations. There are a few companies who are helping CRBs assess their regulatory compliance. One of those is CannaScore®.
CannaScore® is an easy-to-use, software-as-a-service (SaaS) tool, that helps CRBs conduct automated compliance audits to ensure they operate within state and local regulations. The CannaScore® solutions strive to provide mechanisms for CRBs to prove — on an ongoing basis — that they are in compliance with state and local regulations as well as proving their service-worthiness to banks, law firms, landlords, and the like, via independent audit reports, self-audits, and weighted compliance scoring (like a FICO® score).
So, what can we, as an industry, do to make our businesses more acceptable to the insurance industry? The best answer is to help insurance company risk management personnel adopt cannabis-based compliance assessment tools to determine the insurability of CRBs, just as they do with other industries. Risk management firms like Arthur j. Gallagher & Co use several tools to assess and control loss. Why not introduce the insurance industry to the new cannabis-based compliance assessment tools such as FOCUS and CannaScore® as the basis to evaluate CRBs insurability?
Just as in other industries, there are good and bad CRBs. If the Insurance Industry makes use of these cannabis-based compliance assessment tools to determine what is a good insurance risk, then the good CRBs who manage their businesses in a safe and low risk environment, should receive the same premium discounts and enhanced coverages as other industries receive.