As the cannabis industry continues to expand its understanding of the need for insurance, it is becoming more important for the insurance industry to understand the complexity surrounding the licensing of cannabis companies. Not everything that is a cannabis company needs to be licensed and some cannabis companies that need to be licensed are not. Clear as mud, right? If we, as an industry, do not develop a deeper understanding of these licensing complexities, we may not be providing the proper coverage needed to protect our cannabis industry customers. We may also unknowingly cover entities that are actually cannabis companies.
Due to the illegality of marijuana at a federal level, some of the tax benefits afforded to other industries are not afforded to the cannabis industry. Cannabis companies, recognizing this, have structured their operations to address and alleviate these challenges. The result is that some companies are truly cannabis operations even though they are not licensed entities. A single cannabis operation often will create three separate companies:
- The cannabis company that holds a license from the state, has possession of the marijuana, and transacts marijuana sales.
- A real estate holding company that owns the real estate thus allowing the company to obtain tax benefits of real estate much as a non-cannabis company would.
- A management company, which incurs the expenses related to the cannabis company, thus making those expenses deductible as they are not related to cannabis.
While only the licensed entity is technically a cannabis operation, the other two companies (real estate & management) should also be viewed as cannabis companies. The coverage for those two companies may be in jeopardy should a claim arise and the carrier is unaware of their cannabis affiliation.
The impact of licensing goes beyond the structure cannabis companies have established to obtain tax benefits. “White labeling” operations are common in the cannabis industry. This is when a licensed company manufactures a brand owned by an unlicensed company or a company licensed in another state. A company with a brand of products (edibles, concentrates, or flowers, etc.) that is popular in one state may wish to sell their brand in another state. The manufacturer may run into challenges and find that they either cannot be licensed or it is cost prohibitive to be licensed in another state. This may lead them to contract with a licensed processor in the state in which they wish to expand. With this comes complexity as to who should be licensed and whether or not the relationship is properly designed to meet regulatory requirements. With this business structure, an unlicensed company may need insurance. While unlicensed, they may have a product liability exposure just as they would if they were licensed.
While licensing isn’t always clear, what is clear is that cannabis related exposures are not exclusive to entities requiring a license. It is important that the right coverage is put in place for companies that may not be licensed, but for all intents and purposes, are cannabis companies with similar exposures.
Learn more about cannabis insurance
Learn more about Admiral's cannabis insurance solutions.
Admiral Insurance Group is a leading underwriter of product liability insurance for businesses in the cannabis industry.
If you are a wholesale broker in need of an insurance partner with deep expertise in the cannabis industry, contact us about becoming an appointed broker. If you are a retail insurance broker with clients such as marijuana dispensaries, cannabis product manufacturers or marijuana growers, we encourage you to connect with one of our wholesale partners.
Products and services described above are provided through various surplus lines insurance company subsidiaries of W. R. Berkley Corporation and offered through licensed surplus lines brokers. Not all products and services may be available in all jurisdictions, and the coverage provided by any insurer is subject to the actual terms and conditions of the policies issued. Surplus lines insurance carriers do not generally participate in state guaranty funds and insureds are therefore not protected by such funds.