Tag Archives: liabilities

A Guide to Dispensary Insurance

By Itali Heide
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As a business owner, insurance is always a must. If you are interested in entering into the cannabis industry or you already have, it’s important to know what to expect when it comes to insuring your cannabis-related business.

That’s why we’ll be exploring what dispensary insurance is, different options for business owners and general advice regarding dispensary and other CRB insurance.

What is Dispensary Insurance?

Insurance for cannabis-related businesses refers to policies that protect the business against risk. This can include dispensaries, cultivation centers and testing labs – all of which require different levels of coverage and liability.

We spoke to Alexander Marenco, an insurance broker from Marenco Insurance, who explained what dispensary owners should know before seeking out insurance. Marenco says it’s similar to shopping for insurance for other businesess. “You need to have full details of the business and location to receive a quote.” He adds. “The applications will ask questions such as location, renovations, or improvements to the location, ownership information, payroll details, and sales or projected annual sales.”

How is Dispensary Insurance Different From Other Forms of Business Insurance?

Because non-hemp-derived cannabis is still considered a schedule one controlled substance under the Controlled Substance Act, cannabis insurance can be more expensive than regular insurance for non-cannabis businesses. Because of the risks associated with being considered a potential retailer of a controlled substance, liability policies and other options can cost a pretty penny.

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The cash-only nature of the business makes insuring dispensaries more costly

Additionally, when asking Marenco about how dispensary insurance differs from other brick-and-mortar retail insurance, he says: “With more states increasingly legalizing medicinal and recreational marijuana, insurance carriers have started to open risk acceptability. However, since marijuana is still federally illegal, businesses will find it difficult to find multiple quotes from different carriers.”

Types of Insurance Available for Cannabis-Related Businesses

What kind of insurance is available for cannabis-related businesses? Let’s find out.

First off, it’s important to keep in mind that CRBs are at risk for a lot of things: workplace accidents, damage to property, theft, general liability and product liability. Plus, the fact that most dispensaries work on a cash-only business model until the Secure and Fair Enforcement (SAFE) Banking Act is approved by Congress, CRBs tend to handle big amounts of cash, further putting them at risk of theft and liability. CRB insurance can be as low as $350 and as high as $7,500 depending on the type of business and policy.

Here are some of the most common types of insurance for CRBs and what they cover:

  • General liability: third-party claims for bodily injury, property damage and reputational harm.
  • Commercial property: damage to a business-owned property.
  • Professional liability: third-party accusations of negligence and mistakes.
  • Workers’ compensation: employees’ medical bills and lost wages due to injury or illness.
  • Inland marine: damage or theft of business-owned property in transit.
  • Crop: costs from damage to seeds and plants.

With so many things to watch out for, insurance for cannabis businesses and dispensaries isn’t cheap. Here, Marenco says what CRB owners can do to keep their premiums as low as possible:

A smart safe like this one can help secure cash handling

“Premiums are primarily based on sales (actual or projected). After the term expires, the insurance carrier will conduct an audit for the prior term to confirm the information from the application. The audited discrepancy will adjust the next term’s sales figures. Dispensary insurance will typically be placed through an excess & surplus market which do not provide traditional discounts.”

So, in essence, the best thing a dispensary owner can do is be honest about their projections.

Navigating premiums can be a detailed process, as we learned when speaking to Jesse Giffith, an owner of Smokeless CBD and Vape: a chain of retail shops across the twin cities Minneapolis–Saint Paul, Minnesota:

“Our shops carry insurance that has been offered with a modified rate for vape retailers. This route was not as straightforward as some traditional retail insurance options, but may offer benefits, and a better fit for coverage than other dispensary insurance options.”

A Growing Number of Dispensaries Across America

With the growing legalization and normalization of adult use, medical and hemp-derived cannabis across the nation, it should come as no surprise that the number of dispensaries across the country grows exponentially.

In 2021, the cannabis market in the U.S. was valued at 10.8 billion dollars, with an expected annual growth of 14.9% annually. This is a sign of what’s to come. Cannabis may be an industry that’s been considered taboo for decades, but the growth shows the growing acceptance of the plant for medical and adult use reasons.

Insurance providers remain cautious as cannabis laws are still in flux.

With that growth comes a greater need for insurance providers, opening the door to the possibility that these two industries will grow in tandem. The future may bring a greater variety of options for coverage at cheaper prices. But for the time being, insurance providers remain cautious as the fate of federal and local cannabis laws are still in flux.

Are There Limited Carriers that Issue Dispensary Insurance?

Every CRB needs insurance, just like any other type of establishment, business or company. The issue within the cannabis industry is that there is still a limited insurance market, with insurers willing to provide insurance constantly exiting and entering the market. Plus, the overall capacity and variety of policies that cover different types of risks are limited. Lastly, it can be difficult to use CRB insurance when you read between the lines of the policy. Because cannabis with THC is still federally illegal (excluding hemp-derived cannabis products containing less than 0.3% THC), insurers can negate coverage when a loss or claim occurs.

Because of the complications that may arise even if you do have insurance, Marenco offers some advice for dispensary owners that are searching for the right insurance option for them: “Before shopping for insurance make sure you have all your licenses and are in full compliance with all regulations. Insurance carrier’s requirements from the state. Additionally, consider different coverage options.” He continues. “At a minimum, a business needs general liability insurance. Insurance companies can also consider covering business property including inventory, betterments, and improvements to a rented space, among others. When shopping for insurance make sure your agent reviews different coverage options.”

Financing the Cannabis Industry Part 3: A Q&A with Matt Hawkins, Founder of Entourage Effect Capital

By Aaron Green
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Businesses often require outside capital to finance operating activities and to enable scaling and growth. Financing in the cannabis industry is notoriously challenging with regulatory obstacles at the local, state and federal levels. Recent market dynamics pose additional challenges for both financiers and cannabis operators.

We sat down with Matt Hawkins, Founder and Managing Partner of Entourage Effect Capital (EEC) to learn more about EEC and to get his perspective on recent market trends.

Aaron Green: In a nutshell, what is your investment/lending philosophy?

Matt Hawkins, Founder & Managing Partner at Entourage Effect Capital

Matt Hawkins: Entourage Effect Capital’s long history and experienced leadership allow us to access and construct high potential later-stage growth investments with sought-after industry leaders. We want to get ahead of what is happening on the regulatory and federal level to build scale with our investments.

Green: What types of companies are you primarily financing? What qualities do you look for in a cannabis industry operator or operating group?

Hawkins: Essentially, we are focused on investing in companies that will benefit the most when legalization occurs. We are currently working on multiple such deals, and separately, we are excited by how our newly minted, early-stage focused Arcview Ventures Seed Fund will provide a pipeline to the next generation of leading growth opportunities. When evaluating opportunities, we always look for the potential for scale and a strong management team.

Green: Capital market dynamics have led to significant public cannabis company revaluations in 2022. How has this affected your business?

Hawkins: As an industry, we all want companies to be valued for what they are worth, and right now, there are a lot of companies where that’s not the case due to the downturn in valuation. For us, it works the other way, because we are now able to invest at lower valuations with the hope of more upside when valuations reset.

Green: Debt on cannabis companies balance sheets have increased significantly in recent years. What is your perspective on that?

Hawkins: Debt is at its highest in industry. Operators don’t want to take equity capital at this point because valuations have come way down. However, we are lucky to have been in this business for a long time so that we can create our own deals. Our reputation precedes us — as a result, combined with the strength of our portfolio, people want us in their capital stack.

Green: How does the lack of institutional investor participation in the cannabis industry affect your business?

Hawkins: The lack of institutional capital in the industry makes it difficult for a large chunk of companies to grow and scale. For the industry to grow, there needs to be a different type of investor, investors who are not scared to go through the peaks and valleys we go through as an industry, whereas retail investors take their losses and move on. Everybody’s competing for the same small pool of money; managing cash is the most important factor for operators, whether private or public, big or small.

Green: What would you like to see in either state or federal legalization?

Hawkins: The illicit market still has a strong presence, and until we get regulatory reform, it’s going to continue. Reducing the tax burden on legalized markets would bring more revenue to both operators and the government because they’d reduce the market share of the illicit market, with the price offset trickling down to the retail customer.

Passing the SAFE Banking Act would create consequential changes for the cannabis industry. There is also a small chance that the New York Stock Exchange and the Nasdaq could start listing legal plant-touching businesses. If that happens, more institutional capital would enter the market and flush the industry with cash, with market caps going way up. There is a lot of unease and uncertainty with retail investors that prop up the stocks in the space, and it will continue until there is regulatory movement, even on the private side.

Green: What trends are you following closely as we head towards the end of 2022?

Hawkins: I don’t see anything happening unless the SAFE Banking Act passes. Otherwise, things are status quo, especially with public companies. For private companies, we’re going to see a lot more consolidation, especially in California.

Cannabis Receiverships: A Viable Alternative to Bankruptcy

By Oren Bitan
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Doing business in California’s legal cannabis industry remains a risky endeavor. The majority of the industry is still unlicensed, tax rates at the state and local levels are high (notwithstanding a recent reprieve from California’s cultivation tax) and there are not enough licenses to meet geographic demand throughout the state. Outside financing remains difficult to secure for equipment, tenant improvements, account receivables and working capital because, under the federal Controlled Substances Act (CSA), cannabis remains a Schedule I narcotic. Therefore, entrepreneurs, investors and lenders who have stakes in state-sanctioned cannabis enterprises expect to see returns that justify the higher level of risk, which places additional financial pressure on cannabis businesses. In addition to the industry specific challenges, the United States economy is on the verge of a recession that may further hamper the industry notwithstanding the industry’s resiliency during the pandemic when it was deemed to be an “essential” industry that benefited from consumer spending of stimulus monies.

These outside pressures increasingly lead to ownership disputes and creditor defaults that result in litigation and the need for restructuring. In some instances, business partners cannot agree about control and finances of the licensed businesses and in other instances unpaid creditors file suit to enforce their interest in a company’s assets. And sometimes a local municipality discovers wrongdoing by an operator and initiates a health and safety lawsuit to cease the illegal condition.

Bankruptcy reorganization is an option typically utilized by struggling businesses to shed or restructure debt. Cannabis businesses, however, cannot take advantage of bankruptcy remedies because bankruptcy is a product of federal law and federal law still prohibits the sale of cannabis.

As a result, stakeholders in legal California cannabis enterprises must consider alternatives to bankruptcy to collect what they can on their loans and investments in the event the enterprise becomes insolvent or requires restructuring. A well-established alternative to bankruptcy is a state court remedy – the appointment of a receiver over the assets of a business or over the entire business operations. Through the receivership process, stakeholders may obtain many of the same protections available to them through bankruptcy

A. Federal Illegality Bars Access to Bankruptcy Protection

Over the past ten years, bankruptcy courts have routinely prohibited licensed cannabis businesses from seeking bankruptcy protection because cannabis remains illegal at the federal level under the Controlled Substances Act (CSA). Bankruptcy trustees are typically charged with managing and operating property in the same manner that the owner would be bound to do if in possession thereof. Because cannabis remains illegal at the federal level, trustees are not able to manage and operate licensed cannabis businesses.

B. Receivership as an Alternative to Bankruptcy

Under California law, a receiver is a neutral agent of the court appointed to preserve, control, manage and ultimately dispose of property that is subject to the litigation before the court.1 The receiver, therefore, holds property for the court, not the parties to the litigation.

Appointment of a receiver is a statutory provisional remedy. Other than corporate dissolutions under Code of Civil Procedure section 565, the law does not have a specific cause of action to appoint a receiver. Thus, the proponent of a receiver must have a valid cause of action in an underlying lawsuit.

1. The Appointment of a Receiver

The appointment of a receiver rests within the trial court’s discretion. Code of Civil Procedure section 564 contains the broadest statutory authority to appoint a receiver. Subdivision (b), details twelve possible situations in which a receiver may be appointed, most of which are beyond the scope of this article. The most common of these is a lender’s request to appoint a receiver when a borrower defaults on a loan and the lender seeks the appointment of a receiver over its collateral. The statute, however, clarifies that the situations listed in the statute are not exclusive: a court may appoint a receiver “[i]n all other cases where necessary to preserve the property or rights of any party.”

The receiver’s powers are limited by the statute under which the court appointed the receiver and those conferred by the court. The appointment order should, therefore, detail the duties the receiver owes to the court, and actions that the court authorizes the receiver to take to perform those tasks. The order should also specify the property that will be part of the receivership estate.

2. The Receiver’s Powers

The receiver has general statutory powers.2 The statutory powers include (i) commencing or defending litigation; (ii) taking and possessing property of the receivership estate, (iii) receiving rent, collecting debts, and making transfers, and (iv) acting in accordance with the court’s instruction with respect to the property.3 But the court’s authorization is necessary to sue the receiver and for the receiver to commence litigation.4 In the foregoing scenarios, the receiver is immunized personally from tort liability, but not in his or her official capacity as receiver.5

In addition to taking possession of property, the receiver may dispose of receivership property with the court’s approval.6 If the receiver is an equity receiver, the receiver may take possession and satisfy creditors from all the debtor’s assets.7

The court may further authorize the receiver to issue “certificates of indebtedness” to raise money to administer the receivership estate.8 This device permits the receiver to provide liquidity to the estate and gives the certificate holder an interest-bearing priority claim against the receivership estate.

3. Liquidating Cannabis Assets Through a Court Appointed Receiver

After the court appoints the receiver, the receiver should have sufficient powers to, among other things: (i) take over the management of the company; (ii) open bank accounts; (iii) borrow money by issuing receivership certificates; (iv) manage all of the company’s property; (v) hire counsel and other professionals; and (vi) sell the receivership estate’s assets for the benefit of the creditors. To maximize repayment to the creditors, the receiver may hold an auction to sell the assets and assist in facilitating the cancellation of company’s state license while the buyer of the assets secures its state license after the local license is transferred.

State cannabis licenses may not be sold or transferred.9 Yet, to maximize recovery for the creditors, the receiver may need to participate in the regulatory process to maintain a license during the pendency of the receivership and to assist in the amendment of a license while a prospective buyer seeks to obtain its own license. To do so, the receiver will first need to qualify as a licensee under state law to join as a licensee on the license and further the licensee as a going concern. Next, the principals of the prospective buyer will themselves need to qualify as licensees under the license. Then, once the sale of the company’s assets (including any interest in the license) to the buyer closes, the receiver and the company’s original owners will terminate their capacities as licensees of the license, leaving only the new owners as licensees. Thus, the proposed order should be written with attention to ensure the receiver has powers to further the foregoing and not diminish the value of the receivership estate.

After the conclusion of the sale of all assets, the receiver will need to obtain a discharge from the court of his or her duties as receiver. The receiver may do so by the parties’ stipulation or by motion. Together with the request for a discharge, the receiver should seek approval to pay: (i) any lenders to the receivership estate; (ii) professionals that the receiver hired; and (iii) him or herself for his or her services. Upon the court’s approval, the receivership will be terminated.

The conflict between federal and California law regarding cannabis continues to be an impediment for stakeholders in California’s cannabis market. Because of this conflict, stakeholders in California’s legal cannabis market lack access to vital traditional institutions, such as bankruptcy remedies. As a result, stakeholders must be prepared to consider alternatives such as a court appointed receiver, which can be a useful alternative to both secured creditors and unsecured creditors. Stakeholders who pursue a court appointed receiver will benefit from a long-established body of law and experienced professionals.


References

  1. Cal. Rules of Ct., r. 3.1179(a).
  2. Cal. Civ. Proc. Code §§ 568-570.
  3. Free Gold Mining Co. v. Spiers, 136 Cal. 484, 486 (1902); Steinberg v. Goldstein, 129 Cal. App. 2d 682, 685 (1954).
  4. Vitug v. Griffin, 214 Cal. App. 3d 488, 493 (1989).
  5. Chiesur v. Superior Court, 76 Cal. App. 2d 198, 201 (1946).
  6. Helvey v. U.S. Bldg. & Loan Ass’n, 81 Cal. App. 2d 647, 650 (1947).
  7. Turner v. Superior Court, 72 Cal. App. 3d 804, 812 (1977).
  8. Cal. Civ. Proc. Code § 568.
  9. See e.g., Cal. Code Regs. tit. 16, § 5023(c).

How to Protect Your Business from the Emerging Vaping Crisis

By Tom BeLusko, Kelly McCann
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The year 2020 may become a pivotal year for cannabis operators and service providers, including increased access to financial services, and increased exposure to product liability lawsuits. On a positive note, if enacted, the Secure and Fair Enforcement Banking Act of 2019 (SAFE Banking Act) promises to enable cannabis businesses to gain access to financial services previously unavailable to them, including banking and insurance services. The House of Representatives passed the SAFE Banking Act of 2019 on September 25th, 2019. Skopos Labs, an automated predictive intelligence service, predicts there is a 52% chance of the SAFE Banking Act of 2019 becoming law. A recent discovery that vitamin E acetate is likely the culprit in the vaping-related illness epidemic may increase the exposure to costly litigation that cannabis businesses face.

An uptick in litigation like that currently affecting the vaping industry may soon affect cannabis businesses. More litigation affecting the vaping industry is due in large part to the growing number of lung injuries and deaths linked to vaping. As of November 13th, 2019, the CDC reported 2,172 cases of lung injury, and 42 deaths linked to vaping. The cases of lung injury and death have predictably resulted in an increase in litigation facing the vaping industry. Most of the plaintiffs in these cases allege they became addicted to vaping but at least two lawsuits go further. In one, a Connecticut man alleges that he suffered a massive, debilitating stroke as a result of vaping, while in another the parents of a teenage girl allege in a proposed class action suit that their daughter has suffered seizures linked to vaping. On November 14th, 2019, the CDC identified vitamin E acetate as a chemical of concern among people with vaping use associated lung injury. Vitamin E acetate is an additive commonly used as a cutting agent in vape cartridges. About 86% of individuals who have either vaping-related lung injuries, or died due to vaping had used a product containing THC.

The increase in perceived exposure cannabis businesses face has increased their interest in obtaining insurance, but unfortunately insurers are not always interested in insuring them. There are at least two reasons that getting insurance can be difficult for cannabis businesses: (1) insurance industry appetite for cannabis risk is very low due to its status under federal law and (2) express coverage exclusions or limitations of cannabis exposures from standard-form coverage are becoming more common. However, even if cannabis businesses are able to obtain insurance, their insurance may cover them for far less than they believe.

The product liability coverage (which is increasingly crucial for both growers and manufacturers given the mounting litigation facing the vaping industry) may cover far less than it at first appears. The interplay of exclusions and limited coverages in many cannabis-specific policies may leave a cannabis business uninsured.

It is vital now more than ever to ensure you are properly protected against loss.Crucial for cannabis businesses to appreciate is the distinction between “occurrence” and “claims-made” coverage triggers as it relates to both the premises on which cannabis businesses operate their business, and the products they sell.

Many cannabis businesses have an occurrence-based general liability insurance that might actually exclude: (1) product-liability risks; (2) any tobacco-related risks; and (3) any risk associated with governmental investigation or enforcement. These exclusions oftentimes concern cannabis businesses because there is a high likelihood one of these risks could manifest itself as an uninsured loss. Still, the costs of eliminating these exclusions in an occurrence-based general liability insurance policy is often large, assuming an insurer is willing to eliminate the exclusions on an occurrence basis at all. Therefore, cannabis businesses often pair their general liability insurance policy with a “claims-made” coverage trigger for products liability. Navigating the waters of managing the differences between “occurrence” and “claims-made” forms are best left to a qualified and experienced insurance professional.

Consult a local insurance professional that understands how to help your business become properly protected in what would be considered a tumultuous market for this burgeoning industry.

It is vital now more than ever to ensure you are properly protected against loss. As a first step, you must determine what your current insurance policy does and does not cover. After a loss, it is too late to change policies. Rely upon someone that knows the market of insuring this industry and has deep experience in managing both occurrence and claims-made policies.