The cannabis industry has exploded in recent years, driven by legalization in new states and an influx of venture capital investments. The global cannabis industry is expected to reach a staggering $148.9 billion by 2031.
While there are enormous risk factors in the cannabis market, there are ways to manage that risk safely. Cannabis business owners and stakeholders often neglect critical areas of risk mitigation, such as cybersecurity and product liability coverage, which can protect a startup dispensary or other cannabis-related businesses (CRBs) from financial disaster.
This post reviews the core areas of cannabis risk management your business will face as it grows.
The Urgency of Managing Cannabis Risk
The cannabis industry is relatively new to the global market (legally, anyway). Because of this, insurance carriers do not have a standard risk assessment framework as they do with other industries. This fact makes it challenging to determine appropriate levels of coverage.
The banking industry further complicates cannabis risk assessments. Insurance companies lean hard on banks for a variety of services. However, most banks refuse to do business with CBRs because cannabis is still illegal federally. Therefore, CBRs have more difficulty gaining basic protections than other sectors, such as bankruptcy law protections, credit cards, and FDIC-insured bank accounts.
For all these reasons and more, cannabis companies must conduct their own risk analysis and work with seasoned risk management professionals such as insurance agents experienced in the cannabis field.
Learn more: An Introduction to McGowan Wholesale Cannabis Insurance
Cannabis Risk Factors
At McGowan Wholesale, we see eight categories of risk management that impact cannabis companies more than other industries.
1. Theft and crime
State regulations and the lack of banking support force cannabis businesses to lean on cash, making cannabis companies more susceptible to theft and other crimes. Additionally, cannabis zoning laws present a further challenge. Many areas are zoned for only a certain number of dispensaries or CBRs, which forces some businesses into higher-crime districts.
Most thefts at cannabis companies are internal. Employees have access to and knowledge of the inner workings of the business. Large amounts of cash and valuable inventory often prove too great a temptation. But external threats of theft are also a huge problem, with thieves targeting cannabis dispensaries, warehouses, or during transportation. Theft might be inevitable for CBRs, but stakeholders can mitigate the risk through staff training, security staffing and policies, thoughtful store layouts, and proper insurance coverage.
Also read: Workers’ Compensation vs. Workplace Violence Coverage
2. Handling an unexpected bumper harvest
One of the most challenging problems for cultivators is the bumper harvest dilemma. When supply surges or prices drop, cultivators must decide whether to sell everything at a low price and risk losing money or wait for a better offer at the risk of losing the potency of the crop.
Cultivators must invest resources and keep their options open to avoid such surplus issues. These investments include purchasing high-capacity storage units to preserve the crop’s potency. Another option is to sell to other customers besides cannabis consumers. Finding other businesses that manufacture cannabis products and require a steady production chain can benefit all parties.
Having cannabis insurance can also provide crop coverage, which can support cultivators during challenging market conditions.
3. Unprecedented cybersecurity threats
CBRs are at greater risk of cyberattack for several reasons:
- Seed-to-sale compliance regulations in some states require cannabis businesses to track their customers’ sensitive data. Bad actors can target this data for ransomware attacks or try to sell the data off on the dark web. Additionally, using Internet of Things (IoT) devices mandated for tracking plants and products creates potential system vulnerabilities hackers can manipulate.
- Start-up CBRs do not always prioritize cybersecurity. In a poll from MJBiz Daily, 59% of responding cannabis companies said they had not taken steps to prevent cyberattacks.
- So-called “ethical” or activist hackers may target cannabis companies because they disagree with the legalization of cannabis.
- Corporate espionage is also a problem, with proprietary data such as strains, recipes, and cultivation techniques fetching a high price on the black market.
Investing in cybersecurity solutions and basic security hygiene—such as multi-factor authentication and phishing training for employees—can go a long way in preventing cybercrime. Additionally, a cannabis-based cyber liability policy further mitigates the almost inevitable risk of a successful breach.
4. Protection for valuable inventory and property
Cannabis firms are especially vulnerable to fire, vandalism, or natural disasters that cause property damage. Damaged dispensaries, grow facilities, and other CBRs must somehow find a way to repair damage while maintaining standards to protect inventory and reopen as quickly as possible.
Crop loss is another potentially devastating risk area. Policies that insure indoor-grown crops often cover fire, theft, and sprinkler malfunctions. However, cultivators encounter mold, disease, and fertilization mistakes and face the impacts of climate change, which may not be covered in a standard policy.
5. Employee and workplace safety
When running a cannabis company, it is crucial to have a safe setup and adequate equipment to store products and ensure employee safety. It is important to address common problems and have the necessary machinery, tools, and software to conduct tasks legally and safely. Most states have requirements for cash handling, safes, and procedures for safe money transfer and camera coverage. Hiring an experienced and dependable workforce is crucial, but always screen for age and criminal records. Workplace injuries are a significant concern, with risks including musculoskeletal injuries from repetitive motion, exposure to chemicals, and severe injuries from heavy machinery.
6. Product liability
Cannabis products, specifically, have potential health risks such as contamination and adverse reactions. As a result, businesses selling these products may face product liability risks. For example, a cannabis business that sells contaminated products could face legal action and damage to its reputation. Additionally, if a customer experiences adverse side effects from using a cannabis product, the business may encounter product liability claims.
Businesses should consider having a liability policy for products consumed by customers. This policy can help cover damages for allergic reactions, injuries, or other harm.
7. Supply chain risk
The seed-to-sale process for cannabis businesses is quite complex and involves multiple parties, including growers, manufacturers, distributors, and retailers. However, due to federal regulations, cannabis cannot be transported across state lines, which further complicates the supply chain. Any disruptions in this process, such as a crop failure or distribution delay, can pose significant business risks. These disruptions may result in lost revenue and product shortages, harming the overall success of the CBR.
8. Ever-changing compliance regulations
The regulations surrounding the sale of cannabis vary from state to state. However, authorities are stringent in ensuring that cannabis businesses comply with these regulations. The ability of an organization to succeed in the cannabis industry is often determined by how well it adheres to the rules. Failure to comply can lead to substantial penalties and even license revocation in extreme cases.
Cannabis Insurance as Part of a Successful Risk Management Strategy
There is no silver bullet for cannabis risk management. Cannabis companies need to draw on the experience of veteran risk managers to plan mitigation efforts and determine an acceptable amount of risk for investors and stakeholders.
The team at McGowan Program Administrators (MPA) has many years of experience in and around the cannabis industry, so we understand the risks that dispensaries, cultivators, wholesalers, and other CBRs face. Our team can help you secure appropriate cannabis insurance coverage to protect your business. Get in touch to learn more about our cannabis insurance offerings.
