Risk Management Strategies for Cannabis Businesses: A Commercial Insurance Perspective

cannabis insurance

The cannabis industry is booming, providing many opportunities within the supply chain as well as ancillary projects such as specialized marketing, security, and equipment manufacturing. However, this fast-growing and controversial industry also comes with risks. As a result, companies should develop risk management plans to avoid massive losses. As an insurance broker, you can help cannabis businesses address specific risks within their sector by recommending cannabis insurance policies.

The Biggest Risks Cannabis Insurance Can Cover

The cannabis industry struggles with several hard-to-place insurance risks, such as compliance and regulatory uncertainties. States that welcome these businesses have to quickly assemble regulations covering every aspect of the industry:

  • Growing
  • Distillation
  • Testing
  • Sales
  • Marketing

Building the system from scratch is no easy feat, and many states struggle to do so. The result is regulations that change without warning and for seemingly no reason, interfering with companies’ attempts to comply.

Additionally, because legalization is on a state-by-state basis, businesses hoping to break into the national market must track and adhere to a variety of laws subject to change. At times, companies invest in requirements, such as packaging, only for the state to announce new rules, such as child-proofing. Unfortunately, this means a loss for the companies, which can no longer use the containers they designed and paid for.

Like other businesses that sell consumable goods, cannabis businesses worry about liability concerns and product tampering. They may seek cannabis insurance to mitigate these issues, as prevention may be outside their control. For example, edibles manufacturers can run a tight ship to keep quality high, but there’s always the risk of bad actors slipping through the cracks.

Finally, this industry faces the risk of employee theft. Workers may steal for personal use or resale, introducing new liability issues. While businesses can put systems in place to monitor inventory and employee behavior, there’s still a chance of someone finding a loophole.

The Challenge of Risk Assessment for Cannabis Businesses

The cannabis industry has some similarities to agricultural and wine-producing companies. For example, both involve growing, harvesting, and shipping plants. Wine specifically requires processing, secure storage, and systems to verify customers’ ages. However, cannabis’s classification as a Schedule I drug puts it in legal limbo at the federal level, complicating even fundamental aspects of business, such as requiring special cannabis insurance when standard policies don’t provide adequate coverage.

Banks must adhere to strict federal laws prohibiting them from issuing accounts to organizations that profit from selling drugs. Although cannabis is legal at the state level, those protections don’t extend to financial institutions. As a consequence, businesses in this industry lack access to certain economic benefits:

  • Commercial loans
  • Business lines of credit
  • Secure deposit accounts

Without financial records, it may be difficult for businesses to prove their profits and assets, making it challenging for insurance companies to assess their risk accurately. There’s also the problem of storing large sums of money on-site. If the funds get stolen or damaged, there’s no way to recoup the loss. Banks have federal insurance that covers a certain amount of money should the bank fail or otherwise be unable to disperse funds to customers.

The good news is that organizations in both the cannabis and banking industries are pushing for change. The Secure and Fair Enforcement Regulation Banking Act (often shortened to SAFER Banking Act) removes criminality for banks offering services to cannabis businesses, allowing both industries to profit.

Similar laws could shield companies offering cannabis insurance. The National Association of Insurance Commissioners (NAIC) supports this legislation. It’s clear to players in the banking and insurance industries that the cannabis business will only continue to grow, and it’s a matter of public and commercial interest that these companies receive the same services as any other.

Developing Comprehensive Risk Management Plans for Cannabis Operations

In the meantime, insurance brokers can help clients work within today’s patchwork financial and insurance frameworks. Building a holistic risk management strategy is essential for cannabis businesses, and finding the right policy is key.

Cochrane & Company has the necessary experience to underwrite these specialized policies. As experts in the field, we can fill gaps left by traditional commercial insurance.

Of course, cannabis insurance should be supplemental to other mitigation efforts. Businesses must still create, implement, and regularly review a risk management plan. In addition to the risks discussed above, companies should consider the following:

  • Employment practices liability
  • Cybersecurity
  • Property

All employers must avoid bias in hiring, scheduling, and wages — including cannabis companies. To avoid accusations of discrimination, businesses should have protocols to ensure objectivity in these issues.

Cybersecurity is a fast-growing concern as hackers develop new ways to disrupt operations and extort money. Small businesses are especially vulnerable, as they may lack the resources to maintain an information technology department. However, organizations can still train staff in cybersecurity best practices and keep computer systems updated.

Finally, businesses must consider risks to their property. Natural disasters, fire, burglary, and vandalism are all concerns. While security systems and disaster preparation can reduce damage, these risks are largely out of companies’ control. Fortunately, cannabis insurance can provide the necessary funds to recover from these events.

Understandably, every company has different priorities depending on its place in the cannabis industry, physical location, and customer base, among other factors. For the most effective mitigation efforts, organizations should tailor their risk management plans by identifying their most egregious exposure points, determining loss likelihoods and costs, and continually analyzing data for patterns.

Creating a Roadmap for Cannabis Insurance and Risk Management

Risk management is crucial to limiting losses in the cannabis industry. Due to the complex legality of selling cannabis products, companies must stay flexible to meet evolving challenges, such as changing state regulations and federal laws. 

With so much uncertainty and a lack of traditional financial safety nets, cannabis insurance is crucial to risk management. Fortunately, Cochrane & Company offers policies specifically to meet these unique needs. If your clients are active in the cannabis industry, partner with us to provide appropriate coverage.

About Cochrane & Company

For more than six decades, Cochrane & Company has been proudly at the forefront of the insurance industry. Our experience has enabled us to innovate in powerful ways, reimagining the E&S market, and providing technology solutions that make it easy to do business with us. Licensed in all 50 states, we proudly serve clients across the nation, providing personalized and powerful solutions to help you become an even better partner for your clients. Speak to one of our experienced professionals today by calling (855) 967-0069.


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