Hidden Insurance Requirements in Contracts Cannabis Companies Face

It’s more common than you may think for cannabis insurance requirements to be tucked into contracts—and how often, as a business owner, do you have to sign contracts?

From leases to vendor/supplier agreements and distribution contracts, legal documents make up the foundation of doing business. When all of the T’s are crossed and the I’s dotted, business owners and partners sign contracts to keep everything above board.

This isn’t exclusive to the cannabis industry either; you’re likely to have to sign agreements for service contracts like IT and security, financing agreements—the list goes on.

There are many types of documents that may house “hidden” insurance requests.

Lease Agreements: More Than Just Rent

Leases have a lot of legal jargon that describes clauses from your rent to your responsibilities as a tenant. These documents often have a plethora of insurance requirements, from naming your landlord as “Additional Insured” on your general liability policy to requirements for renters insurance of a specific amount. Your lease may require to have specific property coverages, from general “all-risk” insurance to niche perils like flooding and earthquake protection.

Leases tend to be dense documents that contain a lot of requirements, all of which you need to be familiar with, like a Waiver of Subrogation, a fancy name for a clause that say in plain English, “We agree to let our insurance companies handle this, and we won’t sue each other or let our insurers sue each other.” This is an important clause to be familiar with, as it can increase your risk if something happens to the building you’re in. Some leases even hold tenants accountable for business improvements, not the landlord! It’s also common to see rent abatement clauses, which dictate your rent responsibilities during periods of non-operation.

Leases are not always the easiest documents to skim through, but you must understand them thoroughly so that if and when something goes wrong, you know who’s responsible for fixing what.

Vendor & Supplier Contracts: Protecting the Supply Chain

Without vendors, most cannabis businesses would be left in a silo, unable to create a finished product. But do you know what your legal obligations and insurance requirements in cannabis contracts are to your vendors?

If you don’t think you have any insurance requirements, it’s time to give those contracts another look. Many supplier contracts include indemnification clauses, an agreement that holds you responsible for compensating vendors for losses. Oftentimes, these clauses will carry insurance requirements like General Liability, Product Liability, and even Cyber Liability for specific amounts.

Vendor contracts may also include agreements like Hold Harmless, where your company assumes the “risk”, whatever that may be. If your liability coverage isn’t big enough, you may be left holding a hefty bill. Other common requirements in vendor agreements include Certificates of Insurance, which have specific requirements for minimum insurance limits, and transit insurance, which protects you against the risks that come with shipping products to and from vendors.

Distribution & Co-Packing Agreements: Product & Transit Risk

If you’re at the stage of the supply chain for packaging and distribution, there are a few specific requirements you need to be aware of.

• Product Recall Coverage: Who bears the cost of a recall? Contracts may implicitly or explicitly require this specialized coverage. and may shift the responsibility to you.
• Higher Product Liability Limits: Distributors may demand higher limits than your standard product liability policy, especially for high-risk products in cannabis.
• Contamination Coverage: For co-packers, this clause ensures coverage for contamination during processing.
• Bailee Coverage: If you are holding someone else’s product (e.g., flower for processing), you may be responsible for its loss or damage, which is not information you want to be caught off guard with.

Lender & Investor Agreements: Financial Safeguards

It’s incredibly common for lender and investor agreements to require insurance policies as a safeguard for the lender. Specific endorsements often include Loss Payable and Mortgagee Clause on property and liability policies. If you sign a financial agreement without updating your insurance policy to cover the lender, you could be up the creek without a paddle.

Loan agreements often mandate higher general liability and property limits than are initially offered. If you’re signing a new loan agreement, it’s helpful to pull in your insurance partner to understand how your coverage needs to expand.

Vague or “Catch-All” Clauses

Reading your contracts thoroughly is important because sometimes the most vital clauses are also the most vague. Many contracts will require you to “maintain adequate insurance coverage” or “customary insurance for similar businesses. While broad, these statements have been legally interpreted to mean specific coverages—so it’s important to bring in your legal or insurance partner to review if you see these.

Some policies may request specific policy forms like ISO forms (a form from a specific insurance office) or endorsements (additionally insured people) that are not common to a general umbrella of insurance coverage.

When we say these requirements are hidden, we don’t mean with a treasure map you have to hunt for, but rather that insurance requirement clauses are often tucked in the middle of dense legal documents that may not be well-called out. If you’re not looking for them, it’s easy to miss them other important information, like price, delivery, and quality.

Some people miss required insurance policies because they believe that their standard commercial policy covers everything— but this isn’t the case. It’s common within and outside of the cannabis industry for specialized policies to be required, and ignorance of your obligations is not a legal defense. If you’re working with an insurance or legal professional who isn’t well-versed in the cannabis industry, they may miss specific risks and requirements as well, which is why industry expertise is so vital in your partners.

What you don’t know can hurt you. There are many risks that come from being unfamiliar with your contractual obligations.

• Financial Ruin: Failure to be properly insured has a massive financial impact. Uninsured losses from property damage, product liability claims, or legal fees add up quickly and can cripple a business.
• Breach of Contract: Not holding policies you’re contractually obligated to have can lead to contract nullification. Leading to costly litigation, termination of essential business relationships, and reputational damage.
• Loss of Licenses: If you have a reputation for non-compliance with contractual insurance obligations, it may impact your future regulatory standing, directly or indirectly.
• Operational Stoppage: If your business runs into financial trouble, it can lead to an inability to operate due to the high cost of uninsured losses or legal disputes.
• Personal Liability: Depending on the contract and your obligations, owners or officers could face personal liability in some cases.

Navigating the intricate and ever-changing landscape of cannabis regulations requires a proactive approach, rather than a reactive one, to ensure long-term business success.

Professional Contract Review

Are you reading all of your contracts yourself? It may be time to bring in an expert. Engaging with a cannabis attorney to review your contracts is a straightforward way to ensure you understand all of your obligations and responsibilities up front. It also helps to have an insurance partner who understands the cannabis industry to ensure you have the proper umbrella of insurance coverage.

Due Diligence

Don’t skim your contracts. As the business owner, the buck stops with you, and it’s vital that you understand every contract you sign and the implications of each section. If you don’t know, don’t sign—ask for clarity from the other party and trusted advisors. And don’t be afraid to push back. Contracts require two parties, so if there’s something you don’t like, you don’t have to sign it—you may be able to edit it.

Regular Contract Audits

As your business evolves, your insurance needs evolve too. Regular audits of your existing contracts ensure that you are always up-to-date on your responsibilities and obligations, as well as your current insurance portfolio. This is a vital part of a living risk management strategy.

Contractual insurance requirements are a significant, often overlooked part of doing business. Reading contracts can be tedious, but noncompliance with these requirements increases risk for cannabis businesses.

Don’t let a hidden clause spiral into a catastrophe. Protect your cannabis business by thoroughly reviewing your contracts with experienced insurance and legal professionals. If you want help reviewing your contracts, reach out to AlphaRoot—we’ve helped cannabis businesses around the country protect their investment, and we’re happy to help you too.

Protecting your cannabis company can seem confusing; however, we’re a full-service insurance brokerage working with carriers worldwide to offer you the best coverage possible. We’re here to help! Please reach out to us today by email [email protected] or calling 646-854-1093 for a customized letter or learning more about your cannabis insurance options.