Insurance Considerations for Cannabis Delivery Services

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The legal cannabis industry in the U.S. is growing at an unprecedented rate and is projected to reach $73.6 billion by 2027. While federal law still classifies marijuana as a Schedule I drug, many states have legalized both medical and recreational marijuana. As state restrictions ease, new business opportunities continue to emerge.

For example, delivery-only dispensaries are becoming increasingly popular within the cannabis industry and saw a huge surge as a result of the COVID-19 pandemic and emergency lockdown orders. Just last month, Apple removed the ban on cannabis delivery services from being hosted on its App Store, further expanding opportunities for cannabis businesses, and in particular, delivery services.

As consumer demand for more shopping and delivery options increase, and cannabis delivery services multiply, cannabis businesses should review their insurance policies to ensure they have sufficient coverage for their operations. The following list identifies some insurance coverage options cannabis delivery services may want to consider.

General Liability Insurance
General liability insurance is not always required to obtain a cannabis license, but it is worth considering because it can provide coverage for bodily injury, medical expense and property damage claims from third parties against the business, as well as associated legal fees. While delivery-only businesses generally do not welcome customers into a brick-and-mortar location, general liability insurance is not limited to business premises, and third-party claims remain a reality as accidents during delivery can result in serious injury and claims for liability.

Property Insurance
Property insurance generally protects a business in the event the business’s property, including, equipment, storage facilities, or signage is damaged or stolen. Property insurance does not, however, typically cover property in transit, or property belonging to another person. Thus, once the product is out for delivery, a property policy will generally not provide coverage if the product is lost or damaged.

Product Liability Insurance
While property insurance will protect your business’s commercial property, including inventory from perils such as fire, theft and natural disaster, the right product liability coverage (often but not always encompassed within a general liability policy) is necessary if a product results in harm, illness or unwanted side effects. Product liability coverage also covers claims related to product defects. It is important to disclose what products are sold, to ensure the policy covers all available products.

Cyber Insurance
As online cannabis sales continue to increase, so, too, do the cybersecurity and privacy risks for cannabis delivery services offering app-based and/or online services. While the risks are varied, many arise from the fact such online services result in the holding of highly sensitive consumer information or confidential data about business partners. Cannabis business operations also rely on technology, which if taken offline unexpectedly could cause serious disruption and revenue losses. The loss or exposure of confidential information or significant business interruption could result in lost profits, extortion demands, investigations, litigation or regulatory actions. Many of these risks are covered by cyber insurance.

Business Auto Insurance
Although the above coverages, including general liability and property insurance, are available to protect the product and business, coverage for cannabis products in transit may be limited under such policies.

Many delivery business models rely on delivery drivers using their own car and personal auto insurance coverage. However, if the driver has an accident while engaged in a delivery, most personal auto policies have exclusions for business use, which means the policy will not pay for damage to vehicles, injuries, medical bills or pain and suffering, and the business will likely be held responsible. Thus, businesses offering delivery services should consider obtaining a business auto policy to cover both owned and hired vehicles, employees and independent contractors, as well as the products transported. It is important to disclose that the business is transporting cannabis to ensure the policy will cover cannabis operations.

Cargo Insurance
As noted above, while coverage for a business’s cannabis products (i.e., stock and inventory) can often be purchased as part of a property policy, the coverage generally does not cover goods that leave the premises, or once the covered goods are owned by someone else. For delivery dispensaries, the sale must take place on the licensed premises, and then title passes to the consumer when the product leaves the premises and is out for delivery. Cargo coverage can help cover physical loss and damage to cannabis products once they are in transit.

Specifically, a cargo policy can provide coverage in the event the product is lost, damaged or stolen while being loaded, transported and unloaded. Cannabis goods that are out for delivery generally come with a high price tag, and therefore are at a greater risk for theft. Cargo policies can cover products transported as part of a business’s own operation or provide extra coverage for items transported by a hired company if their insurance fails to cover the loss.

The type of coverage required depends on the business operation, so it is important to disclose all current operations when shopping for a policy. If business operations change (i.e., delivery by a hired company is added), it is also important to revisit coverage options.

Crime Insurance
As noted above, given the potentially high cost and huge demand for cannabis products, employee theft is a real concern for many cannabis businesses, as well as delivery services. Cannabis crime insurance can provide protection against criminal behavior of a dishonest employee or third party.

Workers’ Compensation Insurance
Mandatory in most states, workers’ compensation generally covers medical expenses, death benefits, lost wages and rehabilitation for injured employees. Coverage applies to injuries employees sustain that is connected to their employment. Documentation of the connection to employment is important in claims-handling, especially in a delivery context where employment takes the worker away from a traditional workplace.

Cannabis Specific Insurance Policies
Some states offer cannabis specific policies that may be worth considering. California, for example, offers an insurance product called CannaBOP (also available in Colorado and Nevada) that was approved by the California Department of Insurance and provides property and liability coverage to cannabis businesses. The product is marketed as offering “seed to sale” coverage on an off-the-shelf basis. While this and similar products may be an appealing option for cannabis businesses, it is important to review the specific coverage provided to ensure all operations and risks are covered. As outlined above, most property and liability coverage do not cover cannabis products during delivery.

As cannabis delivery services continue to multiply and expand delivery options, new coverages and exclusions will undoubtedly emerge. Thus, it is important to review all business operations and coverages routinely to avoid unexpected coverage gaps or unwanted policy exclusions.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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