Canadian Underwriter

The highs and lows of covering medical marijuana

October 27, 2015   by Sara Tatelman

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Tetrahydrocannabinol is kind of mysterious. One recent study in JAMA Psychiatry found marijuana doesn’t affect the volume of a user’s brain. But another study by different authors in the same journal declared that smoking cannabis could alter brain development in teenage males prone to schizophrenia. So maybe we really don’t know a lot about pot.

But we do know how to insure it. Once it’s legal, that is.

Because all policies have illegal activity exclusions, the hundred-plus medical marijuana dispensaries already operating across the country can’t insure any products that contain cannabis. (Only producers licensed by Health Canada can legally grow, sell and insure medical marijuana, and they can’t operate storefronts.) But coverage for the premises, equipment, security measures and liability is readily available, if you know where to look.

“Usually dispensaries aren’t large businesses, so they don’t necessarily tend to want to spend a great deal on insurance,” says Brody Stonehouse, the general manager of AC&D Insurance in North Vancouver. “They would typically purchase a premises liability policy that doesn’t cover products or completed operations [or] their equipment. And some of them aren’t really that concerned about their equipment or unit improvements either. They’re more or less looking to satisfy their landlord’s requirements and get a liability policy.”

Liability coverage is especially important when a dispensary has a vapour lounge, a room where patients can sample different strains of cannabis and see which provides the best treatment. While these rooms are one of the big selling points for dispensaries, they present insurance problems.

“…You’ve got sick people using a medical product in there,” says Stonehouse, “and marijuana, sure, it’s got its medicinal properties, but no-one’s quite sure of how it affects different people differently… So it could make someone fall down and hurt themselves because they get too intoxicated… And we’ve got coverage for them—it’s just [that] it usually costs more.”

Having a dispensary in a condo or office building can also cause the landlord’s insurance to spike or even be cancelled. “You’re not going to find a standard insurer in Canada to stay on risk with one of those dispensaries,” says a Toronto broker who works with dispensaries and asked for his name to be withheld. And of course, “if they’re not made wind of it, you’re also jeopardizing coverage, because it is deemed a really material change of risk.”

In April, Canadian Northern Shield advised a condo in downtown Vancouver it would no longer cover the building after a dispensary—which had arranged for its own insurance—opened on the ground floor. The Vancouver Sun reported the building’s broker couldn’t find another insurer willing to take on the risk.

“They just have the wrong broker,” says Stonehouse. “…If you can’t find coverage, because in general anything is insurable, you just have to find the person who can do it.” He admits a dispensary opening in a commercial building will limit the landlord’s options but “we can find insurance for a [condo] building, a commercial building owner quite easily, and I insure lots of them, even ones that have commercial grow operations in them.”

Although the landlord’s premiums may increase, tenants often pay the extra cost. “Sometimes if there are multiple tenants, it’s not really fair to the other tenants, and so they come to an agreement with the dispensary owner to cover the entire difference,” says Stonehouse. “But it can be sizeable. You can see a premium for just a standard commercial building go from $5,000 to $10,000.”

Cops and their radar

With premiums nearly doubling like that, dispensaries may not seem like such a bad risk to take, especially since neither Stonehouse nor the Toronto broker have seen many claims. Most dispensaries invest in alarm systems, tamper-proof glass, bars on the windows and a safe, and they take the added precaution of not keeping too much stock on the premises. So would-be thieves looking for maximum profit, says the Toronto broker, would do better to target the liquor store down the road.

In terms of liability, customers usually aren’t looking to sue over slip-and-falls. “They appreciate the service that’s being provided by the dispensaries, and if they were to trip on themselves they probably wouldn’t submit a lawsuit,” says Stonehouse. And since many dispensaries are run by compassion centres and other not-for-profits, “there’s really a limited ability to get much out of them.”

Dispensaries, it turns out, are “like any other retail business,” Stonehouse says, and most of the claims he sees are for water damage.

Sure, pipes can burst in any building, but other stores don’t have to pretend to sell knick-knacks or marijuana paraphernalia to obtain a business license and pay taxes. And they don’t face the risk of having most of their products confiscated by the police during a drug raid (which, of course, wouldn’t be insurable). But for Vancouver’s dispensaries, at least, that’s not a major concern.

“…We need to analyze what’s going on in the city and look at where our resources are best spent and where our money is best spent,” says Sgt. Randy Fincham of the Vancouver Police Department. “With that, our priorities lie with drug traffickers that are using violence, intimidation, possibly providing drugs to children or possibly putting people in the community at risk.”

That’s not to say the Vancouver force condones the dispensaries; selling marijuana outside of the MMPR program remains “a criminal offence of trafficking a controlled substance” and the storefront owner can be arrested at any time. But since resources are tight, they focus on hard criminals and turn their attention to dispensaries only when they are “on top of our radar.” Still, in the past few years, Vancouver cops have searched nine dispensaries and forwarded 18 charges to Crown Counsel. No charges have been laid so far.

In June, Vancouver continued its liberal policy regarding dispensaries, and city council passed a motion regulating dispensaries. The stores must pay a $30,000 licensing fee—knocked down to $1,000 for non-profit compassion centres. They also need to be located at least 300 metres away from schools, community centres and each other, and shops will be banned from certain areas.

Municipal regulations, however, don’t change the police force’s attitude. “Licensing is not our issue,” says Fincham. Selling marijuana is “still illegal in any format, outside of the medical program brought in by the federal government.”

Under the Marihuana for Medical Purposes Regulations, physicians and nurse practitioners can prescribe cannabis, although the Canadian Medical Association does not condone this practice. Patients then register with a Licensed Producer, who ships up to 150 grams of dried marijuana to their homes. That marijuana, Fincham points out, is grown and sold legally, so it can be insured.

Military-grade security

Health Canada has licensed only 26 producers so far, but gets about 25 new applications each week. Stonehouse also insures production centres, and some of his clients have been waiting more than a year for government approval. Even if they get it, there’s no guarantee they can afford to get started.

“The system,” says Khurram Malik, “is designed to not allow your mom-and-pop operations to economically work…” Malik is a research analyst at the investment bank Jacob Securities, which helps licensed producers secure investment funding. Why so few mom-and-pop shops? Because companies need to spend millions to meet the security standards Health Canada requires. “It’s like a military base, almost. You’ve got hundreds of cameras, HD feeds, so you’ve got to have terabytes and terabytes of data storage on site for that.” Employees must swipe their passes to move from room to room, all of which is logged. Every ounce of cannabis is also recorded, and pressure centres can detect if an interloper is trying to tunnel their way into the vaults. “I thought investment banks like ours were regulated. These guys take it to a whole different level.”

When securing investments for producers, Jacob Securities pushes proper insurance. “We are trying to make it an issue,” says Malik. “If we have the right coverage, the risk profile should go down so it should be easier for an investor to pull the trigger, to justify our valuation.” It’s difficult to find coverage for mold and insect infestation, since they occur frequently, and Health Canada prevents producers from using pesticides, but Jacob Securities works with brokers who find coverage for many other aspects of production centres. “The good thing about the brokers, they do a pretty good job of customizing products, taking out covers from different insurance companies and putting it together in a comprehensive block form and making… a bespoke product for this industry itself.”

Equipment breakdown is another big risk for licensed producers, says Marcus Sargent, an account executive at Steer Insurance in Toronto who works with Jacob Securities. If temperature control equipment goes bust, stock can quickly spoil, so “you’ll see subsequent business interruption risk tied to that.”

Medical marijuana producers also need to consider liability issues. “So if I’m a patient,” says Sargent, “I have to provide some pretty sensitive data to the licensed producer, and if that data were to be compromised… you could be dealing with a class-action [suit] and other types of liability, subject to PIPEDA [the Personal Information Protection and Electric Documents Act].” He typically sees producers buy at least $5 million in liability coverage, “and we’re seeing a trend upwards.”

Despite increasing profits, not all insurers want to cover medical marijuana producers. Brody Stonehouse points to Lloyd’s decision in May to exit the U.S. medical marijuana business until the American government formally legalizes the substance. “This hasn’t yet had a dramatic effect on cost or availability of coverage” in Canada, he says. “On the plus side, we are seeing more capacity for property insurance for cannabis cultivation operations and related businesses, including coverage for stock.”

Marcus Sargent believes insurers who avoid the business don’t really understand the products, “and some may very well have political reasons why they’ve decided not to partake in this industry.” And those folks, he says, “may be missing the boat.”

This story was originally published by Canadian Insurance Top Broker.