How business interruption claims could play out in the legal marijuana space

Supply challenges associated with marijuana legalization in Canada will lead to potentially costly business interruption (BI) and contingent business interruption (CBI) claims, an adjusting firm told Canadian Underwriter Tuesday.

Because it’s an emerging market, there are a limited number of sources for the supply of the cannabis to the recreational market, said Stephen Agnew, vice president of ClaimsPro’s specialty risk division.

“Right now, we have a distribution issue and we have a supply problem,” Agnew said, noting that running out of product happened on the first day of legalization, and he doesn’t see that changing in the near future.

“Because you have limited number of supply sources, the end retailer or supplier is going to have difficulty sourcing other areas to get product to distribute,” Agnew said. “So, you would face exposures for contingent business interruption claims. In other words, the supplier goes down and the retailer can’t get product, he’s going to then have a business interruption claim and have someone else supply the product.”

How much will these BI or CBI claims cost the industry? In the medical marijuana space, ClaimsPro has seen claims ranging primarily from $150,000 to $750,000. These losses, mostly on Vancouver Island, were largely for fire and water damage. But there were also those related to extra expense insurance and BI, boiler machinery issues, physical damage to buildings, and specialized greenhouse equipment.

Potential cannabis greenhouse losses are also a consideration, with Agnew reporting that ClaimsPro saw claims at one flower greenhouse in excess of $20 million. “You take the size of the cannabis greenhouses that are significantly larger, your losses get much larger,” he said.

“A $20 million loss from a certain size greenhouse… you take that and multiply it because these new greenhouse operations are much larger. You get a much larger direct damage loss, but you also get a significantly greater business interruption component and product loss because the value of the product being produced in the greenhouses is probably significantly more than in, say, a vegetable operation or a flower operation.”

If there was a major fire to one of these facilities, it wouldn’t be unheard of to see a loss in the $100 million range. “The business interruption component of cannabis loss, where you’ve got higher margins is going to be much greater.”

Complex equipment breakdown insurance (EBI) would also come into play. Sophisticated equipment is required to extract cannabinoids on an industrial scale; these processes involve high value equipment, raw material inputs and finished goods. Operation of this equipment will mean a potential for complex high value first party claims, including EBI.

“Because this is an emerging market, the sourcing of equipment may be difficult, supply of that equipment to replace equipment for a loss may be difficult,” Agnew said. “It’s specialized equipment, so getting the service people or getting the experts to understand how to deal with the equipment may be difficult. Because you’ve got those concerns, it may drive a larger business interruption claim or a contingent business interruption claim.”

Despite these potential types of claims, and other, Agnew believe adjusters will adapt to dealing with cannabis claims well, “because they’re used to dealing with agribusiness, construction business and business interruption already.”