cannabis insurance

With Juul recently in the news and vaping bans going into effect around the country (see our recent coverage here, herehere and here), marijuana companies have been asking us questions about what to expect in the near term. In the midst of this uncertainty, we have been stressing to our clients the importance of insurance coverage for your business (see Anatomy of a Cannabis Insurance Policy Part 1: The Basics)– especially insurance that covers your liability for your marijuana- and hemp-derived products.

You need product liability insurance if you sell any goods or products that end up in the hands of the public. Period. You need as much insurance coverage as you can afford. Period. Your products liability insurance is not a substitute for you producing a safe, quality product. Period. You need to reassess your insurance coverage at least annually. Period.

I spend roughly half of my time doing traditional “legal work” for clients and the other half discussing business strategy, particularly how to protect the company’s business through having good contracts with every important business contact (business partners, suppliers, customers, financiers/investors, and insurers). Insurance is one of the most boring but important parts about running any business, and due to the outsized risks in the cannabis world, it is something that should be prioritized alongside your fundamental business plan. For those of you who do not want to read much further, here are the takeaways:

  1. You need product liability insurance if you sell any goods or products that end up in the hands of the public. Period.
  2. You need as much insurance coverage as you can afford. Period.
  3. Your products liability insurance is not a substitute for you producing a safe, quality product. Period.
  4. You need to reassess your insurance coverage at least annually. Period.

Generally speaking, product liability insurance (potentially) addresses the negative effects surrounding the use and consumption of your completed products, essentially the “what could go horribly wrong?” scenarios. Think exploding vape carts, carcinogenic edibles, and children choking on your packaging. These are the kinds of potential issues that keep businesspeople up at night when new products go to market. The “what could go wrong” scenarios generally fit into the following categories: 1) design defects (negligence claim), 2) production or manufacturing flaws (negligence claim), 3) marketing defects (misleading or defective warnings or instructions) (negligence claim), 4) breach of warranty (breach of contract claim), and 5) strict liability.

Design defects. Design defects are distinct from manufacturing defects because they go to the root of the product itself. If you design a poor product, such as a glass vape cartridge with glass that is too thin and is prone to shattering, you will get sued for damages resulting from your product with a design defect.

Manufacturing defects. You can create a sound product but have lackadaisical manufacturing processes that result in product defects. If your manufacturing process introduces mold into your product or does not sufficiently identify contaminated products, you will get sued for damages resulting from a manufacturing defect.

Marketing defects. Marketing defects refer to misleading or defecting warnings or instructions. If your product label’s instructions for an edible product accidentally get placed on a smokable product or vice versa, you may get sued for damages resulting from that marketing defect. And if your marketing or packaging makes health claims, whether it is in products designed for pets (see Hemp-CBD Pet Foods Are Everywhere But Are They Legal?) or humans (see FDA Issues Warning Letters to CBD Manufacturers Making “Over-The-Line” Health Claims), these claims can also get your company into a world of trouble with state and federal regulators (see CBD Products and False Advertising Under the Lanham Act), which could easily provide substance for marketing-related lawsuits from your consumers.

Breach of warranty. By virtue of state laws, every product sold includes an implied warranty unless it is disclaimed by the manufacturer or retailer. Implied warranties include the implied warranty of merchantability and the implied warranty of fitness for a particular purpose. Providing an express warranty is a smart way for a company to disclaim the implied warranties that are broader than the express warranty. Express warranties provide the company more certainty than it would otherwise have with respect to potential product liability claims. I will cover product warranties in more depth in a later blog post.

Strict liability. This is the scariest of the legal grounds for product liability because, as the term indicates, this liability is strictly applied to companies that manufacture or sell products in dangerous, unreasonable conditions. This claim potentially encompasses every part of the supply chain, from producers, to processors, to manufacturers, to distributors, to retailers. This liability is rooted in state law and provides a mechanism for potential plaintiffs who have been harmed to sue every party that was involved in bringing a dangerous product to market. My co-blogger Jesse Mondry, who specializes in litigation, will cover this topic in a future blog post.

Product liability insurance is not a substitute for designing and producing a quality product, and it will not protect you from your company’s illegal activity. You may have read that California vape maker Kushy Punch was caught making illegal products, essentially selling quality product through the “front door” licensed premises while selling tainted product out the “back door” from an unlicensed premises. In the extremely unlikely event that Kushy Punch’s inside or outside legal counsel recommends contacting their products liability insurer regarding consumer claims stemming from the negative effects of those tainted products, the insurance company will deny coverage without even reviewing the terms of the insurance policy.

As one insurance agent recently commented to me, “Since the business [policy] is almost certainly being written on an excess and surplus basis rather than [an] admitted [basis] and thus [is] less standardized, it is important to read the policy carefully and not buy the cheapest policy. On a products liability policy, pay special attention to the health hazard exclusion. An absolute health hazard exclusion will exclude almost any adulterated product if it causes a bodily injury. It is rare the carriers will offer coverage without a health hazard exclusion, so companies should really be looking for a properly modified health hazard exclusion that only excludes coverage for long term health issues.”

Products liability insurance, like all insurance policies, are affected by the limit of the policy. Do not think just because a certain issue or event is covered by your policy that you have reached the end of your analysis. If a court renders a judgment against your company for $5 million and the limit of your insurance policy is $1 million, you know the other $4 million will come directly from the company’s assets and potentially the owners’ pockets (if the “corporate veil” is pierced – a topic for another day).

Smart business owners will recognize that it is time to do an insurance audit. Talk to your legal counsel on how to properly conduct an insurance audit so that you understand what coverage you have, what events will trigger your policies, how to implement good recordkeeping that is in sync with your insurance policy requirements, and how to negotiate with your insurance company when they want to deny you coverage for a covered event.

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