How Brokers Can Capitalize on Cannabis Regulations

8 Nov 2018

From Marijuana Medical Access Regulations (MMAR), Marijuana for Medical Purposes Regulations (MMPR), Access to Cannabis for Medical Purposes Regulation (ACMPR) to the recently passed Cannabis Act, cannabis regulation in Canada has gone through a lot.

The Cannabis Act allows for legal recreational marijuana possession and use – permitting individuals to use and possess fresh and dried cannabis, cannabis oils, as well as seeds and plants for personal cultivation.

But the story does not end with the successful legalization of recreational cannabis, as this brings forth new business risks that brokers can capitalize on. In a webinar called “Capitalizing on Cannabis: An In-Depth Conversation,” insurance experts discussed what brokers should know to insure their clients in the cannabis industry.

What are the emerging risks to watch out for?

The legalization of cannabis retail sale comes with a number of restrictions and requirements that retailers must comply with to avoid liability and stay in business. Jill Shore, a lawyer at Dolden Wallace Folick LLP, explained the risks associated with these legal requirements.

A major responsibility of retailers is prohibiting the sale of cannabis to minors. Minors are not allowed entry into retail stores, and retailers are required to take proactive steps to prevent sales to minors, such as verifying customers’ age by ID. If they cannot demonstrate being able to do so, they can be held liable for allowing a minor into the store or selling to a minor.

Another potential risk facing retailers is third party liability arising from bodily injury or property damage claims arising from the actions of intoxicated persons. Most provincial regulations will prohibit the sale of cannabis to intoxicated persons. As such, it will be important for all retail employees to be trained to recognize the signs of impairment of all types (not just impairment by cannabis), as well as for retailers to enforce policies and procedures that employees will follow to prevent the risk of selling cannabis to intoxicated persons.

Retailers also face potential privacy risks due to some security and record-keeping requirements. The use of security cameras is one. Various privacy commissioners have issued guidance documents on how to avoid violating privacy rights when using security cameras – brokers should look at those guidelines. On the record-keeping side, retailers are required to keep records of incidents occurring in retail areas, and in those records will be the personal information of people who have been affected or involved in the incidents.

There are also risks associated with the changing and evolving regulatory landscape. As such, retailers will need to keep on top of legislative amendments affecting the cannabis industry.

And aside from the risks discussed above, there are also risks of product recall. If contaminated products reach the distribution stream, licensed producers, wholesalers, distributors, and retailers will need to track the source of those products and grant all relevant parties access to that information to be able to identify which products need to be withdrawn. On the licensed producers’ end, they are required to employ good production practices and implement quality control procedures, including the conducting of tests on products for microbial and chemical contaminants, shelf life and content of active ingredients. If the tests result in the identification of contaminants and other product defects, the need for product recall will arise.

What are the complexities to consider when insuring licensed producers?

Carlos Centeno, branch manager of Cansure’s Toronto outpost, enumerated the key aspects to consider when addressing coverage complexities. One consideration is the breakdown of the elements of the balance sheet into inventory and biological assets. Dried marijuana and oil extracts in millilitres can be considered under inventory. Meanwhile, the biological assets can include plant, flower and vegetary state (sometimes with the maximum valuation of grams per plant), in addition to clones, seeds, and seedlings.

Another aspect to consider is the proper breakdown between medical and non-medical/recreational assets. Current product liability coverage might not respond to recreational cannabis.

On the issue of property holdings, the importance of greenhouses as a seasonal alternative for cannabis production cannot be avoided or discounted. As such, becoming fully versed with greenhouse production methods, inherent exposures and newly instituted mitigation measures are “the order of the day.”

With respect to business interruption, only a few licensed producers are generating profit at this juncture. The traditional approach to profit coverage might represent a challenge for brokers in stipulating a proper business interruption evaluation, as they might encounter negative profits. For that, other alternatives such as an actual loss sustained might be available. It is also important to know that some licensed producers maintain agreements with other licensed producers to mitigate a potential business interruption loss and meet purchase order, thus avoiding reputational risk.

In terms of third party liability and product liability, it is advisable to seek bespoke Canadian wordings which will adopt the stipulations of the Cannabis Act and its associate regulations.

On the possibility of covering cannabis consumption facilities

“We have to examine the location and legalities surrounding them, municipal by-laws, etc,” Centeno said. “We have to feel comfortable as an industry and be proactive. We have to be in touch with entrepreneurs through the broking community in understanding their requirements from legal, operational [and] risk management perspectives ... Our stakeholders understand the supply chain well, and rest assured that once we understand [and] embrace the exposure together with the legalities associated with them, we’ll have an adequate response to it.”