Cannabis Legalization in New Jersey: Insuring the Garden State’s Greenery

Bruce Springsteen, New Jersey’s rock ‘n’ roll gift to the world, almost faded into oblivion due to a marijuana bust involving his bandmates. Legend has it that The Boss’ early band, the Castilles, had to disband after being caught with cannabis in Freehold in 1967. Fast forward to today, and New Jersey is teetering on the edge of marijuana legalization. Governor Phil Murphy is keen on legalizing recreational use, and three cannabis-related bills are waiting for the legislature’s final vote. Legalization could revamp New Jersey’s economy and might even influence nearby New York. So, if you’re a business owner, entrepreneur, or investor eyeing the cannabis industry, it’s high time to learn about potential insurance coverages for the industry.

Coverage Issues and Challenges: A Smoky Affair

Just like any other business, cannabis businesses face risks: a customer could trip over a misplaced bong, an employee might sue for being fired because they couldn’t roll a joint right, or a hurricane could give your building a good soak. However, the cannabis industry faces some unique coverage challenges, thanks to regulatory inconsistencies, insurers’ cautiousness, and the lack of court-tested policy language.

Product liability coverage is a significant concern. Any business that “touches the plant” could face allegations involving mislabeled pot brownies or defective vaporizers. In New Jersey, an injured consumer can sue everyone from the manufacturer to the retailer. While this risk is not unique to the cannabis industry, several potential insurance coverage issues are:

Traditional general liability and product liability policies often exclude illegal conduct, which some insurers might apply to cannabis business activities that are legal under state law but not federally.
Policies tailored for the cannabis industry might limit coverage for products with high amounts of THC and/or CBD.
Policies might require proof of compliance with state and local regulations, from licensing to “seed to sale” product tracking, and even tax compliance.

In New Jersey, the expected influx of “cannabis tourists” from places where cannabis is still illegal could complicate matters even further. Insurers might impose additional restrictions or requirements for coverage involving out-of-state actors.

First-party coverages are also crucial to protect grow operations, manufacturing facilities, and dispensaries from property damage due to fire, water, wind, and other perils. However, cannabis insurance underwriters might apply coverage limitations. For example, a commercial property policy might cover your greenhouse and irrigation equipment but exclude standing crops and “mother stock.” Federal crop insurance is not currently available for cannabis growers, but it could soon be for farmers who grow industrial hemp from which CBD is extracted. Policies might also exclude theft of cash, crop, or harvested plants, a perennial problem in the industry that may require coverage under a specialized type of crime policy.

Admitted vs. Non-admitted Carriers: The Big League vs. The Minor League

Beyond what is covered, it’s also crucial to consider who is offering the coverage. Insurers are regulated by state insurance departments such as the New Jersey Department of Banking & Insurance. Typically, a carrier must be licensed to do business in the state and must file with the Department for approval to market and sell particular insurance products. Insurers who obtain such approval are known as “admitted” carriers, and they are generally subject to more stringent consumer protection regulations than “non-admitted” carriers.

If and when New Jersey legalizes, the immediately available insurance will likely be from non-admitted carriers, while the Department takes time to solicit, review and process filings from insurers seeking to become admitted. This issue is compounded by the fact that many of the big-name national carriers appear to still be taking a “wait-and-see” approach to cannabis underwriting, pending legalization at the federal level. Non-admitted, regional carriers have jumped into the gap, offering policy packages that cover legal cannabis from seed to sale, but may not have received regulatory scrutiny.

Take-Aways for Prospective Policyholders: Don’t Just Roll with It

An insurance policy is only as good as the scope of coverage that it offers. Don’t just grab a policy because it’s marketed as “cannabis insurance.” You need to do your homework. Here are some issues that merit scrutiny:

Do the proposed types of insurance coverage fit your business’ needs?
Does the nature of your business potentially trigger exclusions that could swallow coverage for certain types of loss?
For post-legalization New Jerseyans, could the legal landscape and/or political climate in the Garden State have coverage implications?
Who is underwriting the proposed insurance, what regulations are they subject to, what is their financial strength, and is there any reason to believe that they might be pre-disposed to deny claims?

Brokers can help explore market issues, and competent coverage counsel can advise on legal ones. Without this due diligence, you—like Bon Jovi—may only be “livin’ on a prayer.”