With any Marijuana Business Insurance program, or any commercial insurance program for that matter, a lesson can be learned from the unfortunate fire of Seattle’s first legal marijuana farm, Sea of Green Farms. The lesson to be learned is always apply the ‘Golden Rules of Risk Management’ which are:
- Don’t risk more than you can afford to lose. This is a measure of severity. If the maximum possible loss could not be paid out of your existing finances without necessitating borrowing or if such a loss might lead to bankruptcy then insurance must be considered.
- Consider the odds. What is the probability that a loss will occur?
- Don’t risk a lot for a little. After weighing the cost of insurance compared to the potential out-of-pocket expense. Don’t self-insure a loss that could be transferred to the insurance carrier for a known, relatively small amount of premium.
Why apply the ‘Golden Rules of Risk Management’? The New York Daily News, reported a fire official estimated the fire caused about $250,000 in damages to the building and equipment, not including the lost marijuana products and The Stranger reported the business lost about $150,000 worth of marijuana.
How Marijuana Business Insurance might apply to the Sea of Greens Fire
- What Building limit or Premises Rented to You limit is in place? If they are the owner of the building the area within their marijuana business insurance policy to make the necessary repairs would be under the building limit. If they are leasing the space the area within the marijuana business insurance policy that provides protection is within the coverage for ‘Damage to Premises Rented to You’. This coverage pays for damage caused by any one fire to any premises while rented by you, or temporarily occupied by you with the owner’s permission. The standard limit provided within all quotes I have received is $100,000, for an additional premium this limit can be increased. If they are not the owner of the building hopefully they have enough coverage in place to meet the estimated repair costs of the building.
- What Crop Coverage limit is in place? If you are grow operation being up-to-date with this figure is very important as a marijuana business insurance policy will reimburse a business for the stock (finished product) on hand and also protect the in-progress crop of the operation. The Stranger reported it is estimated that 3,000 pot plants perished in the blaze with a value of $150,000. When completing a marijuana business insurance application you need to take diligence when assigning per plant values for the following categories: seeds, immature seedings, vegetative plants, flowering plants, & harvested plants. Once the per plant value is assigned to the number of plants in each category you then have your total crop coverage limit. It is from this coverage limit that your policy will provide reimbursement.
- What Business Income limit is in place? If the business needs to shut down as a result of the fire then business income would apply. Business income will provide normal operating expenses and get a business back in operation after the suspension of operations due to a covered loss. Business income is the net income, net profit, or net loss before income taxes that would have been earned or incurred plus continuing normal operating expenses to keep the business going. Fortunately it does not appear that the business will need to fully shut down as The Stranger article quoted the owner as saying “the company has enough dried product to keep the stores they’ve contracted with supplied while they rebuild over the next few months.”
In addition to the above the last area of importance to consider is the information provided on the insurance application. Was the information on the application correct and truthful? It is a requirement for cultivation operations to warrant to one of the following statements:
- I have used or will use a licensed, insured contractor for all electrical work at my grow facility.
- I have had or will have within 30 days, all the wiring inspected by a licensed, insured contractor at my grow facility.
I warrant the above to be true and I understand the Insurance contract will be based on my warranty.
This is important to point out because The Stranger article states firefighters told Sea of Green owner Philip Tobias the blaze was likely caused by part of his fluorescent lighting system. If the business owner is unable to provide the insurance company with documentation that the wiring was either installed or inspected by a licensed, insured contractor the insurance carrier has the ability to void the insurance policy and deny the claim. The reason for this is the warranty at the end of the application states “I further understand and agree that failure to provide a true and accurate response to the foregoing questions may, at the option of the company, result in the voiding of the insurance issued in reliance on this application and/or denial of claims under any policy issued. ” If the business owner is unable to back up the warranty statement with proof then the claim process will hit some roadblocks.
The Marijuana Business Insurance marketplace is limited with only a handful of options at the moment, you need to make certain you apply the rules of risk management to your marijuana business insurance program and work with a local broker to make certain you are properly insured.
This article is intended for informational purposes only and is not insurance advice or a substitute for consultation with a licensed insurance broker to address your particular risk or circumstance.