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Limiting Your Liability

Liability insurance

CBD manufacturers can use insurance to help cover financial losses should a product create legal problems.

CBD manufacturers risk paying thousands of dollars in legal expenses if they lack insurance to deal with rash-inducing topicals, exploding vape pens and other problems connected to their products.

Cannabis companies, regardless of their size, could benefit from having at least some product liability insurance coverage, according to experts. The policies curb financial loss for manufacturers whose products create legal problems.

In simple terms, a product liability policy essentially covers bodily injury and property damage that happens as a result of the use of your product, said Brett Lipton, vice president of Castle Rock Capacity Insurance Agency. The New York firm is a division of Epic Insurance Brokers & Consultants in San Francisco.

Product liability insurance is especially important for CBD companies hoping to stock their products on the shelves of major retailers. Many big-box stores require at least some coverage as part of their retailer agreements, experts said.

 

Who Needs Insurance?

“My contention is if you’re putting a product in the public’s hands, then you really should have product liability insurance, regardless of what the product is,” Lipton said, adding that chocolate chip cookies need coverage as much as military contracts and medical products.

The reasons are twofold:

  • Companies need to protect themselves from claims and suits that could cost thousands, if not millions, of dollars in legal fees.
  • There’s a responsibility to offer indemnification—compensation for harm or loss—to customers harmed by a product.

Even an innocuous-seeming product such as baby powder could pose major headaches, as demonstrated by Johnson & Johnson’s litigation woes, Lipton said. The health-care giant is facing more than 100,000 lawsuits tied to its safety and marketing practices.

In some cases, the company might not even be the direct cause of the legal problems—as when Johnson & Johnson’s Tylenol painkiller was the target of drug tampering and seven people died after consuming cyanide-laced capsules in 1982.

In short, it’s hard to know what might generate legal issues related to a product. That’s why some experts recommend manufacturers get product liability coverage from the moment the product starts getting sampled. Even employees trying a cannabis topical or potential customers trying an edible could trigger problems.

 

A Significant Cost

The annual premiums for product-liability insurance could easily run thousands of dollars. Castle Rock says coverage for hemp-based ingestible CBD products with sales under $1 million starts at “under $4,000” per year.

“If something goes wrong and you get slapped with a lawsuit, chances are the cost to respond to the lawsuit is probably going to be more expensive than what the insurance would cost,” Lipton said. “On the other side, if there’s a judgment or settlement, I can pretty much guarantee you that’s going to be more expensive than what the insurance would cost.”

Premiums are derived based on two factors, said Chris Martin, a senior wholesale broker with Veracity Insurance Solutions in Utah: what you’re selling, and how much of it you’re selling. The firm is an underwriter and servicer of commercial insurance policies within the cannabis and CBD industries.

“If you have $100,000 worth of product out there, that’s a lot less exposure for an insurance company to consider than $100 million, where you have your product in a lot more people’s hands,” Martin said.

The cost for coverage is typically lowest on topical products such as a CBD-infused lotion or makeup, with an insurance policy starting at $2,500 annually before taxes and fees, he said. Rates are higher, beginning at $3,500 per year, for ingestible products such as tinctures and even pet supplements.

“Hemp flour and vape are the most expensive CBD-related policies. Those are $5,000 to start,” Martin said.

 

Retailers Might Look for Coverage

The desire to work with retailers is perhaps the main reason CBD companies inquire about product-liability insurance, brokers said. Many big-box stores or retailers require coverage.

Uninsured companies might run into delays in signing a retail agreement, or retailers might choose not to work with them at all without insurance.

“It’s going to add validity to your company to be insured,” Martin said. “It means that an insurance company reviewed your product and approved it and is willing to cover it. If you were to go into a retail partner and ask them to sell your product and you didn’t have insurance, that would probably be a red flag to them.”

CBD manufacturers can list their vendors as additionally insured parties on their policies. That would allow the retailers to be indemnified for money they become legally obligated to pay as a result of claims arising from insured products.

Castle Rock advises CBD companies to consider discussing their insurance requirements with vendors or an attorney before making any decisions. Vendors might have a certain amount of coverage they require in order to stock a product.

 

Read the Fine Print

Insurance companies might add several conditions to CBD manufacturers’ policies that, if not followed, could allow carriers to deny coverage, said Lisa Pittman, partner at Thomas Pittman. The Austin, Texas-based law firm specializes in business planning and compliance.

“It costs a lot of money to challenge an insurance company, and you have to file a suit against them if they deny your claim,” Pittman said.

Companies are advised to understand the full policy, including exclusions and endorsements, to ensure they don’t inadvertently void their coverage. Companies can get referrals from a trusted attorney, certified public accountant or other sources to ensure they are working with reputable brokers and insurance carriers.

Some industry groups such as the American Association of Insurance Services are working to standardize exclusions and endorsements for the cannabis industry.

Most insurers will not cover suits related to ingestible products that result from unchecked health claims or other statements that are not approved by the  U.S. Food and Drug Administration. Others will deny coverage if a company didn’t provide notice about a change to the ingredients of the insured products, including sourcing the same ingredients from a different provider.

As with any insurance policy, it always pays to read the fine print.