With Halloween just days away, children across the country are readying their costumes and preparing to ask, “trick or treat?” To protect against their own ghosts and goblins, businesses across the cannabis industry should follow the kids’ lead. Those businesses should carefully review their commercial insurance policies and make sure that they are receiving the treats they expect, i.e., coverage, and not a “trick,” i.e., a coverage-defeating exclusion.
👻🎵👻(Cue the spooky music.)👻🎵👻
Commercial insurance policies include, for example, commercial general liability (“CGL”), product liability, cyber, property, and directors and officers’ (“D&O”) insurance policies. To ward off evil spirits and mitigate its risks, a vigilant cannabis-related business should consider procuring many, if not all, of these (and other) coverages.
For many policyholders, though, any one of these policies may feel like a haunted corn-maze, leaving them unsure which way to go. Reading such an insurance policy, it may feel as if there is uncertainty at every turn and danger lurking in every shadow. And, just when a policyholder expects to receive coverage, something may go “bump in the night,” scaring the policyholder and its financial bottom-line.
These nightmarish feelings may be particularly prevalent in the cannabis industry, as, commercial insurance policies marketed and sold to policyholders in this industry may contain all sorts of harmful exclusions that could be read to defeat the very coverage cannabis-related businesses need and expect. For example:
- A broad “Health Hazard” exclusion – which, paradoxically, could appear even in a product liability insurance policy – could preclude coverage for injuries “arising directly or indirectly out of, related to, or, in any way involving” the actual “or alleged emergence, contraction, contribution to, aggravation or exacerbation of any” type “of adverse health effect, impairment of health, abnormal condition or conditions, disorder, sickness, ailment, unhealthiness, symptom, disease, illness or malady of the human body” resulting from “the use, consumption or exposure to any product that is manufactured, sold, handled or distributed by, for, or on behalf of any insured” that contains “Cannabis sativa, cannabis indica, hemp or marijuana or any of their derivatives.”
- Any number of vaping-related exclusions also could appear in a product liability insurance policy. Vaping-related exclusions can vary widely: Some may be absolute. Some may apply to batteries only. Some may apply just to vaping products from specific countries or manufacturers.
- A regulatory exclusion in a D&O policy could preclude coverage for claims involving, for example, a “criminal act,” a “fraudulent act,” or a “dishonest act.” Faced with an insurance claim, a disingenuous insurer could argue that almost any cannabis-related act could fit within one of these definitions.
- For obvious reasons, another potentially ghoulish D&O exclusion could be one that precludes coverage for a claim “[b]ased upon, arising out of, or in any way involving any violation of any local, state, or federal administrative or regulatory statute, code, rule or regulation or procedure” (emphasis added).
Other policy exclusions that may seem benign on their face, can – at least in the hands of an insurer determined to deny coverage – still prove to be downright scary. For example, in an effort to avoid its coverage obligation, an insurer may try to conjure a “witch’s brew” of exclusions relating to growing crops, fungi and bacteria, mold, mildew, bacteria, carcinogens, lead, pesticides, occupational disease, cross-pollination, designated products, certain additives, and/or “misdelivery.”
Policyholders need to not abandon all hope, however. First, they can and should review their existing insurance policies. In doing so, at a minimum, they can identify any harrowing exclusions and “sleep with one eye open” – that is to say, they can at least identify any (potential) gaps in coverage and structure their business accordingly.
Moreover, when it comes time to renew or purchase insurance, policyholders, working with their insurance brokers and coverage counsel, can and should obtain and review specimen policies to determine whether they contain any dangerous exclusions. Be sure to review the actual policy language; do not just judge any exclusion by its name alone. Names can be misleading, and not all exclusions with similar names are worded the same. If there is a dangerous exclusion lurking in any policy form, the policyholder can try to negotiate for its removal or choose a different insurer/insurance policy.
Second, if and when a policyholder experiences a first-party loss or a third-party claim, and an insurer denies coverage purportedly on the basis of some exclusion(s), the policyholder should not just raise the white flag. To the contrary, the policyholder should consult insurance coverage counsel and remember:
- Generally, coverage grants in an insurance policy should be interpreted broadly in favor of coverage.
- Exclusions, however, generally should be interpreted narrowly (and, also in favor of coverage).
- If a policy provision is ambiguous, generally that term should be construed in favor of the policyholder (and, again, in favor of coverage).
- A reading of an insurance policy that results in an absurd conclusion and/or illusory coverage should be avoided. As one Indiana state appellate court explained, “illusory coverage” is insurance coverage “for which the insured paid a premium but from which he would not be paid benefits under any reasonably expected circumstances.”
Insurance policies need not be scary. But, policyholders still should tread carefully, making sure they check for perilous traps – some of which may be hiding in plain sight in policy forms. And, should one of those traps be sprung, a policyholder should be prepared to free itself and know how to exorcise the demonic exclusion(s).
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