Insurance Daily News

Cannabis Insurance: Why Theft Claims Are Being Denied

Cannabis operators frequently focus their insurance discussions on premiums and coverage limits, often neglecting the critical question of what might cause a claim to be denied. Stephanie Bozzuto, CEO of Bozzuto Surety Insurance Services, notes that this oversight often stems from a lack of understanding regarding specific policy conditions, particularly the protective safeguards endorsement.

This endorsement, found in most cannabis property policies, mandates strict operational requirements for security systems. It is not enough to simply install cameras and alarms; these systems must be functional and actively monitored by a third party at all times. Bozzuto highlights that claims are frequently rejected if an alarm is disabled for maintenance during a break-in or if a monitoring contract lapses due to payment issues. Many operators mistakenly view these security measures solely as regulatory compliance tools, failing to realize they are also binding insurance obligations.

Beyond property security, Bozzuto identifies directors and officers (D&O) liability as a frequently underestimated risk. Because the cannabis industry is characterized by significant volatility—including frequent ownership changes, investor disputes, and failed acquisitions—D&O coverage is essential. However, many operators delay purchasing this insurance until a crisis is already underway. Because D&O policies are written on a claims-made basis, they generally do not cover disputes that originated before the policy was active. This timing gap can leave leadership personally exposed to legal costs that often reach six figures.

Property coverage also suffers from common structural flaws, primarily due to cost-cutting measures during the placement phase. Operators often request lower property limits to reduce premiums, and they frequently underestimate business income projections by failing to account for the lengthy duration required to rebuild after a loss. When these limits are set too low, operators may find themselves without sufficient funds to complete repairs or cover income replacement while the business remains non-operational.

Context/Analysis: The recurring theme in these insurance failures is a focus on policy breadth rather than policy depth. For operators, this means the procurement process should prioritize a thorough review of exclusions and warranties over simple price comparisons. Brokers who cannot clearly articulate what will trigger a claim denial are likely failing to provide adequate risk management. Moving forward, operators should ensure that site-level staff—not just ownership—are fully trained on the specific requirements of their security safeguards, as operational lapses at the ground level can invalidate high-level coverage.

Why it matters

Cannabis operators often face denied claims and personal liability because they prioritize premiums over understanding the specific operational conditions and exclusions buried in their insurance policies.

FAQ

Why might a cannabis property insurance claim for theft be denied?
Claims are often denied if the required security systems, such as alarms and cameras, were not operational or actively monitored by a third party at the time of the incident, as these are strict conditions of the protective safeguards endorsement.

What is the risk of waiting to purchase directors and officers (D&O) liability insurance?
D&O policies operate on a claims-made basis, meaning they do not cover disputes that began before the policy was in effect. Waiting until a crisis occurs often means the coverage will not apply to existing legal issues.

How do business income projections often fail cannabis operators?
Operators frequently underestimate the time required to rebuild after a major loss, leading to business income coverage that is exhausted long before the facility is operational again.

Source: Insurance Business America. See the original source for full details.