While some cannabis organizations were considered “essential businesses” during the pandemic, similar operations in other states were simultaneously deemed to be “illegal.” This divide will continue to be a significant source of uncertainty for retailers, cultivators and consumers everywhere into 2021 and beyond.
Unfortunately for everyone, the palpable tug of war between the states and the federal government will likely only increase if legalization is ever introduced at the federal level, putting tax dollars up for grabs.
For this reason, it’s very challenging for cannabis businesses to obtain insurance coverage, investors and bank accounts. It causes additional security and compliance issues. Indeed, it’s the reason the industry is lacking in support for start-ups and why employees face rudimentary or even dangerous R&D conditions.
Many cannabis operations are falling behind when instituting a proper risk management structure as they fight to expand their market share. Cannabis businesses that haven’t incorporated risk management will need to in 2021, especially when seeking to secure funding from PE firms.
As the 8th fastest growing industry in the U.S., the burgeoning U.S. cannabis industry is now estimated at $54 to $67 billion, maturing at more than 25% annually, recreational and medical cannabis sales are not likely to slow down anytime soon. Instead, experts predict continued growing pains – and gains – to shape the U.S. cannabis industry in 2021.
1. COVID-19 furthers growth but with a few roadblocks. During routine COVID-19 inspections of cannabis operations in 2020, state officials uncovered a host of issues at many cannabis extraction plants and retail outlets, including inadequate safety and health practices, incorrect labeling, lack of PPE compliance by staff and customers, improper counting of cash and more. In more extreme cases, these visits resulted in regulatory fines and even shutdowns. This led to the need to use seed money for something other than the organization’s original mission. In 2021, these scenarios are likely to develop into lawsuits from shareholders and activate Directors & Officers (D&O) and employment practices liability (EPL) claims from laid-off workers.
Many cannabis businesses have not procured the necessary liability insurance coverage for the significant risk that comes with rapidly growing. Whether it’s D&O and EPL policies or Cyber, Property or General Liability (GL) policies, it’s vital to think more holistically about insurance coverage. Cannabis operations must work with an insurance broker that specializes in the cannabis industry and understands different operations and business location, as exposures vary greatly.
2. Significant hurdles continue in compliance, banking and financial services. Although marijuana is legal for medicinal or recreational use in 43 states, businesses still struggle to secure necessary business loans, bank accounts and insurance coverage. In 2021, smaller local banks and savings and loan businesses may be more willing to work with cannabis businesses, but large institutions will likely shy away.
At every stop of the supply chain, cannabis business operators need to be proactive when taking steps to manage risk. That means consistently implementing risk management protocols to protect their business, their workforce, as well as securing the proper insurance coverage. This also includes growing the cannabis business’ safety net by engaging Cyber, Environmental Liability and Crime policies, or applying for emerging loan programs in an attempt to secure additional capital.
3. R&D into extraction can be risky business. In 2021, extraction will be a major point of focus for cannabis organizations. Cannabis extraction laboratories will experiment with optimizing existing methods involving the solvents ethanol and CO2 as well as innovative methods adopted from the agriculture industry, using water and light exposure and different nutrients for extraction. R&D becomes a potential liability when cannabis extractors modify the use of existing equipment for a different type of extraction. Before experimenting with R&D, cannabis operators should engage their insurance broker to ensure such a risk is covered within existing policies.
4. More security needed inside and outside cannabis operations. A cannabis operation’s security risk is two-fold. In light of civil unrest and looting across the U.S. this year, additional security measures were required to secure property and goods. On top of that, a mundane risk— employee theft — has also increased.
The majority of cannabis industry theft — as high as 90% by some estimates — is employee-related. Often, employees in cannabis grow facilities and retail storefront scheme together to cheat their employers. Part of the challenge is that state regulations require plant and production facility blueprints to be publicly accessible.
Employers may reduce theft by restricting access exclusively to employee areas, while also investing in better internal access controls. Conduct an audit of your work areas with a specialized insurance broker who can provide you with a list of best practices for reducing theft.
Looking ahead for cannabis
Much will ultimately remain the same in 2021 for the cannabis industry. Even if the U.S. government takes steps to legalize cannabis federally, a bill would not go into effect until the end of the year, more likely, in 2022 or beyond. Until a bill is passed, cannabis businesses will seek to remain viable beyond the state level. For all cannabis businesses, the year 2021 will be about building on existing foundations and preparing for what will hopefully come next.