Cannabis Excess And Umbrella Insurance

What Does Cannabis Excess And Umbrella Insurance Cover?

Both policies pay liability losses above the limits of underlying policies. An umbrella can also drop down when an underlying aggregate is exhausted and may cover some claims the underlying policies do not, while an excess policy only adds limits on the same terms as the policy beneath it.

The two terms are often used interchangeably, but they describe different policies. According to IRMI's insurance glossary:

• Umbrella liability sits over primary policies such as commercial auto and general liability. It provides excess limits when underlying limits are exhausted by claims, drops down to pick up where an underlying policy leaves off when that policy's aggregate is exhausted, and can cover some claims the underlying policies do not, subject to a self-insured retention.
• Excess liability provides limits above an underlying policy, which is often an umbrella. It is no broader than the underlying policy. Its sole purpose is additional limits.

For a cannabis business, the practical question is what sits underneath: general liability, product liability, commercial auto for delivery and transport, or some combination. The upper layers generally respond only to the kinds of claims the underlying program covers.

Why Is Excess And Umbrella Different For Cannabis Businesses?

Primary limits in cannabis are often capped, most cannabis coverage is written in the surplus lines market, and standard umbrella forms have optional cannabis exclusions. That combination makes the wording of each layer as important as the limit.

The NAIC's 2023 regulatory guide on the cannabis insurance market reports that a common complaint is constrained limits, for example $1 million per occurrence and $2 million aggregate. It also reports that most of the cannabis industry buys insurance through the excess and surplus lines market rather than admitted carriers. When the primary layer is capped, additional limits have to come from policies stacked above it.

Wording is the main cannabis-specific risk. Effective December 1, 2019, ISO introduced optional cannabis exclusion endorsements for its commercial umbrella and excess forms:

• A broad cannabis exclusion, defining cannabis goods as any product containing any amount of THC or any other cannabinoid.
• A version with a hemp exception.
• A version with hemp and lessors risk exceptions.

If an upper layer carries a cannabis exclusion while the primary policy covers cannabis operations, the layers do not line up, and the upper limit may not respond to the claims the operator is most likely to face. Operators commonly check that each layer is written to cover licensed cannabis activity and follows the underlying terms.

Which Cannabis Businesses Commonly Carry It?

Retailers, manufacturers, cultivators, distributors and delivery operators with public, product or vehicle exposure commonly carry an umbrella or excess layer. The NAIC lists umbrella among the typical business insurance needs of cannabis retailers.

• Dispensaries and retailers: premises traffic and product sales. The NAIC's guide lists umbrella alongside general liability, property, business income, commercial auto and cyber as typical retailer needs.
• Manufacturers and processors: product claims can erode a primary products aggregate.
• Distributors and delivery operators: vehicle exposure on public roads, layered over commercial auto.
• Multi-location and vertically integrated operators: several exposures sharing one set of aggregates.

State rules can also bring an umbrella into play. In Washington, WAC 314-55-082 requires licensees to carry commercial general liability insurance or commercial umbrella insurance for bodily injury and property damage arising out of licensed activities, with limits of not less than $1,000,000. The rule requires the state to be named as an additional insured, requires the policies to be primary, and sets a minimum insurer rating of A- Class VII in Best's Reports. Failure to maintain proof of insurance may result in license cancellation.

Leases and supply contracts often set liability minimums of their own. Requirements change, so verify current rules with your state cannabis regulator.

How Are Limits Typically Structured?

Umbrella and excess limits are stacked in layers above a primary program, with each layer paying only after the one below it is exhausted. The primary layer is commonly written per occurrence with an aggregate, such as the $1 million and $2 million structure Massachusetts requires for general and product liability.

A typical tower looks like this:

1. Primary policies: general liability, product liability and commercial auto, each with its own per occurrence and aggregate limits.
2. Umbrella: sits over the scheduled primary policies and may carry a self-insured retention for claims the primary policies do not cover.
3. Excess layers: additional limits above the umbrella, written on the same terms as the policy below.

Upper layers generally require the underlying limits to stay in force. In Massachusetts, 935 CMR 500.105(10) requires marijuana establishments to carry general liability and product liability of no less than $1,000,000 per occurrence and $2,000,000 in aggregate, annually, with a deductible no higher than $5,000 per occurrence. That sets a floor for the primary layer in that state, not a ceiling.

The appropriate total limit depends on the operation, its contracts and its assets, and is a question for a licensed broker.

What Do Carriers Ask For When Quoting Excess And Umbrella?

Umbrella and excess underwriters typically start with the schedule of underlying policies: carriers, limits, forms and loss history. They then look at the operations that drive severity, such as delivery vehicles and product volume.

• Copies or summaries of the underlying general liability, product liability and auto policies.
• Confirmation that underlying policies cover licensed cannabis activity, and any cannabis or hemp endorsements.
• Loss runs for the underlying lines.
• Vehicle schedules and driver information for delivery or transport.
• Product categories and annual volume.
• Contract and lease insurance requirements the layer is meant to satisfy.

Frequently Asked Questions