Everyone in business recognizes the need to have complete insurance for the safety of company assets. Some courts have suggested that the policyholders should understand their policies; but basically, the contracts are rarely read or written in legal language so a lay person is generally unable to see what is covered.
Most people buy their coverage based on “trust.” Cannabis is a newly emerging, now legalized risk, growing exponentially financially, and will inevitably incur potential claims for reasons still unknown. The analog for THC sales is the similarity between Dram Shop coverage and potential sales of THC infused products with their concomitant liabilities. So, who does the industry trust: their insurance brokers of course!
However, when an insurance agent, whether retail or wholesale, is accused of allowing customers to be underinsured or placed with a poorly financed carrier, agents will, in the event of non-responsibility by the insurer, claim that a “favorable case” in law limits the industry’s legal exposure. There are many cases and statutes reinforcing this position because the Insurance industry, regulated by states and not the Federal government as are banks, has over the decades been weak in supervising the financial solidity of insurers. Knowing this, and to remedy this conundrum, they set up state-regulated solvency funds, to which companies are “admitted” when approved by these same regulators. These funds ameliorate some failure of carriers, but rarely pay all of the outstanding claims a weak carrier leaves behind — with the insureds picking up the pieces.
Strange as the location seems, an insurance-agent-lawyer in Nevada conducted a study “Agents E&O Standard of Care Project: Nevada Survey”. He writes that “an agent or broker has a duty to use reasonable diligence if he is unable to place the requested, needed insurance and notify the client: Keddie v. Beneficial Insurance, 94 Nev, 418, 420, (1978). The context of this is that the agent or broker does not need to provide the insured any duties other than procuring the coverages.
The Nevada Supreme Court, while not issuing a published opinion, has instructed brokers and agents to advise their insureds of this SINGLE responsibility…see Flaherty, 2013 WL7155078 (citing Gary Knapp a Nevada lawyer). The Federal court in Nevada has said there are SPECIAL CIRCUMSTANCES where the salesperson MUST assume some duties that are not spelled out in the insurance contract.
The cannabis issue is simply this: Are your current marketers telling their insureds about the financial stability of the sold carriers and their responsibilities for explaining same. Kanna Risk Management is concerned about this issue for cannabis brokers, because of the newness of cannabis businesses and old-style language that populates insurance contracts. So here are four thoughts:
1) Document interactions and policy issues with your insureds
2) Confirm your ability to place OR NOT the required needed coverages
3) Follow up oral discussions on accepting and declining offered policies in writing
4) Keep well-maintained written files for your E&O carrier
Remember, legal cannabis is a new industry, with similar and new risks for the sellers and public. There will be a great deal of legal cases filed on these issues in the future…better safe than sorry. See you next time …