Cannabis EPL Insurance: 5 Reasons Why Your PEO’s Isn’t Enough

There’s a bevy of benefits when your cannabis company uses the services of a professional employer organization (PEO). They provide convenience by allowing you to outsource your HR duties to them. PEO’s also guide you through a maze of regulations and laws that most cannabis companies don’t have time to review.

Understanding PEOs

From a startups’ perspective, PEO’s can help fledgling companies grow. Why? A company’s ability to survive and profit often hinges on the degree to which it can manage employees more efficiently. Businesses that use PEO’s for at least four quarters are approximately 50% less likely to go out of business.

So it’s no surprise that more and more cannabis entrepreneurs are looking at PEO’s to provide a needed solution. One study confirms that 14 – 16% of small businesses use PEOs, with a trend upward.

Here comes the “but” when you hire a PEO; your employees technically become employees of that PEO. Sure, this reduces costs by capitalizing on price breaks given to larger companies. But this system can also add to the complications since it forces the PEO to take on more risk than traditional businesses.

That’s why you’ll find state-mandated workers’ compensation as well as employment practices liability (EPL) insurance coverages included. It’s for their benefit as much as it is for yours. The PEO must be in compliance with state laws and guard itself from exposure to disputes between you and your employee.

So is the PEO’s EPL policy the right fit for your company? Good question! Let’s explore five reasons why your cannabis company should get its own EPL.

1. Your “Limit of Liability” should mean just that: your limit of liability.

Why would you want to share your limit of liability with a group of unrelated companies? That’s exactly what happens when you use the services of a PEO, unfortunately.

Imagine sharing limits in other lines of insurance. What if you shared a single auto insurance policy with everyone on your block? While it’s unlikely that multiple neighbors will get into accidents in one year, it’s also far from impossible. A few costly accidents, and suddenly, the amount of coverage available to you skyrockets. Someone else did something wrong but you might have to pay the price because…why?

A PEO’s EPL policy generally offer two limits: an aggregate limit and a per company limit. The per company limit (generally $1,000,000) represents the most a carrier will pay out for all claims against any of their PEO’s clients. The aggregate limit indicates the most a carrier will pay out during the policy period for all employees at each company on the policy.

So even with an aggregate limit of $20,000,000, cannabis companies who rely on this policy are taking unnecessary risks that ironically go against the core reason you get insurance in the first place: to protect your cannabis business from worst-case scenarios!

If, for whatever reason, the aggregate limit is depleted, there’s no coverage left for your business. You could be the poster child for sound employment practices but if you happen to get an EPLI claim and the aggregate limit is already used up, that $1,000,000 limit you were relying on disappears.

2. A high retention can be a bad thing.

A retention (in insurance speak) is the amount you have to pay per claim before the insurance company will start covering you.

Let’s start by looking at some positive effects of high retentions. Policyholders refrain from over-reporting claims (which lowers costs for everyone in the market). Higher retentions are also thought to promote personal responsibility. The hope here is that policyholders will engage in less risky behavior when they have more skin in the game. Not to mention the fact that your premiums go down when you raise your retentions.

But a high retention can be a big problem if it isn’t managed properly. If your policy’s retention is too high, you’ve either made the decision to self-insure or something is broken. Remember that insurance companies know the cost-per-claim statistics and will use that data to make policies more profitable for themselves.

Increasing retentions is one way they do this. Carriers want to put a buffer between themselves and the potential claim. We’ve seen PEO’s EPL retentions reaching as high as $75,000, but more likely they’re in the $35,000 range. It’s no accident that this amount happens to be the average retention for companies with under 500 employees. 

Companies with 20 or even 100 employees present very different risk profiles than those with 500 employees. As a result, smaller businesses who buy their own EPL policies can find retentions as low as $10,000 (or lower). The trick is to keep the retention low enough that you don’t have to suffer when a claim hits and high enough that your premiums aren’t a burden.

The average cost of settling an EPLI lawsuit is $125,000. Most likely, you’re not going to be able to settle an EPL lawsuit for less than your retention. The insurer will probably enter the picture and start using your policy limits to defend you.

The question at hand: would you rather pay $10,000 or $75,000 out-of-pocket before that happens? That $65,000 difference could (in theory) pay for your EPL premiums for the next decade or longer!

3. No two cannabis companies are created the same — insurance coverage should reflect this.

Back to that last example, why do you and your neighbor have two different auto insurance policies? You have two different vehicles and two different lifestyles. Even if it was possible to save some premium dollars by sharing policies, would you? When planning got the future, who wants to take into account the full range of bad decisions their neighbor might make?

Planning for employment practices claims shouldn’t be any different.

A PEO’s EPL insurance policy is often generic and designed to protect diverse companies from the basic risks faced by employers. No more, no less. The coverage isn’t tailored to the specific risks posed by its client companies.

For instance, the risk of a harassment lawsuit is considerably lower at an charitable non-profit with a mainly female workforce than it is at a hyper-competitive venture capital firm with mostly male employees.

Non-exempt, uniformed employees who receive hourly wages are more likely to get into wage disputes with their employer than virtual employees with flexible hours and annual salaries.

Why should these varied types of companies be thrown into the same category? The answer? They shouldn’t.

Let’s take wage and hour claims as an example. (Wage and hour claims are disputes between an employee and employer regarding compensation). These claims are costly and happen often. They also frequently tilt in favor of the plaintiff. As a result, this coverage is usually excluded from PEO’s employment practices policies.

It’s for these very reasons you should be covered by a policy that protects you from wage and hour claims. Most EPL insurers will agree to sell you a sub-limit (generally $100,000 to $250,000) to pay for legal defense costs. Unfortunately, your PEO will probably not offer the same kind of concession.

4. Your insurance coverage shouldn’t be tied to your relationship with a service provider.

Traditionally, insurance is an agreement between two parties: the insurance company and you. As long as you pay your premiums, they’ll hold up their end of the bargain.

It’s a different story when you rely on your PEO’s EPL policy. Now another party’s interests are involved. If you were to fire them, your EPL coverage disappears. This is not sound risk management. The reliability of your insurance coverage shouldn’t be based on a third-party service agreement that’s often not as clear-cut as advertised.

The worst case scenario? You fire your PEO and your EPL coverage is cancelled. Just go out and get new insurance, right?

Sad to say, it’s not as simple as that. There’s a concept in the insurance world known as continuity of coverage that controls how these policies operate.

In a nutshell: from the time you buy your company’s first EPLI policy, you need to keep the coverage intact. Your policy simply won’t work effectively if you don’t. Without continuity of coverage, handling claims can become troublesome. Insurers could restrict the coverage they offer you in the future.

In a perfect world, you have an EPL policy that’s tailored to supplement the one provided by your PEO. But let’s say you don’t. Let’s say you rely on the EPL policy provided by the same PEO with whom you’re about to terminate services. Then what do you do?

alk to a qualified insurance professional first before making any final decisions. You’ll want a bindable quote in-hand from a carrier who has agreed to honor the continuity of your coverage.

You’ll also need coverage that’s equal to (or better than) whatever the PEO provided. This will allow you to take back control of your risk today without adding to your risk tomorrow.

5. If a claim occurs, your attorney should be working for you and only you.

Trust us, the claims process is already dense and complicated. Most EPL carriers require you to give up partial or total control of the litigation process. If you don’t follow their rules, they’ll probably try to avoid defending you altogether. So before you’ve even added a PEO to the equation, conflicting interests are already at play.

Now, let’s put the PEO back into the equation. If a lawsuit names you and the PEO (highly likely, since they are the employer of record), the carrier may appoint the same attorney to represent you and the PEO. And for good reason: they don’t want the plaintiff playing your attorney and the PEO’s against each other.

But there’s also a potential pitfall: you and your PEO could want different results from the lawsuit. What happens if you want to fight and your PEO wants to settle? Or vice versa?

Considering insurers are often incentivized to settle cases and minimize costs, throwing a third party into the mix could easily make matters worse. A shrewd cannabis company owner will rely on his or her own EPL insurance policy. It’s one of the primary ways to avoid an EPL claim going from bad to worse.

Takeaways

Regardless of the reason you obtain your own EPL, the first step is talking to a broker who knows what he or she is doing. It’s critical that your new EPL policy is constructed in a manner that helps, not hinders. Something as seemingly meaningless as one mis-worded sentence in your policy could pit your carrier and the PEO’s against each other, compounding issues further.  

The right insurance professional will also be able to take an intimate look at your cannabis company and tell you exactly what you need. What’s the right limit for you? Is the retention low enough? High enough? Do you require a simple EPL policy or is a bespoke policy a better fit?

Remember, your answers may not be the same as other cannabis companies. Let’s find a policy that reflects that.

Protecting your cannabis company can seem confusing; however, we’re a full-service insurance brokerage working with carriers worldwide to offer you the best coverage possible. We’re here to help! Please reach out to us today by emailing [email protected] or calling 646-854-1093 to learn more about your cannabis insurance options.