Cannabis and ag business insurance claims made easy
When should you turn to your insurance for help? As a business owner and an entrepreneur, you might be surrounded by insurance protection. The trick is knowing when and how to use that protection.
“I pay all this money for insurance and as soon as I submit a claim my insurance premium skyrockets!”
It’s a common fear and, luckily for everyone, it’s not always true. But, it’s certainly not impossible.
So is submitting a claim to your insurance company somewhat of a double-edged sword? You can make the argument, sure. But when you consider all of the implications of reporting a claim or not reporting a claim, the answer may be less murky than you’d think depending on what kind of claim you’re talking about. Cannabis and ag business insurance claims are no different.
Bottom line: how does the common business owner know when to turn to their insurance for coverage?
- Turn to your insurance broker for guidance. Every claim is different and it’s helpful to have a partner who knows the in’s and out’s.
- Educate yourself. It’s important for you personally to have a working knowledge of the relationship between your cannabis and ag business insurance claims and your policy premiums.
What insurance companies look at
There are two key elements the insurance companies consider when it comes to analyzing a cannabis or ag company’s claim history:
Claim frequency: how often the insurance company is put on notice regarding an incident that may (or already did) result in a claim. Let’s consider a hypothetical situation in which a cannabis business owner pays $50,000 a year for general liability insurance. Over the course of this year, they submitted four claims, resulting in a $4,000 settlement for each. At the end of the 12-month period, the insurance company collected $50,000 and only paid out $16,000 – seems like a profitable account for the insurance company.
But this is a prime example of how the loss ratio (what you’ve paid in premium vs what they’ve paid in claims) is not indicative of the insurance company’s view of the account. If this particular business experienced four separate incidents in the past year, it is only a matter of time until a more catastrophic loss is incurred – and for this reason, the insurance company can justify a steep increase in insurance premium upon renewal of this account.
Claim severity: the total dollar amount the insurance company pays out on a specific claim. In the case of a severe, or catastrophic claim, there’s no question that it needs to be reported to the insurance company, but there’s also a slim chance that the premium does not increase upon renewal. Often times after a severe loss, a business is forced to tweak their operations to demonstrate to insurers their awareness of loss exposures and willingness to change to avoid certain risks.
How to deal with it
Let’s use a couple examples to explore how claims can play out.
1) At your company’s facilities, an employee slips while working with an extraction machine and sustains serious head injuries, damaging the machine.
- The company could insure the floors have proper matting in “slippery areas” around the extraction machines
- Implement necessary clean up & safety procedures for using extraction machines
2) A child consumes an edible intended for adult use and has an adverse reaction.
There could be severe injury to the child and a lawsuit will almost certainly follow. This must be reported to the insurance company. Changes the company could make:
- Redesign the packaging, clearly stating to keep away from children.
- Improve safety features of the product, its packaging or its storage needs to be 100% childproof.
- Work with a qualified attorney who can guide you through proper labeling, warnings and disclaimers.
If a policy holder only has one severe loss, often considered a “shock” loss, it may be easier to convince a new insurance company that this type of loss cannot happen again due to operational changes (ex: remove all trampolines).
But what about smaller claims?
3) Your company’s office is broken into and a laptop is stolen.
The total cost to replace the laptop is $1,600. Your property insurance policy has a limit of $50,000 and a deductible of $1,000. Changes the company could make:
- Improve written guidelines and procedures about handling company property.
But here, because of the small size of the loss, it’s especially important to pay attention to the policy’s limits and deductibles. We know the limit is large enough to cover the loss. But, since you would have to pay $1,000 (the deductible) before the policy would start paying it may be better in the long run to retain the loss rather than report it to the insurance company. The claim payment of about $600 might not be enough of a benefit to justify the long-term cost of claim activity.
When in doubt, turn to your broker for guidance!
More importantly than when to report a claim, are actions you could take to prevent a claim. Here are some important procedural considerations when trying to minimize future losses:
- Past losses (claims history): History tends to repeat itself. By understanding what caused past losses, it’s easier to make adjustments to prevent similar losses in the future.
- Personnel: Look to employ people with a clear understanding of your businesses goals, and the proper way to achieve these goals. This type of personnel should look to be retained, rewarded and used as examples of how to conduct business.
- Top-down risk management: The tone is set by company executives. These key people should present specific risk management guidelines, often in the form of safety manuals and an open-door policy for employees to report questionable behavior that may result in potential loss for the business. Good training can prevent a lot of headaches down the road.
Don’t have the time or resources to implement such detailed risk management practices and procedures? Here’s a quick chart to illustrate how different loss exposures should be handled:
Businesses benefit from knowing how insurance claims play out before they have to make a claim themselves. Yes, there are some constants, but cannabis and ag business insurance claims really need to be considered on a case-by-case basis. There are countless variables to consider and risk management procedures to apply. Your best bet: stay educated, be vigilant in your risk management and work with the right insurance broker who knows how to properly deal with cannabis and ag business insurance claims.