The burgeoning on-demand economy is having a real and direct impact on cannabis and ag startups. Companies like Eaze, Onfleet, GreenRush, and Meadow are answering the markets demand to deliver cannabis products to your door-step at breakneck speeds.
Our friends at Founder Shield previously discussed the risk profile of on-demand services and the ways insurance can help. Let’s take a look at some more critical information specific to on-demand cannabis and ag startups.
1. A standard tech policy is not enough.
A common refrain we hear from clients: “We’re just a tech platform — a middleman to connect our users. We don’t really perform any of the services on our app.”
And while there’s some truth there, it doesn’t mean that a cannabis or ag startup can just be underwritten like a direct-to-customer retailer. For insurers, the style of the business model doesn’t matter as nearly much as the actual legal liability.
Take a popular on-demand company like Airbnb. When a consumer finds a place to stay using their services, he or she is obviously dealing with an independent 3rd party, right? But if something were to go awry, do you think a team of hungry lawyers would leave Airbnb out of the equation simply because they’re merely the “middleman?”
These types of legal scenarios become increasingly muddled as the 3rd party distinction continues to lessen and branding strengthens (think Uber or Postmates).
The takeaway? As a new on-demand cannabis or ag startup, be prepared to get pulled into service provider-related lawsuits. Regardless of how well your contracts are drafted, you could still foot the bill for some hefty legal fees. A “standard tech company” insurance policy is often not enough. Especially as state licensing comes into play around who can deliver cannabis products, the liability and risk transfer becomes even more complex.
That’s why underwriters will factor in service provider risks when underwriting your policy. But that’s also why underwriting for on-demand cannabis and ag startups may take longer (and premiums may be higher) than your cannabis colleagues building a B2B SaaS product or running a web design company.
2. The dilemma of the 1099 economy
Another term for the on-demand economy is the “1099 economy.” This refers to the use of 1099 independent contractors as the service providers on the platforms.
Back in the day, independent contractors were considered separate businesses (consultants) that often carried their own insurance. These contractors would have to show proof of insurance to general contractors who hired them.
And while this practice still exists today, the new wave of on-demand services has turned the traditional paradigm on its head, giving rise to opportunity, criticism and new legal challenges all at the same time.
Here’s the dilemma:
Insurance companies look at an independent contractor (IC) through a traditional lens and will quote coverage based on a condition: the insured requires proof of coverage from IC’s before working with them.
But generally, on-demand cannabis and ag startups don’t like to play this way. Too much screening can create on-boarding friction or stifle adoption by prospective IC’s.
A standoff can occur: between old-world risk mitigation and the cannabis and ag startups fast and furious mindset. Some services and dispensaries have employees ready to coordinate with delivery services, while other services relay heavily on contractors to bring the gap between logistics, dispensaries, and the end consumer.
Luckily for on-demand cannabis and ag startups, these requirements can be loosened or tossed altogether…but it will come at a (literal) price. SpeedWeed witnessed this first hand as a first mover last year in LA. They have been able to combat the issue by making the drivers full-time employees. Underwriters also may look past the proof of insurance requirements but make up for it by including IC’s as employees when pricing the premium.
3. Blurred lines creates caution.
The distinction between service provider and conduit, contractor and employee or tech product and tangible service are often muddled in this new economy space. When roles aren’t clear, it creates an air of confusion.
It’s this kind of uncertainty that causes underwriters to package coverage together. One underwriter might be willing to offer general liability insurance but only if the insured shows proof of errors and omissions insurance in addition.
The on-demand world can be hazy. The cannabis and ag startup economy is still young and insurance carriers are still adjusting to it. Throw in some legal uncertainty and its a recipe for higher premiums and longer underwriting cycles.
So yes, getting business insurance for cannabis and ag startups may be a bit more involved than for other cannabis related companies…but it’s doable. Get the ball rolling early. Build the cost of insurance into the model as the your on-demand cannabis and ag startup grows.
Want to know more? Talk to us! We’re here to help.