Q: When is my cannabis startup officially covered by our new insurance policies?
Ready for the short answer? It depends on the policy. There are different types of insurance policies available: occurrence policies and claims made policies. Depending on whether the policy is on occurrence basis or claims made determines when you can (or should) make a claim.
Claims Made Insurance Policies
Under a claims made policy, two events must occur during the policy period:
- A claim must be made against the insured company.
- A claim must be reported to the insurer by the insured company
When these two criteria are met, the insured company can recover regardless of the time the wrongful act took place.
One exception of note is that claims made policies generally have a “retroactive date.” You might consider this date a “cliff.” This means that any wrongful acts that occur on or after that date are recoverable but not before that date.
If you’re binding up a brand new policy, the retroactive date generally coincides with the start date of the policy. The retroactive date will remain through renewals in the following years, however, so coverage “extends” further each year.
This is why it’s critical for cannabis startups to consider insurance preemptively, so their retroactive dates are early in the company’s life (and their insurance policy start date covers most of the company’s acts). This can prevent a mistake made during the company’s younger days from rearing its ugly head years later.
Bottom Line? Check your retroactive dates and understand what should happen in an acquisition situation.
Extended Reporting Period
Given the requirements to recover under a claims made policy, coverage ceases when the startup company stops renewing. That’s why insurance carriers often provide something called an extended reporting period (ERP).
In short, the ERP offers the insured company an extra period to report claims that occurred after the retroactive date and before the policy was non-renewed.
While it’s generally better to simply renew coverage, cannabis startups that are winding up or in the process of being acquired might want to consider this option.
Per Occurrence Policies
An occurrence policy is basically the opposite of a claims made policy. The insured company recovers when an occurrence took place during the policy period even if the claim is made considerably after the policy has expired. (Most general liability policies are on an occurrence basis.)
There’s a certain level of permanence to occurrence coverage. The policy is basically covering a window of time. So for every renewing policy period, you add to your underlying limits.
For instance, a $1M general liability policy that has renewed for 2 years will actually provide $2M in coverage: $1M per year. This in unlike a claims-made policy (where the limits remain the same regardless of how many years the policy has been in place).
If you’re a funded cannabis startup, you most likely have at least one of each type of insurance policy. Given the shift in the markets, there’s a good chance you have more claims made policies than occurrence policies.
You may think that your cannabis business insurance start date is all you need to worry about but there’s more to the story than that. Take the time and make sure you know how both types of insurance policies work. Then work with your insurance broker to report claims early…and correctly.