It’s well known the cannabis industry is highly regulated and subject to a variety of environmental laws / regulations.
Cannabis is also an agricultural product with cultivators, processors, laboratories, transporters, landlords, dispensaries & retail operations all part of the business model. We know the agriculture industry is impacted by a cornucopia of environmental exposures. Agricultural operations consume 80% of the world’s fresh water and contaminate 70% of our waterways.
The fact the agricultural industry is impacted by so many environmental issues means it’s critical in today’s business environment, for those involved in the cannabis industry to have an environmental financial assurance plan.
This is especially true for any cannabis business that utilize or have signed contracts / work orders which contain environmental indemnifications. Without environmental financial assurance in place the contract may not be worth the paper it’s written on.
To make sure we are on the same page, it’s critical you have a clear understanding of what a pollutant is.
What is a Pollutant?
Insurance companies generally describe a pollutant as smoke, soot, vapors, fumes, acids, alkalis, chemicals…. I am not a scientist and I assume most who are reading this are not either so based upon the way courts and insurance companies have responded to pollution claims in the past, environmental Strategist® has created a definition of a pollutant that is easier for the masses to understand.
A Pollutant is any material, substance, liquid, product…, which is introduced into an environment for other than its intended use / purpose. In other words, something that ends up where it does not belong. Fresh water, cheese, milk, fruit juice, cannabis have all been classified as pollutants by courts and insurance carriers under various circumstances.
Now that we understand what a pollutant is, let’s review some of the environmental exposures impacting the cannabis industry.
Environmental Exposures Impacting The Cannabis Industry
Storm water runoff; Vapor intrusion; Volatile Organic Compounds (VOC) air emissions from odors & chemical applications during plant growth and processing; Extraction facilities use solvents (i.e. propane, isopropyl alcohol, ethanol, butane…); evaporation of solvents used in the THC extraction process which are toxic and / or flammable: Decontaminating equipment; Transport storage, use and disposal of fertilizers, pesticides, and herbicides; Storage & use of fuels, antifreeze, oil and hydraulic fluids; Natural resource damages; Packaging operations using plastic, glues, inks…; Leaking above and/or underground storage tanks; Spills from loading, unloading and transport of equipment, supplies, finished product; Faulty HVAC units allowing release of coolants or causing sick building syndrome; Overuse of irrigation; Old equipment storage yards; On-site compost piles; Historical contamination; Old or abandoned wells not properly closed allowing contamination into the soil and ground water; Improper management of protected or sensitive areas like wetlands; Easements on the property (rail/roadways, pipelines, power lines, waterways…) with potential environmental implications; Hazardous mercury-containing waste due to the use of ultraviolet (UV) lights; Cannabis generates a wide variety of waste streams; Inadequate or no auditing of hazardous and non-hazardous waste handlers; Waste water management; Spills and air emissions from emergency power generator systems; Mold and mildew from plants gets onto clothing and other surfaces; Grow operations generate agricultural waste that must be managed and disposed of as a regulated or scheduled substance (e.g., pursuant to Drug Enforcement Agency (DEA) or state-level programs); Terpenes, which are responsible for the different aroma, flavors, and even colors in cannabis plants, terpenes may also be harmful to employees when they react with ozone (O3), commonly causing irritation or inflammation to eyes and airways; Adverse reactions and interactions of chemical compounds that accidentally commingle during a fire; Some states do not allow recycling facilities to accept waste that has come into contact with cannabis products; Illegal disposal of waste; Siltation of nearby streams from improper erosion control management; Products can become tainted during growth, storage, manufacture, or transport to mold / bacteria build up or pesticides used; Silica; lab operations; vandalism and more…
Environmental Financial Assurance
Due to government regulations, for many businesses, environmental financial assurance has been in place for decades. Asbestos and lead abatement contractors must evidence environmental financial assurance to perform their services, industrial and hazardous waste haulers must evidence environmental financial assurance before they are allowed to move any waste, regulated underground storage tanks owners must evidence environmental financial assurance before they can put any product in their tanks.
It has been the private business sector that has been slow to respond in requiring environmental financial assurance to back stop environmental indemnifications contained in contractors. There are several forms of environmental financial assurance from bonds, letters of credit, monies in escrow, insurance….
Overlooked Benefits of Environmental Liability Insurance
Unlike most liability exposures impacting the cannabis industry, pollution losses are not a frequency risk, but rather a severity risk. Because all cannabis operations face notable environmental exposures, consideration needs to be given to the economies of scale afforded with Environmental Liability Insurance as part of your risk transfer strategy, versus self-insurance.
Furthermore, most commercial insureds only consider the remediation costs associated with a pollution event. However, often the clean-up costs are far less than other costs that can arise from a pollution loss.
Three Overlooked Benefits of Environmental Liability Insurance;
- Defense Costs: Environmental liabilities are relatively new and very litigious. Even if you do nothing wrong you can still get named in a suit and have to expense defense costs i.e. legal fees, environmental investigations, etc.
- Claim Management: All policies come with specialists to assist you in handling a claim. Who oversees communications, public relations, emergency response, government compliance, financial management, third party claims for bodily injury, property damage, natural resource damages….?
- Third Party Liability: The majority of the time the cost to clean up the environmental problem/s is far less than the associated claims that come in from third parties for bodily injury, property damage and business interruption. You need to look at your client’s and neighbors that can be impacted if you or a sub-contractor/vendor cause an environmental loss.
Pollution insurance is designed to fill in coverage gaps created by standard property and casualty policies.
Environmental Liability Insurance Products For The Cannabis Industry
Environmental Impairment Liability (EIL)
EIL is for cannabis operations susceptible to economic loss caused by pollution that actually or allegedly originated from their properties. Sometimes referred to as pollution legal liability, this coverage is for those who own, operate, lease, or have any other insurable interest in real property and/or the operations. Coverage can be written in a variety of ways addressing unknown preexisting conditions or new conditions. Coverage can include third party bodily injury and property damage along with business interruption and extra expenses, on and off site clean-up costs, legal defense expenses, non-owned disposal sites, transportation and more. EIL can be offered on multiyear terms. Most EIL policies cover above ground storage tanks. You can cover multiple locations on a single policy.
Contractors Pollution Liability (CPL)
CPL Coverage protects the insured for pollution conditions they may cause or exacerbate while performing work at a 3rd party location/s. This is for covered operations performed by or on behalf of the insured.
Cannabis operations have potential pollution exposures from vendors (HVAC, Electrical, Plumbing, Applicators, Harvestors…) they hire to perform services. Should your vendors cause a pollution problem or exacerbate an existing environmental issue their general liability insurance policy typically will have either an absolute or total pollution exclusion. To be protected you should make sure your vendors have this insurance coverage before they begin doing work.
Property Transfer Coverage
Note: This coverage is designed for buyers or sellers of real properties.
When buying or selling property there can be unknown preexisting environmental conditions. Since environmental due diligence (All Appropriate Inquiry (AAI), a Phase I or Phase II survey, Baseline Environmental Assessment (BEA)….), cannot guarantee uncovering all potential environmental liabilities, insurance companies have created property transfer insurance. This coverage protects the new owner or any party with an insurable interest, against unknown environmental conditions that may be discovered during the policy period, that were not caused by the new owner.
This coverage not only helps to keep the property at its maximum value, it will assist the purchaser in being able to secure the necessary financing to complete their transaction. Property buyers have negotiated lower interest rates by blending property transfer coverage with their mortgage. You can cover multiple locations on a single policy.
Transportation Pollution Liability (TPL)
Generally, Business Auto or Truckers policies will exclude pollution losses arising from spills or releases of transported cargo. TPL affords coverage during the loading, unloading and transportation, for a spill, release or sudden upset and overturn of transported cargo.
Products Pollution Liability
Products Pollution Liability is for cannabis businesses that make and/or distribute a product that if faulty could cause a pollution incident. This coverage can be written on a stand-alone policy or included on an environmental impairment liability policy.
Underground Storage Tanks
Financial responsibility requirements ensure that owners and operators of regulated underground storage tank systems can financially handle a release from an underground storage tank. The responsibility encompasses the ability to pay funds for corrective action and third-party bodily injury and property damage from non-sudden and sudden and accidental releases from a regulated underground system.