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In November 2022, Higher Learning LV interviewed attorney David Kennedy, a pioneering expert in the field of risk management and insurance coverage for the cannabis and hemp industries. He is CEO of Connecticut-based brokerage PurpleRisk Insurance Services, which he founded in 2019.
Image courtesy David Kennedy
Kennedy is a graduate of the University of Vermont who went on to earn a law degree from Hastings College of the Law at the University of California. He is licensed to practice law in Vermont, Massachusetts, and California and currently focuses his attention on his clients at PurpleRisk Insurance Services.
Other popular articles in the Higher Learning LV Interview series include:
The Interview
Higher Learning LV: "Thank you for your time, David. As founder of PurpleRisk Management Services, an insurance provider serving the cannabis industry, let's first discuss the state of the industry with respect to insurance services and risk. How would you describe the current landscape?"
David Kennedy: "Thank you, Curt. It's great to chat with you about insurance services and risk in the cannabis industry.
"The topic of insurance is likely not at the forefront for many cannabis operators. However, it is a critical issue for any successful operation. Insurance is almost always required to maintain a cannabis license or operate in compliance with state laws or contractual requirements—including leases and vendor agreements.
"Cannabis-related businesses face an array of heightened and unique risks. These include an increased exposure to theft, robbery, and other crimes."
"Cannabis-related businesses face an array of heightened and unique risks. These include an increased exposure to theft, robbery, and other crimes (due to product and cash-on-hand), product liability and product recall (with heavy regulatory oversight and product testing regulations), specialized property and equipment exposures (extraction operations/use of solvents and grow light concerns, among others), and shifting and varied state-specific regulatory and compliance issues.
Image courtesy David Kennedy
"These are just a few of the risks faced by cannabis businesses.
"Of course, the cannabis industry also confronts more standard risks faced by traditional industries, including natural disasters, fire, smoke and water damage, consumer accidents, employment practices liability issues, worker injuries, and cyber threats.
"With few exceptions, the cannabis insurance landscape falls almost entirely within the Excess and Surplus Lines (E&S) insurance market. This is a specialized and niche marketplace for hard-to-place or more unique risks that cannot typically be insured by carriers in the standard ('Admitted') insurance market.
"Most standard market insurance carriers continue to avoid writing coverage for operators in the cannabis industry. This is primarily due to ongoing federal prohibition and the Schedule 1 status of cannabis.
"The reality is that a cannabis operator cannot go to a local State Farm office or the Geico website—or to any major standard/Admitted insurance carrier—to obtain core commercial business insurance."
"The reality is that a cannabis operator cannot go to a local State Farm office or the Geico website—or to any major standard/Admitted insurance carrier—to obtain core commercial business insurance products such as property, commercial auto, general liability, and product liability coverage.
"Rather, cannabis companies must work with a licensed E&S broker who can access the limited number of specialty insurance carriers and Managing General Underwriters willing to write cannabis insurance policies. As a result, policies are often more challenging to underwrite and secure and are typically more costly to purchase compared to traditional industries.
"The cannabis industry as a whole should be covered to well over $1 billion in annual premiums. This would be if it was insured to levels normal for other industries, or roughly a five percent insurance take up rate per gross sales. However, the industry is likely insured to roughly half that amount.
"A good E&S insurance broker will serve as a trusted advisor and partner to clients, properly advising operators regarding the landscape and coverage and limit options. A broker can also guide clients through the often-difficult cannabis insurance procurement process.
"We are currently witnessing new carrier options for various lines of coverage in the cannabis insurance market. However, until we see broader cannabis reform at the federal level, we are unlikely to observe a large entry into the market by standard/Admitted market insurance carriers that would provide more coverage options and rate relief."
"Today, more than half of Americans, from all sectors, favor full legalization and an overwhelming majority of adults favor cannabis for medical purposes."
HLLV: "Cannabis, and by extension the cannabis industry, is one of the most controversial issues in modern America. What attracted you to work in this risky, challenging, and often criticized space that is so rife with opposition?"
DK: "Today, more than half of Americans, from all sectors, favor full legalization and an overwhelming majority of adults favor cannabis for medical purposes. Although it is beyond the scope of our discussion today, there is no reason that 'marijuana' should remain a Schedule 1 substance alongside heroin or other drugs with 'no currently accepted medical use.'
"Some of the most challenging aspects about the cannabis industry and, in turn, the cannabis insurance market, are the same traits that have drawn me to focusing my practice on this space: The unique state-regulated markets, the constantly evolving cannabis and hemp laws and regulations, the emerging exposures and shifting risk profiles, and limited insurance market options.
"These all make the cannabis industry intriguing and well-suited for a broker and attorney like me with a background in insurance coverage law and E&S insurance product innovation.
"There are challenges in the cannabis insurance space. These include diminished insurance limits and capacity, thin coverage options for some exposures, and inflated premiums for products like directors & officers liability insurance, commercial auto, and others. Many lines of coverage also feature restrictive safeguards and exclusionary policy language.
"For me personally, it is the challenges of the industry that make it so exciting."
"For me personally, it is the challenges of the industry that make it so exciting. I must find insurance solutions for my clients in a market featuring limited options. Navigating cannabis insurance is complicated and currently requires professional guidance."
HLLV: "Please tell our readers more about PurpleRisk and why you founded this innovative insurance provider for the cannabis industry."
DK: "I first started researching the cannabis industry and insurance needs in 2013 while participating in a Lexington Insurance Company internal Innovation Bootcamp program. Lexington Insurance is among the largest specialty (E&S) insurance carriers based in the U.S. At Lexington, I became increasingly intrigued by the cannabis industry’s growth potential and the sector's need for specialty solutions.
"While leading the Lexington Insurance product development team from 2014 to 2019, I explored the possibility of launching a cannabis insurance program at the company. However, our parent company, AIG—like many large carriers—was not and is not entering the cannabis insurance market. This is primarily due to the federal position on marijuana.
"After leaving Lexington Insurance in 2019, I combined my passion for innovation and an entrepreneurial mindset to take the leap into starting my own independent insurance brokerage. PurpleRisk is a cannabis insurance specialist. If operators value expertise, relationships, and service, PurpleRisk may be the right insurance partner."
"After leaving Lexington Insurance in 2019, I combined my passion for innovation and an entrepreneurial mindset to take the leap into starting my own independent insurance brokerage."
HLLV: "From an insurance perspective, what are the major risks with which various segments of the cannabis industry are burdened and how does PurpleRisk help cannabis businesses mitigate these risks?"
DK: "As noted earlier, cannabis-related businesses are burdened with an array of heightened risks combined with more traditional exposures. Finding insurance solutions for these risks within the still-limited carrier marketplace can be challenging. But I love this challenge!
"For example, operators seeking higher total insured value limits for property coverage face difficulties with the cannabis insurance market's capacity limitations. Clients seeking property insurance for a building under construction can be difficult to place.
"In 2022, we are seeing a trend of increasing product liability claims, as well as first-party property damage and liability-related matters arising out of manufacturing equipment. This includes explosions and fires with extraction lab equipment, among other things.
"As more states license standalone cannabis delivery operators—or even cultivators or manufacturers with commercial auto needs—we are seeing auto insurance continue to be a particularly challenging coverage to secure at reasonable rates. This is especially true for small to midsize operators that may have only one or two company-owned vehicles. The premium charged for commercial auto coverage is substantially higher per vehicle compared to other industries.
"In 2022, we are seeing a trend of increasing product liability claims, as well as first-party property damage and liability-related matters arising out of manufacturing equipment."
"Similarly, management liability insurance and, in particular, directors and officers (D&O) liability insurance options remain limited and an expensive line of coverage. However, we have seen new options and improved pricing in the market recently. For more information on D&O liability insurance in the cannabis space, check out my article in MJBiz Daily.
"Even a standard insurance product line such as workers compensation can be challenging to place for smaller operators and cultivators with, say, one to three employees. This is due primarily to limited carrier options and minimum premium requirements.
"At PurpleRisk, we specialize exclusively in the cannabis industry. We have developed deep relationships with leading carrier and underwriter markets to better serve our clients. As an insurance coverage attorney, I'm not aware of other licensed attorneys that have transitioned to leading a cannabis insurance brokerage. That professional background gives me a unique lens to better serve my clients' insurance needs."
HLLV: "How do you anticipate the insurance needs of legal cannabis businesses, including cultivators, processor/manufacturers, and retail players evolving during the next decade?"
DK: "There is significant evidence that the cannabis industry is significantly underinsured—and even uninsured—compared to similarly situated traditional industries. At the same time, we are witnessing new markets coming online in New Jersey, New York, Vermont, and other states. There's new and emerging risks in the form of delivery operations, onsite consumption lounges, and mixed-use exposures.
"There is significant evidence that the cannabis industry is significantly underinsured—and even uninsured—compared to similarly situated traditional industries."
"Often, newer ventures will buy whatever insurance policy or package is available and within budget. They're basically checking a box for insurance and hoping that it protects them. Businesses are increasingly exposed to uninsured liabilities as they expand operations.
"As the industry continues to mature, we expect companies to grow increasingly concerned with the need for adequate cannabis insurance coverage to protect their businesses, investments, and people.
"Over the coming years, this coverage-to-price in-balance will improve, especially as cannabis insurance options expand with new carrier entrants in tandem with the reform of cannabis laws at the national level. It is this federal-level prohibition that continues to drive hesitancy to broader carrier participation in the cannabis insurance market.
"Broad-based cannabis reform at the federal level will help alleviate price pressures and bring more robust insurance options to cannabis operators in the years to come."
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