Cannabis Insurance Risk Transfer Tools: Indemnification, Hold Harmless, & Insurance

Risk is the potential or possibility of something, usually negative, will occur.

Risk management is the evaluation of the probability of a harmful event occurring. It also involves reducing risk, assessing the costs of reducing risk, and determining how to reduce exposure to the costs associated with a harmful event. To practice risk management you need to begin by having a plan in place.

This means a program needs to be in place to protect your cannabis business from loss or exposure to loss resulting from any negligence on the part of an under/uninsured cannabis business who furnishes faulty products to the business for distribution. When you contract with a vendor for materials, equipment, supplies, products or services:

• Vendor’s activities and the goods provided create an inherent liability risk to the business and your business can be held liable for damages caused by your suppliers
• You should be able to rely on the supplier’s expertise to provide safe ingredients, and services and if it doesn’t, it should pay for the consequences

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The following cannabis insurance risk transfer tools can be used as an outline of how to manage cannabis risk and transfer risk from your business to the vendors you work with. The goal of this outline is help you establish procedures to protect your cannabis business from loss or exposure to loss resulting from any negligence on the part of an under/uninsured vendor who furnishes services to your business.

Contractual Liability: More than likely your business will engage in a contract like a lease for the space it occupies or equipment that it might lease. These contracts are likely to contain the following clauses:

Indemnification Agreement: This transfers risk and responsibility to other parties. The types of indemnification agreements are commonly referred to as:

• Broad Form Agreement: you transfer all risk of loss described in the contract regardless of who is at fault.
• Intermediate Form Agreement: you transfer all risk of loss described in the contract, except when the loss is entirely your fault.
• Limited Form Agreement: the lower tier is obligated to reimburse you for its share of liability for loss described in the contract. ​

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Most states have anti-indemnity statutes that limit enforceability of some indemnification agreements. An invalid agreement means you could retain risk you meant to transfer to another party. My disclaimer is that I’m not a contract lawyer and I recommend you consult with your legal counsel when considering Indemnification Agreement language. Sample wording would be as follows:

Vendor shall indemnify, defend and hold harmless (business name), its parents, affiliates, subsidiaries, related entities, and their officers, directors, employees, agents, successors and assigns (collectively, “Indemnified Party”) from and against any third party claims, demands, liabilities or losses, damages, and expenses (including reasonable attorneys’ fees and costs) related to the including, without limitation, claims based upon: (i) any product liability or similar claims arising or resulting from the use or consumption of any Product, including claims seeking damages for personal injury or property damage arising from or in relation to Products; (ii) any intentional misconduct or negligence by Vendor or its employees or agents in performing its obligations under this Agreement; (iii) any third party claim that a Product, or any part thereof, infringes or misappropriates any Intellectual Property Right of a third party; (iv) the failure or alleged failure of Products to comply with any express or implied warranties of Vendor; (v) the violation or alleged violation of any law, statute or governmental ordinance due or related to the manufacture, possession, use or sale of any Products; (vi) any actual or alleged unfair business practices, false advertising, misrepresentation or fraud resulting from the Products or materials related to the Products and provided by Vendor; (vii) any breach or alleged breach of a Vendor representation or warranty or any other provision of this Agreement by Vendor. An Indemnified Party shall promptly notify Vendor in writing if a credible claim is made or threatened; provided, however, that any delay or failure to give such notice will not waive nor diminish any rights of an Indemnified Party except to the extent that the rights of Vendor are actually prejudiced thereby. Vendor shall conduct the defense of such claim at its sole cost and expense, provided that the Indemnified Party may join in the defense of such claim and employ counsel at its own expense. Vendor may not settle or compromise the claim without the Indemnified Party’s consent unless such settlement (A) includes a release of all covered claims pending against the Indemnified Party; (B) contains no admission of liability or wrongdoing by the Indemnified Party; and (C) imposes no obligations upon the Indemnified Party. The Indemnified Party agrees to provide reasonable assistance to Vendor in the defense of such claim or action, at the Vendor’s expense.

Hold Harmless Agreement: A Hold Harmless agreement is a different legal term and has a different function than an Indemnification Agreement. Under a hold harmless agreement, the Vendor assuming risk agrees not to recover payment for damages from the distributor. My disclaimer is I’m not a contract lawyer and recommend you consult with your legal counsel when considering Hold Harmless Agreement language. Sample wording would be as follows:

Vendor shall indemnify, hold harmless and defend (business name), its successors and assigns for all losses, claims and defense costs claimed by any third party for any injury, property damage suffered by such third party to the extent resulting from a defect in the manufacture or design of the Product(s) supplied hereunder, unless such injury, death or property damage is the result of (business name) negligence, willful misconduct, breach of this Agreement or any modification made by (business name) to the Product(s) without the Vendors consent.

Cannabis Insurance Requirement: You need to require vendors to maintain adequate limits of insurance. Your vendors should have no less than the limits that are provided to you on the document. Your attorney can advise you on the limits that might be appropriate for your operations.
Vendors commercial general liability insurance must include Products & Completed Operations. This specific coverage is not automatic and provides protection from the event that someone gets injured as a result any of the following:

• Consumption of a cannabis flower
• Consumption of a cannabis edible
• Consumption of a cannabis extract
• Use of a cannabis accessory ​

My disclaimer is I’m not a contract lawyer and recommend you consult with your legal counsel to review what limits should be required.

Additional Insured Endorsement & Certificates of Insurance: Being listed as an additional insured will help fill a gap if the indemnification agreement is ever found invalid by a court. When added as an additional insured to the cannabis insurance policy of your vendor you are protected against liability for injury or damage caused by the products of that vendor. The policy will defend you as an insured and pay the amount of any settlement or judgment, up to its policy limits.

You should request being an additional insured with the following provisions included:
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1. ‘Primary’ basis. This means the vendor’s policy must respond first in the event of a covered claim. Your liability policy will respond on an excess basis and will pay only the amount of any judgement or settlement that exceeds the vendors policy limits.
2. ‘Waiver of Subrogation’. This removes an insurance carrier’s ability to recover the money paid on a claim from a third party. For example, if a vendor’s policy paid out on a claim you were named in a lawsuit the a waiver of subrogation would eliminate the insurance company to recoup the funds from the insurance policy you have in place with your insurance carrier.

A certificate of of insurance is evidence to confirm if your vendors liability policy will meet your insurance requirements and confirm that you’re named as an additional insured. The certificate will summarize the vendor’s insurance coverage and include the following:
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• Name of business
• Policy number
• Name of insurance agency
• Name of insurance company
• Type of policy (General Liability, Automobile Liability, Workers’ Compensation, etc.)
• Policy effective and expiration dates
• Limits of Insurance
• Special provisions
• Terms under which you, the certificate holder, must be notified if the vendor’s policy is cancelled

Only the additional insured endorsement can make your business an additional insured. Request a copy of the actual endorsement showing you have been added as an additional insured and be sure to get a copy at each renewal.

The certificate of insurance & endorsement should be provided prior to any services commences for the vendor.

Requesting, obtaining, and verifying insurance for contracted goods takes time, can be aggravating, and most often doesn’t seem to make any difference, since most contracts are completed without incident. However, when an incident occurs, all of those efforts become worth it. 

In summary, in the practice of good risk management, your cannabis business should follow a set procedure for each vendor that you work with. You should transfer the risk through written contracts and not provide services until all contracts are signed and all risk transfer requirements are met. Risk transfer requirements should include:

A written contract that includes at a minimum:
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• Indemnification in your favor
• Hold harmless agreement
• Requirement that you be added as an additional insured on the vendors commercial general liability policy
• Requirement that commercial general liability coverage includes Products & Completed operations
• Requirement that additional insured status be on a primary basis
• Requirement that additional insured coverage be maintained for a specific period of time
• Requirement that vendor must maintain adequate general liability limits (see below)
• Requirement that you be given 30 days’ written notice if the vendors policy is cancelled

Certificate of insurance need to include:
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• Describes the type of insurance and limits of insurance in effect
• Named your business as certificate holder and indicates you have been named as an additional insured on the commercial general liability coverage
• Indicates the form number of the additional insured endorsement
• States that you must be given 30 days’ written notice if the vendor’s policy is cancelled
• Obtain a copy of the endorsement that names you as an additional insured to the vendor’s policy

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Reach out to me when you’re considering cannabis business insurance. I will discuss coverage’s with you, how each coverage works and assess how it fits into your risk management needs. I will provide you with comparative cannabis business insurance quotes from multiple insurance carriers so you can get the best possible rate.

As an insurance broker I help cannabis businesses manage risk through insurance.​

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