It is hard to find real world circumstances under which the saying “one bad apple spoils the bunch” applies as neatly as it does to an insurance policy. Fifty to 100 coverage-expanding pages of policy forms can be rendered effectively moot by a single-page exclusionary endorsement. And so it is with the products liability insurance offering from Continental Heritage Insurance Company accepted by the California Department of Insurance last week.
Remove a single page, and this new offering could easily be the most policyholder-friendly products liability policy on the market. But, alas, that single page—a “Compliance With Applicable Law” endorsement—cannot be removed from the policy. This endorsement eliminates coverage in the event that the policyholder commits a single act of noncompliance with a regulatory system already notorious for its complexity and constant revisions. Even the best operators cannot yet navigate the new regime to perfection, meaning that few, if any of Continental Heritage's policyholders will be capable of meeting this seemingly-benign coverage requirement. As a result, the policy's many strong features appear unlikely to provide the practical benefits they otherwise would.
The Good Apples
And, to be sure, much like the first admitted cannabis product approved in California, there is a lot to like in the Continental Heritage policy. It is written in large part using standardized Insurance Services Office forms, meaning that operators can have more certainty regarding the way that certain coverage provisions will operate and/or be interpreted by the courts. Moreover, Continental Heritage has seemingly gone out of its way to include coverage-expanding endorsements, including limited coverage for cost of recall and a “Cannabis Intoxication Liability Endorsement that expressly covers liability for injury or damage “imposed on the insured by reason of selling, serving or furnishing of any ‘cannabis’ product causing or contributing to the ‘cannabis’ impairment of any person.”
This Cannabis Intoxication Liability Endorsement appears to be crafted to favorably compare the policy against the only other cannabis products liability policy offered by an admitted insurance carrier in California. That policy, issued by Golden Bear Insurance Company, excludes among a number of other things, injury or damage resulting from any impairment from cannabis use.
The Continental Heritage policy also contains an endorsement that provides limited product withdrawal coverage that covers certain out-of-pocket expenses incurred in connection with product withdrawals/recalls. While this is not the true products recall coverage that the industry could use, it’s inclusion can fairly be called a luxury relative to cannabis insurance norms. Moreover, the policy is available to distributors, whereas the Golden Bear policy is available only to dispensaries, cultivators, and/or manufacturers. And, perhaps most notably, the policy contains no “Health Hazard” or similar exclusionary endorsement, through which most other cannabis products liability policies eliminate a great deal of coverage for bodily injury claims.
But that one bad apple…
What’s Wrong With Compliance?
At first blush, the apple does not even look that bad. Continental Heritage’s “Compliance With Applicable Law” endorsement arguably requires merely that licensed cannabis operators do what they are already required to do—comply with state and local laws and regulations. The policy makes it “a condition precedent to the coverage afforded by this policy” that an operator “must maintain compliance with all applicable state and local laws, statutes, rules, regulations, ordinances, licensing requirements or restrictions.” The endorsement further states expressly that “coverage for any claim under this policy shall not apply” if the operator is out of compliance with “any” such rule.
The problem, of course, as any licensed cannabis operator in California can tell you, is that complying with these voluminous and ever-changing rules is difficult. Perfection in this task is practically impossible. One client recently received glowing marks when a Bureau of Cannabis Control inspection turned up only 3 regulatory violations. Unlike Lori Ajax, however, an insurer evaluating whether or not an exclusionary endorsement applies to bar coverage for a significant claim will not be taking an “education first” approach. Instead, armed with this “Compliance With Applicable Law” endorsement, Continental Heritage will have every incentive to scrutinize its policyholders’ operations for any evidence of any noncompliance.
For most operators, evidence of minor regulatory violations will not be hard to find. And for these operators, all of the expansive coverage forms discussed at the top of this piece will be spoiled through their association with that one bad apple.