Many investors and cannabis businesses are keen on opportunities to participate in financing rounds. As with any other investment or business venture, financing rounds for cannabis operations carry various risks. Investors and businesses looking to participate in these financing rounds naturally wonder how to insure cannabis financing, and what insurance options are available to protect their investments.
It turns out, often investors and businesses don’t need to look too far. Obviously there are few (if any) options to insure against the failure of a particular business plan or idea in the marketplace. But savvy investors and businesses can insure themselves against other risks outside of their control by conditioning their capital investments on being named an “additional insured” under insurance policies issued to the cannabis business itself.
The “additional insured” strategy
An “additional insured” in an insurance policy is just that: an additional third-party designated to receive the same rights under the policy as the named insured itself. Investors and businesses may condition their capital investments on being named as one of these “additional insureds” on any of the policies held by the business they are financing. Depending on the situation, investors may be able to require the business they are financing to carry certain coverage, and then name them as an “additional insured.”
For example, if an investor is considering a $100,000 capital investment in a Tier 3 facility, the investor may request that the business add him or her as an “additional insured” under a policy covering theft. The investor would then share the same rights under the insurance policy as the business itself, and in the event of any stolen equipment, the investor would be able to exercise those rights.
Benefits of the “additional insured” strategy
There are two primary benefits to the “additional insured” strategy. First, the investor may better understand situations when noticing an insurance claim makes sense. Second, “additional insured” status gives the investor a measure of his or her own control. Coupled together, the investor has the legal right to act on an insurance policy when the underlying business either will not or cannot act on it. Essentially, the investment is insured against theft.
Securing “additional insured” status must be done through endorsement of the business’s policy, which often requires an additional premium. The language in the policy and endorsement dictates the rights and obligations all parties will have under them. Thus, investors would again be keen to approve the endorsement’s language and maximize their rights.
Harris Sliwoski’s insurance coverage lawyers have experience navigating financing issues in the ever-expanding cannabis sector. If you are seeking advice about how to insure your investment in this space, Harris Sliwoski’s coverage lawyers can assist.