CBD has grown into a colossal $311.8 million industry that has attracted many entrepreneurs, from farmers and producers, processors and packagers, suppliers and distributers to wholesalers and retailers; and the supply-chain is growing as fast as the industry itself. Most consumers are unaware of the sheer complexity that goes into putting CBD products, spanning everything from pharmaceuticals to pet food, on the shelves. Moreover, they trust that the products they purchase are advertised correctly and safe for intended use, which is not always the case. In 2019, we saw a dramatic influx of product liability claims associated. One such lawsuit is enough to fold a business due to costly legal fees and fines, as well reputation damage beyond repair.
The complexities surrounding CBD legalities have left business owners in the dark about how to navigate the industry’s murky waters. S2S Specialists helps cannabis businesses (of all kinds) understand their own specific product liability risks at every step of their supply chain and provides insurance policies tailored to protect their livelihood. Below are some of the main risk factors that all CBD businesses should be aware of:
Product Tracing & Contamination
CBD made with THC is a highly regulated industry versus CBD containing hemp (no more than 0.3% THC). At the present time, there is no one regulatory body governing the hemp sector and that leads to a lack of testing, which results in a great risk of product contamination.
Many things can happen to a cannabis crop, ranging from pesticides to spoilage to equipment malfunctions, all of which pose a significant risk. Even if the original seed or flower was confirmed free of mold or contaminants upon sale, the grower can still be dragged into a product liability claim for contamination issues that are introduced along the supply chain.
For wholesalers and distributors who are concerned about the products they purchase from growers, cannabis Product Liability Insurance is necessary to safeguard your business.
For many retailers in the current industry, it is virtually impossible to trace a Hemp CBD product back to its original source (or seed) and verify the products are labeled accurately, safe and free of contaminants. Even if you can trace your cannabis from seed to flower, when the product moves along the supply chain, tracing becomes more difficult. You don’t always know who’s buying a particular strain or what they’re doing with the raw material. For example, if your product is going into a distillate, like a THC oil or a CBD oil, the company producing that distillate might be using many batches and strains of cannabis, which vastly increases the risk of contaminants.
Mislabeled Products & False Advertising
A 2017 study by researchers at Johns Hopkins School of Medicine and University of Pennsylvania Perelman School of Medicine found that more than two-thirds of the products they purchased online were mislabeled, containing more CBD or less CBD than listed on the label, or containing none at all. There are currently no federal testing requirements for legal, hemp-derived CBD, making it difficult for wholesalers, retailers, and end consumers to know if a “CBD” product is, in fact, CBD or if it isn’t laced with other substances.
Furthermore, companies and stores marketing CBD products often make unsubstantiated health claims. Take medical cannabis health and wellness operator Curaleaf, for example. The company was recently warned to remove all CBD health claims from their website and social media by the FDA. Similar to what happened in the dietary supplement market when it was emerging, lawsuits are targeting companies that sell CBD products without any scientific evidence to support their health claims.
That 0.3% limit on THC content is very important. Many people will only try CBD because they are assured that there is no chance of psychoactive response. If someone does experience such a reaction, there could be dire consequences, and the proper insurance must be in place to cover it.
Any CBD business that touches products, no matter where they are in the supply chain, needs Product Liability Insurance. If a consumer purchases and uses a product that is mislabeled, falsely advertised or results in bodily injury or damage, litigation will trace the product back from point of sale and your business could be held responsible.
Edibles are particularly vulnerable to product liability claims for various reasons. When cannabis is sold in an edible form, business owners could face claims of food poisoning or illness. Contrary to popular belief, just because a retailer did not make the defective product it sold, does not mean it cannot be held liable. When it comes to product liability lawsuits, it’s very difficult for companies to fund the often-extensive legal defense and settlement costs, which is why Product Liability Insurance is so important as it will cover the costs, so you don’t have to pay out-of-pocket.
What is Product Liability Insurance?
As a Board Member of the National Cannabis Industry Associates (NCIA) Risk Management and Insurance Committee, we define Product Liability Insurance as a type of coverage that “provides protection from bodily injury or property damage claims resulting from defective products that have been manufactured or sold.” In essence, Product Liability Insurance is designed to protect your cannabis company from claims that can happen anywhere along the supply chain. With proper coverage, your insurance company will pay for damages and legal expenses if you are sued, up to your policy limits. Your liability policy will also cover medical fees of any other parties who are harmed by your business.
Product Liability Insurance is often overlooked by cannabis companies, especially those in the small or middle-market range. However, your cannabis business needs product liability insurance if you sell any goods or products that end up in the hands of the public. Period. In fact, your business may be contractually obligated to have certain types of insurance. Furthermore, to minimize risk, your business should demand certificates of insurance (and, ideally the full policy) from vendors to confirm protection in the event of a claim arising from another company’s product that you may sell to consumers.
It is extremely important to work with an insurance company, like S2S Insurance Specialists, who has a keen understanding of the cannabis industry and available coverages tailored to your specific operations. Taking steps to minimize your risk now will protect you and your company down the road.
We encourage you to contact S2S Insurance Specialists with any questions. We will examine your current policies, help you understand what is and is not covered, and adjust your policy, as needed.