All Forum Posts by: Eric Belgau

@John D. I apologize for the delay in posting a response.  

I'll reply generally.  There's a certain amount of flux in this market, and any specific program can change.  Because of that I don't want to post what could seem like an endorsement of a particular program or wholesaler on a public forum.  

The Washington regulatory structure requires licensees to carry General Liability and Products Liability coverage, and there are three competing coverage forms out there.  The most prevalent is written on Lloyds paper through any number of wholesalers, each with a different set of program and brokers' fees, as well as varying minimum premiums. 

The coverage is pretty standard with some notable exclusions, the biggest being some kind of health hazard exclusion.  Those exclusions can be very broad, or they can be limited to the smoking hazard, but there's something there in every policy.  (I feel that hazard will be refined going forward as the increasing prevalence of MMJ and the experiments in WA and CO enable us to gain more hard data about the health benefits and hazards.)

Landlords who rent to cannabis companies should make sure that the tenant is carrying General Liability at least.  I notice more and more landlords also requiring $1M in auto coverage, and I would encourage any landlord to follow suit.

Outside of Washington, the same coverage is available for basically all types of cannabis companies - the recreational industry in Colorado, of course, and medical marijuana growers, processors, and dispensaries from sea to shining sea, as long as they're in compliance with state laws and regulations.  

Property coverage for a cannabis business is more expensive than it is for other businesses, but I wouldn't try to hide the tenancy from my insurance company even if I wasn't an agent.  In fact, it can work well for the landlord and tenant to work on the insurance coverage together:  that way the landlord knows coverage is in place, and the tenant knows that the price tag isn't just a play by the landlord to grab an extra couple bucks.

There's also coverage for plants, stock, commercial auto, employee benefits - everything a growing, professional business needs.

I have seen subtle rating differences between medical and recreational, with slightly better rates for recreational here in WA.  I think that may have something to do with the intense security burden recreational growers, processors, and retailers have to bear.  Products liability on medibles can get pretty high, depending on what the product is and some other factors.

The biggest challenge isn't finding coverage; it's compliance with all the program requirements.  That's a function of the evolution of the industry from black to gray to...green?...markets.  Because of that trajectory, many cannabis businesses are build on work-arounds rather than being built from the ground up on best practices.  Sometimes we have to take the business model apart and rebuild it to effectively limit liability potential and make the risk acceptable.

I hope this is helpful.  

@Account Closed 

This is a very good question.  The simple answer is yes.  While I haven't dealt with a claim out of my own book, I've vetted the programs I use to ensure that they will pay and verified that claims have been paid out.  But those are insurance programs developed for the cannabis industry with their own supplemental application.

So they won't deny a claim based on "illegal activity" under federal law.  They can deny a claim if there's a violation of state law.  

Outside of cannabis-specific coverage, there can be a gray area.  The existence of illegal activity wouldn't necessarily preclude a claim.  Using the above example, if someone's illegally cooking meth in my rental and they blow it up, my property coverage on that building will be triggered.  An investigation will also be triggered, and if it turns out that I'm complicit in the meth lab, then the claim probably would be denied.  If I'm complicit in a meth lab and a tree falls on my house, I might have some legal challenges, but the insurance would pay the claim.

Because there's a gray area, and because there's a lot of flux, each carrier is handling this issue differently.  Generally, your expectation that the insurance company would try to connect the claim to the illegal activity and use that as a reason to deny it is probably accurate.  That's especially true when you know about it.

Don't self-insure though.  You can require your tenant to buy full property insurance, and as long as that requirement is specifically documented in the lease the coverage is available as long as it's a legal, licensed, permitted grow.  That way the cost burden is on them.  

@Bradley Bogdan Brings up a good point about the processing.  Unsavory characters aside, from a risk perspective I wouldn't want to see any type of chemically-based processing in a residential building.

Butane hash oil processing gets a lot of press for the explosions it causes, and most reputable processors are moving to closed-loop systems.  But even those closed-loop systems can fail and release gas unless they are meticulously maintained.  I don't mind them in industrial or commercial settings, but even as an insurance agent I choose not to work with those who are making oils in their houses.  It doesn't matter if it's a closed-loop system, or even a CO2 system.  If that process can't be done in a detached structure, I don't like the risk.

The chemical issue extends to the growing process, too.  Are they going to use CO2 to promote growth...in the basement?  What fertilizers/pesticides/etc.?

I would make sure that the lease is very explicit about the use of chemicals and about prohibiting whole classes of processing.

Also, if you do your due diligence I believe the affirmative defense will hold up on a property seizure.  (I'm not a lawyer.  That's not legal advice.)  However, I want property owners to add a "compliance" clause to their lease, requiring a signature, which simply states that the tenant agrees to abide by all state and local laws concerning the production and distribution of marijuana.

If you become aware of a violation, you're compelled to correct it.  And I really wouldn't take the blind-eye approach.  This industry presents additional risks (as well as rewards), and it's best to face them head on.

@Bill Coleman 

I specialize in insuring these operations at a commercial level in Washington, so I can speak a little to the insurance piece.

Illegal activities are specifically excluded on standard property insurance policies, and if the growing operation is the cause of loss - like an electrical overload causing a fire - the insurance company has a legitimate reason to deny the claim.  It's just not covered.

You can identify the property as a growing facility and buy coverage that will apply, but it will cost more.  If you're thinking of doing this you should determine how much more in advance, so you can pass that cost on to the tenants.  

Generally, I like my clients to have separate buildings for living and growing.  Done right, a grow op can be done with a small environmental footprint, but as @John D. points out, there are structural limitations to the house that might not allow best practices, in which case a lot of harm can be done.  He's going to want to keep that room at 70 degrees, and I'd be worried about the damage that could be done to the structure over the course of several years.  Even expert growers with good ventilation in place have temporary humidity issues from time to time, which could seep into the frame of the house.

I don't know what it's like on the ground in Adams County, but in many counties here in WA there are issues at the county and municipal levels about zoning and permitting.  I would caution a residential landlord to be very careful about allowing the installation of a grow where it could suddenly be precluded by local ordinance.  The grower would have to move on, and you'd be left holding the bag.  And the bag, sadly, wouldn't be full of anything green.

With all that said I'm a strong advocate of the legal industry, and I think that well managed growing operations can benefit everybody involved.  The key is to take a very thorough and cautious - perhaps even pessimistic - look at possible expenses and to build the revenue model around them.  In your case, if you're interested in the tenants and willing to work with them, I'd look at the plausibility of adding a separate structure for the growing.

@Sam Leon You should talk to your insurance agent.  You may be able to rewrite the policy based on the new map.  

You have to be looking at the FEMA map, not county data. Localities participating in the flood insurance program undertake mitigation efforts in order to reduce flood risk, and there is a good bit of conflict between local governments and FEMA over just how effective that mitigation has been.

@Dave Toelkes You are correct. The personal umbrella covers personal liability, not commercial liability. If you personally own a couple of rental properties - the magic number is usually four - then the umbrella looks at that ownership as personal investment, not commercial activity. If you create a company that owns and operates the assets, that entity is commercial and not covered by a personal umbrella. The LLC would need its own insurance policy and a commercial umbrella.

There's nothing special about insurance for a strip mall.  It's a Lessor's Risk policy that covers the property and provides general liability.  You want to make sure it covers lost rents, but that and other key endorsements are generally included.

Some tenancies - like an exercise facility, commercial kitchen, or bar - can cause a problem, and it's worth asking your agent if any existing tenants present added exposure. 

@Liam Goble 

When you meet with your attorney, take a copy of your policy - or at least all the declarations.  Depending on what your policy covers, you may want to retain the right to sue versus having your company pay and subrogate.

Normally on a complete loss, your insurance company will pay the policy limits.  If those limits are significantly insufficient - like you have ACV coverage - then you might (emphasis on "might") run into trouble.  Your insurance company is required to make you whole based on the coverage and limits of your policy.  The driver's insurance is liable for all your damages.

Outside of the valuation, one thing I would pay close attention to is the "ordinance or law" provision - essentially the amount beyond your policy limits that is available to pay for upgrades required by city ordinances, building code, and other laws.  You mentioned this as an issue.

Even if there is a deficiency in your policy, you're probably still wise to file the claim against your insurance for the full amount.  Just be working on a Plan B if they only offer limits, since accepting that offer may preclude your ability to sue independently.

@Bridget Smith-Osbourne  You may easily take a hit to your premium because of the fire, but you should certainly make a claim against your policy.  And contact a public adjuster if the settlement your insurer offers seems low.

After the fact, there are a couple of ways to mitigate the inevitable premium hike.  First, institute a renter's insurance policy if you don't already have one.  (That policy doesn't cover your property, but it shows a protective position.)  Second, take a look at your screening process and find a way to add another layer.  (This communicates an increased commitment to avoiding future problems.)  Third, consider installing the Stovetop Fire Stop.  (This would have stopped the fire you had, so it shows you're learning from the situation.)

Doing those things allows your broker to present a case to carriers that you're going to be less of a risk now that you've had a loss.  Statistically, those who experience losses are substantially more likely to experience another one, which is the math behind the inevitable rate hike.

Good luck!

@Brian Campbell 

Fully understood.  You might do well to specify investors with experience settling an ACV claim.  It is certainly true that there's a savings to be had.

If you have a loan, it's probably a moot point.  Most lenders require the building to be insured for replacement cost, largely because an ACV policy probably won't pay enough to cover the note if there's a total loss.  If there's significant damage, you can expect to come out of pocket to a significant degree.  20-year siding that's ten years old would likely be depreciated by 50%, and new siding would be bought with today's prices.

Although I'm an insurance guy, I am personally a huge fan of public adjusters.  If you have one in your contacts list (every landlord should), you might do well to present this question to him or her.  A public adjuster will have exactly the experience you're looking for, having adjusted claims on both ACV and Replacement Cost bases.