Understanding product recall insurance as an operator

On August 14, 2023, the Division of Cannabis Regulation issued a mandatory product recall, the Division cited a potential threat to health and safety stating that products were not compliantly tracked.

The recall not only affected Delta Extraction, but many manufacturing and dispensary licensees that purchased distillate from the company as well as those who purchased finished product form a manufacturer that did. The recall included more than 62,000 products dating back more than a year.

DCR has offered some, but little guidance and the investigation is ongoing.

With the situation being fluid, there have been many questions as to whether insurance will cover the loss of product recall and business interruption.

The short answer is no, unless you have the endorsement for Product Withdrawal Expense.

Product Recall Expense can be added by endorsement to your product liability policy.

Typically, you can purchase limits up to $250,000 and deductibles vary from carrier to carrier.

This endorsement covers expenses only, which could include the cost of notification, overtime pay, transportation costs, computer time costs, hiring of independent contractors, warehouse or storage space, and the cost to dispose of the product.

This line of coverage is triggered by the insured or an authorized government entity.

At this point, the products are on administrative hold and the state has not yet confirmed if the products will need to be destroyed or will be released for sale.

If the insured deems it necessary to incur expenses for a product withdrawal, then there might be coverage for the claim.

It is our recommendation that operators track any expenses incurred during and as a result of the product recall.

    

In addition, dispensary operators affected can reach out to the manufacturer purchased finished products originated from and inquire about their product recall policy.

Product liability is a third-party coverage form; therefore, the claim would need to be triggered by a third-party, the coverage is not meant to be first-party coverage.

In short, because a customer did not have any bodily injury, mental anguish, or physical harm – the product liability coverage is not triggered.

Regarding the property policy, typically the insured will purchase coverage for cannabis stock and business income, while this is a first-party coverage, there would need to be a direct physical loss, such as fire, wind, or theft to be triggered.

Unfortunately, with the product recall there is not a physical loss.

As more details come out regarding the product recall, we will continue to research if and how coverage could be afforded.

With so many licensees impacted by the first major recall in Missouri, more information is needed to understand the full scope of the situation and to determine if any insurance coverage will be available.

Please note that every claim is viewed independently by a claims adjuster, and I cannot confirm or deny that a claim will or will not be covered.

This article is not an encouragement or discouragement to file a claim and is for educational purposes only.

Tiffany Maggard serves as Vice President and Midwest Cannabis Practice Leader of Heffernan Insurance Brokers.

Since 2017, Heffernan Insurance Brokers has been an exclusive insurance broker for the California Growers Association. Heffernan is also a member of the Missouri Cannabis Trade Association and partners with leading legal, accounting, and consulting resources. The insurance products offered to cannabis operators are few and well-distributed. Choose a risk management partner that provides you with insightful consultation, valuable resources, and information you can trust.