Considering a design project in the fledgling cannabis industry? Make sure your professional liability coverage won’t go up in smoke.
During a recent ground-breaking ceremony for a $13 million school expansion in a small Colorado town, several public officials spoke, as did the general contractor and the prime architect. The architect pointed out the substantial involvement of several design team subs – structural, mechanical, landscape architecture, and several other specialty designers. Interestingly, it was noted that of the $13 million in funding, nearly $9 million is being raised from taxes the state will collect from the cannabis industry.
Should members of the design team be concerned that the project and their work are essentially being paid for by an industry deemed illegal under federal law? Does that fact impact the insurability of their work? Perhaps, at least in connection with this project, these are questions fairly easily answered: the funds are not directly from the cannabis industry, but have been passed through the state, which seems to bring a level of credibility to the process.
However, if the setting and the facts are changed slightly, might there be more cause for concern? For example, would an architect sign on – and would a host of design subs sign on – to design the underground drug lab that was the scene of the television series in Breaking Bad? No, of course not. What about the “grey” areas in between these two examples – the real-life situations that many architects and engineers might readily accept as a new client and revenue stream, such as designing cultivation facilities or dispensaries approved by the state to grow and dispense state-licensed cannabis?
Aside from any moral considerations – and strictly from a business perspective – might this be considered a “good risk” in comparison to other areas of your practice? Furthermore, are there any unique insurance-related issues to consider before jumping into this line of work?
As in any project, the basic tenets of sound risk management still apply to any work involving the cannabis industry; evaluate the client and the project before you agree to accept it and bring the work into your firm. You already know some clients are a better risk than others and not all projects are viewed as presenting the same level of risks.
With regard to the latter, there is not yet a sufficient history of cannabis-related design and construction to give the professional liability insurance carriers a well-formed base of actual experience to guide their underwriting assessments. However, in the author’s experiences working with designers who have taken on projects for the cannabis industry, grow facilities tend to be on the higher-risk scale.
In some respects, these projects may not be considered as high risk as condos. Yet, they do present some unique HVAC-related challenges, such as heat, humidity, and control of noxious gases, etc. Thus, from an exposure perspective, they may be viewed as higher risk and insurance will cost relatively more on a rate or unit cost basis than lower-end risks.
Another key factor to keep in mind is that the owners will likely be viewed by the underwriting community as higher-risk owners, certainly far riskier than such clients as the federal government. The reasoning behind this is actually fairly straightforward: these owners either lack or have very short track records. In addition, they often deal only in cash (as many banks will not work with them). Further, they may not be all that well represented or experienced when dealing with design firms, contractors and construction.
Their legal counsel (assuming they have counsel) may also have little experience in this arena. (Note that there is considerable debate within the legal community about whether it is ethical to represent clients known to be in violation of federal law. This also may be a question licensed architects and engineers might consider relative to their state licensing boards.)
So, when you think about it, you may have a client with little to no experience in design and construction, along with what is likely a demanding schedule to grow, process, or sell the product and high expectations of starting up quickly and generating revenues. All of this could amount to a situation ripe for potential claims against designers.
In thinking about claims and getting back to the insurance industry, there is no clear language in a typical AEC professional liability policy affirming coverage for work in the cannabis market. Of course, that factor, by itself, is not a prohibition against this line of work. For example, and similarly, there is typically no affirmative coverage grant for working on schools or even on residential. If you go back 25 years, however, service and project types were often specifically listed in professional liability policies – and if they were not listed, then that work wasn’t covered.
Today, however, you should check your insurance policy to see if either a specific or general exclusion might apply to any cannabis industry-related work. While policies may not have specific exclusions for cannabis industry-related work, all policies contain a more general coverage limitation stating that claims arising out of illegal activities are excluded.
The question then becomes, is your design and involvement sufficient to fall within the exclusion? The answer depends on (1) the answer to a similar question: “Is your work considered within the federal prohibition; making it subject to criminal prosecution?” and (2) “Would your carrier take the position that it is and therefore not insurable?”
At this writing, I am not aware of any federal prosecution of a design firm in this context. Meanwhile, given the present state of the commercial insurance market, the majority of carriers providing AEC professional liability insurance appear to be looking for ways to support their insureds and cover this work under their policies. Nonetheless, the latter would certainly change if the federal government ever decided to pursue a criminal case against a designer – and won the case.
In the current environment, any design firms considering taking on projects for prospective clients in the cannabis industry should consult their insurance advisors to determine whether and how their professional liability insurance might respond to potential claims. As mentioned, they should also check their state licensing authorities for a perspective on how this work is viewed.
Rob Hughes is senior vice president and partner at Ames & Gough. Contact him at at email@example.com.