Reed Smith Client Alerts

The outbreak of a new strain of the coronavirus has impacted in one way or another many businesses across the United States and around the world. Cannabis- and vaping-related businesses are no exception. According to recent media reports, those businesses have experienced – or may experience – interruption in their supply chains as a result of the viral outbreak. In certain circumstances, losses resulting from supply-chain or other business interruption, and/or additional costs incurred as a result of a viral outbreak, may be covered by commercial insurance, particularly business interruption or contingent business interruption coverage. Still other types of insurance potentially may cover other types of coronavirus-related losses.

Authors: Michael H. Sampson Mark A. West

The novel coronavirus and the cannabis industry

As explained by the World Health Organization (WHO), and as widely reported in the media, a “new strain” of the coronavirus recently has been identified. “Coronaviruses,” according to the WHO, “are a large family of viruses that cause illnesses ranging from the common cold to more severe diseases ….” That said, as The New York Times reports, “[w]hile the virus is a serious public health concern, the risk to most people outside China remains very low, and seasonal flu is a more immediate threat.”

Nonetheless, the viral outbreak has affected many different industries, including the cannabis and vaping industries. Marijuana Business Daily reports that the outbreak “is expected to impact marijuana vaporizer companies that depend on Chinese suppliers by interfering with the flow of hardware and other products.” Further, according to that same report, one cannabis vape hardware manufacturer executive explained that “[o]n top of the impact to vape manufacturers, he expects [the novel coronavirus-related] work stoppage to affect all sectors in the cannabis industry, including cultivators using LED lighting, greenhouse structures and packaging[,] and extraction equipment providers.”

Coverage considerations

Coverage for coronavirus-related losses and/or costs potentially may be available under various commercial insurance policies – most notably, those that provide business interruption and/or contingent business interruption coverage. Business interruption insurance is designed to pay a policyholder its lost profit and continuing unavoidable expenses when the policyholder’s operations are disrupted by “physical loss or damage” to property at the place of those operations or a place critical to those operations. Contingent business interruption insurance is designed to pay a policyholder similar amounts – the difference being that it applies not when the policyholder’s own operations are directly affected, but, rather, when the operations of a supplier(s), buyer(s), or someone else is affected.

Other coverages – such as civil authority, business travel/evacuation, and directors and officers – also may be implicated by the recent coronavirus outbreak. As such, it is important for a business to consult with knowledgeable coverage counsel who can assist with a review of its entire coverage portfolio to maximize any possible insurance recovery.

More detailed information relating to insurance coverage for losses caused by this viral outbreak can be found in the February 6, 2020 Reed Smith Client Alert “Novel coronavirus: commercial insurance considerations.”