Changes to Ontario cannabis rules may increase competition

A leader in Ontario cannabis insurance says that the province removing a requirement for licensed producers to carry recall insurance could open up the market to smaller producers. However she also cautions that cannabis businesses are more vulnerable to recalls than most.

In November of 2022, facing pressure from the cannabis industry, the Ontario Cannabis Store (OCS) – the body that regulates legal cannabis in Ontario – dropped a requirement for all licensed producers to carry $15 million in product recall insurance. This was a welcome development for smaller producers, for whom the minimum premiums were a barrier to entry into the Ontario market.

“It was a significant problem for smaller businesses,” said Kelli Hunt, Senior Vice President at CannGen Insurance Canada. “If you were a micro-grower that wanted to list your products on the OCS website, it was about a $50,000 minimum premium just for the recall insurance before you did anything else. So it kept a lot of those growers out of the Ontario market.”

At the same time, OCS increased the requirement for CGL and product liability insurance from $5 million to $15 million, but that is much less onerous for small producers because premiums are based on the revenues of the business, as opposed to the recall coverage which is more like a flat rate for everyone.

The problem with removing the recall insurance requirement altogether is that most small cannabis producers are very price conscious, so many of them just dropped the coverage altogether. Hunt worries that this might be a mistake, given that it seems Health Canada is treating the cannabis industry much like healthcare and big pharma, which means recalls are a constant risk.

“To go from $15 million down to a reasonable number is a great idea,” said Hunt. “To go from $15 million to zero is probably going to, in hindsight, hurt some folks along the way.”

The Health Canada website lists 62 consumer product recalls related to cannabis since legalization in 2018. The cost of some of the bigger recalls might be around $2 million for larger producers.

“Have there been recalls over the last five years? Absolutely there have been,” said Hunt. “But I don’t know that we’ve seen that big, bad, major recall. That may be thanks to the way Health Canada requires small batches so that problems can be pinpointed and dealt with.

“Still, even with a minor recall, a business can be in for $100,000 or more, plus your stock if it’s deemed unusable. You might think that’s covered under your property policy. It’s not.”

Some cannabis insurers have responded to the regulatory change by offering recall coverage with lower limits and more reasonable premiums. But since recall insurance is no longer mandated, Hunt says it’s up to brokers to explain to their clients what exactly they are getting rid of and what can happen. That’s going to be different for each producer, and requires an understanding of the business.

“Say your big campaign for the fourth quarter is a cannabis advent calendar for the Christmas season, and you have to pull it back,” added Hunt. ”You’re not going to have time to get it back on the market. What happens then? This is the conversation that brokers need to have with their clients.”

At Mitch Insurance, we offer competitive cannabis business coverage for growers, distributors and retailers. We work with some of the top cannabis insurers in the province, and our commercial insurance brokers take the time to understand your business and recommend a package of coverage that reduces your risks while respecting your bottom line.