The cannabis sector is booming, but a critical vulnerability threatens to blunt its momentum. Chris Sullivan (pictured), commercial practice leader at Powers Insurance and Risk Management, says the industry's lack of robust risk strategies around product liability could trigger financial catastrophe for operators large and small.
“The regulatory infrastructure is immature,” Sullivan said, pointing to inconsistencies across state lines that make compliance and accountability difficult to maintain. Testing inaccuracies, unclear legal frameworks, and reliance on raw materials like hemp-derived distillate – sometimes acquired under murky legality – are exposing operators to enormous financial risk.
"Testing results are inconsistent, and ultimately it is the entire seed-to-sale chain of commerce that can be heavily impacted by a product liability event,” he said. A government-mandated recall, he warned, “is financially devastating.”
The practice of “inversion,” where legal hemp distillate is used to manufacture THC-rich cannabis products, further complicates exposure. “That distillate is then sold to other manufacturers,” Sullivan said, until regulators step in, ordering that every product containing the substance be “recalled and destroyed.”
Despite the scale of exposure, few cannabis operators carry adequate insurance coverage. “There really isn't… a well-known or successfully operating traditional product recall product out there,” Sullivan said. Most rely on limited product withdrawal expense coverage, which doesn't come close to covering the potential losses.
“When a recall occurs, the operator may have to destroy five, six, or seven figures’ worth of product,” he said. “And there’s not going to be a refund.”
This blind spot is compounded by testing discrepancies that distort market signals. “The same product is going to several different testing labs, and all three are showing different results,” he said. That inconsistency allows THC inflation – where operators select labs that produce higher potency readings – to skew the market.
“THC percentage alone is very much misunderstood. And quite frankly, it’s manipulated,” Sullivan said.
With investor pressure and slim margins driving day-to-day decisions, many cannabis businesses treat insurance as an afterthought. “There’s not a ton of pressure for [insurers] to improve and broaden their insurance terms,” Sullivan said. A lack of competition among insurers has left coverage thin and reactive.
The solution, he said, is a layered risk strategy: begin with identifying exposures, assess where traditional insurance ends, and consider self-insurance for critical gaps. “It’s about knowing where coverage starts, where it stops, and what can we do to fill the gaps between,” he said.
This includes bolstering management protections. Directors and officers (D&O), employment practices liability, and cyber coverage are crucial – even for smaller, private firms. “There’s a misconception that you got to be a certain size… it’s just not true,” Sullivan said.
While cannabis firms face unique challenges, Sullivan believes their approach to risk management could offer lessons for other sectors. “Best-in-class operators are identifying this as a critical operational need,” he said. Increasingly, companies are assigning dedicated insurance liaisons to manage these complex exposures.
For traditional industries like manufacturing or construction, Sullivan’s message is clear: start early, educate thoroughly, and implement intentionally. “Almost always, D&O is a part of that conversation,” he said. The risks are real, and the solutions must be proactive.
