The State of Michigan is giving you a choice…
And it’s important to understand your options!
On Friday, December 15th, the State of Michigan started accepting applications for Medical Marihuana Facilities Licensing. One of the criteria listed in the emergency rules was Rule 10. Proof of financial responsibility; insurance. In Rule 10, the following requirements were listed:
- Before a license is issued or renewed, the licensee or renewal applicant shall file a proof of financial responsibility for liability for bodily injury on the form prescribed in section 408 of the act for an amount not less than $100,000.00. If the proof under this sub-rule is a bond, the bond must be in a format acceptable to the department.
- A renewal applicant or licensee shall carry premise liability and casualty insurance for an amount
- A secure transporter shall show proof of auto insurance, vehicle registration and registration as a commercial motor vehicle as applicable for any transporting vehicles used to transport marihuana product as required by the act and these rules.
So what does this mean for cultivators, processors, provisioning centers and safety compliance facilities?
In layman’s terms, each entity applying for a license will be required to purchase $100,000 in premise liability and casualty insurance (general liability) coverage and $100,000 in product liability coverage, either in the form of an insurance policy or surety bond.
For secured transporters, they will be required to purchase not only the general and product liability coverage, but also proof of auto insurance.
By allowing the entities applying for licenses to decide which type of product liability coverage they can purchase, they are providing the freedom of choice, however, as mentioned above, it is imperative that applicants understand their options.
How is Product Liability Coverage different from a Surety Bond?
The easiest way to answer this question is to first define each. Product liability insurance protects the manufacturer, distributor or seller of a product from the liability associated with a defective condition causing personal injury or damage. Basically, if you make it and somebody gets hurt from it, product liability insurance kicks in the cover the defense costs and the settlement to the injured party.
Surety bonds create a contract between three parties – the principal (applicant), the surety (the carrier) and the obligee (the entity requiring the bond). The surety would financially guarantee to the obligee that the principal will act in accordance with terms established by the bond. As it pertains to MMFLA, the principal would be the entity applying for the license, the surety is the surety bond company and the obligee would be the State of Michigan (although some cities are requiring bonds for their licensing process).
Important fact: some states such as California, are requiring both a bond and insurance policies!
Additionally, product liability protects the insured, the manufacturer, distributor and retailers related to the products that they manufacture, distribute or sell.
Surety bonds offer protection for the obligee (the entity requiring the bond), therefore, the principal (entity) is not protected. To be clear, if you purchase a surety bond, it does not protect you. It protects somebody else from your actions or inactions. Another important note: you are responsible for paying back the bond. This means that the underwriting for a surety bond is completely different than the underwriting for product liability. It requires the owners of the entity, and their spouses if applicable, to guarantee the bond personally.
It is also important to mention that with product liability, not only is there protection for liability resulting from a defective condition, but defence costs are also included in the coverage. While defense costs are covered either inside or outside the limits of coverage, it is important to emphasize that defense costs are covered. According to the Insurance Information Institute, the average cost of defense of a product liability claim is $876,000, so imagine the devastation of experiencing a product liability claim and only having a $100,000 surety bond in place.
While Bricks + Mortar Group appreciates the opportunity to decide the best coverage options to satisfy the financial responsibility portion of the MMFLA licensing application, we feel it is necessary that applicants understand the options available to them and make the best decision to protect their business.