At What Point Should You Self-Insure?

Self insurance doesn't sound complicated, but it can be. Most major corporations implement some form of self-insurance. Self insurance is defined as: insurance of oneself or one's interests by maintaining a fund to cover possible losses rather than by purchasing an insurance policy. This can be accomplished by holding assets as an emergency fund to cover unexpected losses. There are many reasons why most businesses do not self insure:

  • It can be expensive. You would likely need to cover base liability limits of one million dollars to protect yourself and satisfy landlords and vendors. You can then purchase excess liability insurance for claims over one million. 

  • It ties up valuable assets needed to fund to growth of the business. You will need to keep a separate fund for losses. This could tie up capital that you may desperately need to grow your business. 
  • It's time consuming. You would need to administer the trust account and work with your vendors to prove that you have adequate funds to cover what a standard insurance policy would. 

Generally, we do not see businesses start to fully self-insure until they reach at least eight digit plus net revenue and 7 digit plus in liquid assets. If your business is still to small to self insure, consider these options as a form of self insurance:

  1. Carry a higher liability deductible. Most general liability policies will have a small deductible like $1,000. To lower your premium, ask your broker for pricing of $10,000, $25,000 or higher. If you can afford a small loss, but not a large one, a higher deducible could be the best way to go. Plus, by carrying a higher deductible you would not be reporting the very minor claims which will help your future insurability. Too many small claims and insurers either pass or inflate your rates. 
  2. Carry a higher property deductible. Same as above. You probably don't want to carry a $1,000 deductible and put in a $1,500 claim. Ask your broker for at least a $2,500 deductible to help your rates and limit the number of very small claims you may otherwise report. The premium savings is usually worth the bump in deductibles, especially if you have a good track record of no claims. 
  3. Only cover property vital to your operations. If your a cultivator, you might want to cover your crop, but not be too concerned with your miscellaneous equipment. Your crop could be worth a couple million, but your equipment may only be valued at $100,000. You could choose to self insure everything except your most valuable assets. Talk to your broker about the pros and cons of selective property coverage. 
  4. Choose a loss of business income limit that works for you. Business income (BI) is an essential part of a business insurance package. Cannabis/marijuana related businesses are no exception.  BI can be expensive, so it's important to choose a limit that works for you. Maybe you can get by with 3 months loss of income or maybe it would take a year or more to reestablish your operations after say a total fire. Work with your broker and business partners to figure out just how much business income insurance you need so you're not overpaying or underinsured. 

As you can see, self insurance can mean different things. By working with a professional insurance agent and brokerage team you can come up with a plan that suits your business. The cannabis business can be risky and we understand that may of our clients are risk takers. It's okay to absorb some risk expense in house, but you likely need guidance on risk management and insurance. Cannabis Insurance Associates is here to help. Reach out if you're ready to consult with us.