African american woman opening bottle of weed close up

The next frontier in the rapidly expanding legal cannabis industry is the consumption lounge.  This development in the growth of our industry poses several obstacles in both a regulatory and insurability standpoint.  Like other operations up the vertical, the rules and regulations surrounding the licensing and operation of a cannabis consumption lounge will vary by state and municipality, but it will be the next model that will see significant expansion over the next few years. 

Consumption lounges are an inevitable, but necessary evolution in the industry.  With the development of legal cannabis in large metropolitan areas such as New York/New Jersey, where many residents live in rented or HOA controlled condos and apartments, consumption of purchased product is at odds with rules set forth by landlords or HOAs.  Add this to visitors to legal cannabis destinations such as Las Vegas and Colorado, who may wish to consume cannabis while vacationing in hotels or rented homes where smoking of any kind is forbidden, and you wind up with a significant need for a safe, controlled space for legal cannabis consumption.  Many states have recognized this and are issuing licenses for standalone and dispensary adjacent consumption lounges.

But wait! What regulations will be put in place? Can we sell and serve cannabis products in the lounge, or should it be BYOB? How can the operators of a consumption lounge minimize their liability exposure and insure the rest? These are all questions potential operators should be asking themselves because much like other legal cannabis regulations, they vary by location. 

As a cannabis insurance professional, I can’t help but dwell on the myriad combinations of exposures that a business can create in launching a cannabis consumption lounge.  Does the location operate an attached dispensary? Are they planning to cook and serve food? Does the location require visitors to be transported by car, and is it accessible to ride-share drivers? The insurance industry is obviously risk adverse and is still catching up to the needs of the cannabis industry, so the current options for a consumption lounge can be best described as “case by case” and hinges on the regulations set forth by the location’s state of operation and the insurer’s willingness to wade further into uncharted waters. 

To get a better idea of what current operations look like, I did a survey of some consumption lounges to determine, from an insurance standpoint, which might be more attractive to an insurance company when seeking coverage.  I’d like to highlight two different approaches I found:

Lounge 1 –

  • “Private” Club with daily, monthly, or annual membership required for entry
  • No cannabis sales onsite
  • Members sign a liability waiver which outlines expectations of members and advises of the effects of consuming cannabis
  • No alcohol OR food service
  • Members must be 21 or older to enter

Lounge 2 –

  • Entry fee, but not “membership”
  • Cannabis sales in lounge including infused drinks and pre-rolls
  • Food service
  • 30-minute time limit for consumption of purchased products (Limit increased with each purchase)
  • No alcohol sales
  • 21 or older to enter

Which location would insurance companies be more apt to cover?

Both would require diligent underwriting and warranties but Lounge 1 would be more attractive to more insurance carriers for a few reasons.  First, no onsite sales or consumable product preparation removes any product liability exposure.  The operation is BYOB (Bring Your Own Buds).  Second, the exclusion of food service from the operations.  Obtaining comprehensive insurance for a cannabis business is hard enough, adding food preparation and service to your operations only complicates matters.  Third, and most alarming is the time limit imposed by Lounge 2.  Putting such a short time limit on the consumption of a product that will impair the abilities of the consumer is, in my opinion, ill advised.  Depending on the tolerance of the consumer and the concentration of the product consumed, the impairment can last several hours.  Add to that the requirement to purchase more product to extend your time and you have the potential for significant issues stemming from the consumers impairment. 

So, if you’re currently operating a cannabis business and have an eye to open a consumption lounge, I would advise doing some diligence on your state and local regulations, then go even further to protect yourself.  It may seem like a great idea to open a flashy night club-like lounge with table service and THC infused mock-tails but limiting your liability exposure by requiring product to be purchased elsewhere might be the safer (and cost effective) option, at least in the short term.  As regulations and insurance coverage for these operations evolve, you may have more options available to you, and can expand your services in the future.

Author:
Thomas Cioletti
Trichome VP of Underwriting

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