Cannabis Product Recalls Can Cripple Operators

On August 2, Missouri cannabis regulators suspended Delta Extraction’s cannabis business license, accusing them of illegally sourcing materials from an unlicensed facility. Twelve days later, over 60,000 of Delta Extraction’s products were recalled state-wide. 

Although Missouri’s recall is one of the more recent examples, cannabis product recall woes are growing nationwide. According to Jencap VP of Cannabis Practice Lee Woodruff, “Over the past twelve months, we’ve started to see more recalls issued by states.” Here are just a few: 

• Oregon recalled over 22,000 cannabis concentrate products last December due to possible pesticide contamination. 
• Michigan recalled cannabis-infused edibles this September after discovering the products contained more than the maximum allowed THC per serving. 
• Colorado recalled 200 batches of cannabis flower last November after tests revealed they were tainted by yeast and mold. 

Financial Impacts of Recalls Can Devastate Cannabis Businesses

Missouri’s recent recall of Delta Extraction products amounts to millions of dollars in losses for the state’s cannabis industry. Delta Extractraction is a product manufacturer and supplier, which means the recall impacts every downstream cannabis manufacturer and retailer who buys their products. MJBizDaily reports that 20% of Missouri’s 91 licensed manufacturers will feel the impacts of the recall, as well as all of the state’s 200 retailers. 

Businesses that purchased from Delta Extraction are left holding inventory until regulators come to a decision about whether the products should be destroyed, returned, or ultimately approved for sale (which is unlikely). This ties up a significant amount of potential revenue that businesses may be forced to write off as a loss. 

• Clovr, one of Missouri’s largest suppliers of cannabis-infused products, says they have roughly $2 million worth of Delta Extraction’s oil they can’t use to produce products. 
• Dark Horse estimates they have more than $1 million of processed cannabis products they aren’t able to move. 
• Retail operator, Greenlight, has over 4,500 products locked away, which could cost them up to $200,000 in lost revenue. 

Recall Costs Extend Beyond Product Loss

“Operators are becoming more aware of the financial impacts and exposures they face as a result of these recalls,” says Woodruff. Those impacts and exposures go far beyond just unsellable products. In the midst of a recall, businesses can experience a number of different expenses — which can add up fast. These may include:

• Communication efforts to inform customers and consumers about the recall
• PR expenses to mitigate reputational damage 
• Tracking, retrieving, and transporting recalled products from the market — including products already sold to customers 
• Properly disposing of recalled product 
• Legal defenses, if a customer or consumer sues for damages
• Compensation and medical expenses for injured consumers

In combination with lost product and revenue, the total expense of a recall can be staggering. Woodruff explains, “Unless a business has the right insurance coverage, they are left to absorb these losses and costs. It’s a huge financial burden that operators may not be able to recover from — especially small and mid-sized operators.” 

Specialized Cannabis Insurance Bridges the Gap

Product recalls can impact any industry, which is why it’s important for businesses to proactively develop proper recall-response plans and secure comprehensive insurance policies for their operations. This can be a challenge, however, for businesses working within a developing industry like cannabis, which is plagued by ever-changing policies and regulations that vary from state to state. 

Unless cannabis operators are working with insurance professionals who are very familiar with the nuances of the cannabis industry, they may not even be aware of their own business’s risks and how to best guard against them. 

Woodruff says, “Unfortunately, many retail insurance agents who don’t focus solely on the cannabis industry aren’t offering cannabis-specific business insurance coverage to their clients. That’s a huge mistake that leaves clients unprotected.” 

Working with knowledgeable agents and brokers can help cannabis operators avoid costly product recalls by arming them with resources for proper risk mitigation. In the unfortunate situation where a recall can’t be avoided, operators will have peace of mind that they have the means to address the recall without risking financial ruin. 

Put Jencap’s extensive industry experience to work for you and your clients.. We operate in every cannabis market, coast to coast, and specialize in every cannabis business across the supply chain — from growers and manufacturers to dispensaries and transportation services, and everything in between. Contact us today to speak with an expert and secure a quote.