California is a cannabis pioneer, one of the first states to legalize and regulate legal cannabis in the US. Consequently, California is also one of the states setting the precedent for the cannabis industry, establishing regulations that affect how, where, when, and by whom cannabis can be sold. The first step to establishing a California cannabis business is obtaining the correct California licensing and cannabis surety bonds. In this article, you’ll learn the key basics of California cannabis surety bonds, how they work, why they’re required, and how Millers Insurance Group can help you get cannabis bonded in California.
California’s Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA)
In 2015, California passed a series of bills which established the framework of the California legal cannabis industry. These bills are collectively known as the Medical Cannabis Regulation and Safety Act (MCRSA). In 2017, this framework was expanded to include recreational cannabis sales in the state, integrating MCRSA with AUMA to create the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA).This bill included the requirement for all cannabis licensees to post a surety bond.
What Is A Cannabis Surety Bond?
Surety bonds are essentially a legal promise between three parties: Principal, Surety, and Obligee. A cannabis surety bond is the legally binding agreement between a cannabis company (principal), the bond issuer (surety) and the state (obligee.) Should the principal company fail to be in compliance with regulations, the surety bond issuer agrees to be liable for any debt, default, or failure caused by the principal company.
What Does A Cannabis Surety Bond Do?
The issuer of the surety bond “vouches” that the principal company will adhere to all the obligee’s state or municipality laws and regulations that govern the principal’s state license. A cannabis surety bond provides a financial guarantee that if the principal is found in violation of any law or regulation, the obligee will be compensated by the surety bond issuer. California cannabis laws and regulations require all businesses that grow, distribute, and/or sell cannabis must obtain a California cannabis surety bond.
What Purpose Do Cannabis Surety Bonds Serve?
By requiring cannabis companies to be bonded, there’s an additional layer of scrutiny of the company’s credit, finances, and leadership, ensuring that the company is both qualified and a good risk. If a cannabis company violates the terms of their cannabis surety bond resulting in a financial loss, the state or municipality can make a claim against the bond. If the claim proves valid, the surety will pay out an amount up to (but not exceeding) the amount of the bond to the state or municipality. After which, the surety will pursue reimbursement from the company.
Why Are Surety Bonds Required In California?
California cannabis surety bonds are required to legally operate within the state’s cannabis industry primarily to protect the public in the event that the license holder doesn’t comply with rules and regulations. For example, if a crop of cannabis is found to be contaminated, in accordance with MAUCRSA regulations, the cannabis company must destroy the contaminated crop. Depending on your state regulations, cannabis surety bond requirements might apply to improper packaging and labeling, defective products, and other violations. If the business entity is proven to be out of compliance, the bond may be called by the state.
How Does A Surety Bond Work In California?
California cannabis surety bonds are valid from their effective issue date until they are canceled. Cannabis surety bonds renew annually, and may be canceled with thirty (30) days written notice to the Obligee. Should any claims be leveraged against the bond, the ultimate financial responsibility lies with the principal party (the cannabis company.)
Types of California Cannabis Surety Bonds
There are five basic types of California Cannabis License surety bonds:
- Cultivator
- Retailer
- Distributor
- Manufacturer
- Microbusiness, Testing Lab, Event Organizer, or Other
How Much Do California Cannabis Surety Bonds Cost?
California cannabis surety bonds are individually underwritten, meaning that the cost can vary from person to person, and the cost is often directly related to the principal party’s credit score. For a cannabis company with strong credit, their rate might be as low as 5% of the total bond amount. However, bear in mind that the typical cost of a cannabis surety bond in California ranges from $5,000 to $5,000,000. Cannabis retailers, distributors, and manufacturers may also have the cost of their bond determined in part by the square footage and usage of their business. Additionally, some California localities may require more costly city and county cannabis bonds, which may be required in the jurisdiction.
Protect Your Canna-Biz With Millers Insurance Group
The cannabis industry is exciting –but it’s also complex and nuanced. Most cannabis entrepreneurs get into the canna-biz because they have big ideas about the future of the industry, and Millers Insurance Group is no exception. We’re in the business of cannabis insurance to free up time for the cannabis innovators of tomorrow. We’re dedicated to protecting your business so that you have peace of mind to focus on growing your business.
Millers Insurance Group has the cannabis industry experience you’re looking for, with a full range of insurance solutions to customize your policies and protection. Our experts are dedicated to the ongoing success of your cannabis business – contact us today for a free, zero-obligation consultation.
