Marijuana Retailer Bond
What is a Marijuana Retailer Bond?
Marijuana retailer license bonds are a subset of the broader license bond category that must be filed with the government agency (city, county, or state) responsible for regulating marijuana sales activity in the retailer’s jurisdiction as a condition of licensure for most marijuana retailers or medical marijuana dispensaries . Colorado is currently the only state requiring bonds for marijuana retailer licenses; however, many states have passed similar legislation and will likely soon follow suit.
Marijuana retailer license bonds must be issued by insurance carriers admitted in the state where the government agency requiring the bond resides. The insurance carrier issuing any surety bond, such as a marijuana retailer license bond, will also be referred to as the “surety company” or the “bond company”. Marijuana retailer license bonds refer to the retailer as the Principal, the surety bond company as the Obligor and the government agency as the Obligee.
What is a Marijuana Retailer Bond?
Marijuana retailers are required to purchase license bonds by state and local statutes to protect a government agency by transferring to a surety bond company the cost of ensuring the public is compensated for damages resulting from a retailer breaking state or local statutes applicable to marijuana retailer licensing. The surety company provides the government a guarantee (the surety bond) that the customers of a licensed marijuana retailer will receive payment for financial damages due to a violation of the statutes and regulations pertaining to the marijuana retailer license up to a limit specified in the bond (“penal sum” or “bond amount”). The bond company also directly receives claims from the public and determines the validity of claims. Ultimately, marijuana retailers are responsible for their actions and required by law to reimburse the surety company for any payments made under the bond or face indefinite license suspension.
Marijuana retailer license bond violations triggering a bond payout may include a retailer selling marijuana in a public space, admitting entrance of individuals under the age of 21 to the retail marijuana establishment, or engaging in operations outside of the marijuana retailer license specifications.
How Much Does a Marijuana Retailer Bond Cost?
Retail marijuana license bonds generally cost between 5% and 20% of the bond limit.
Example: $10,000 Marijuana Retailer Bond Cost
| Credit Score | Premium Rate | Bond Cost |
|---|---|---|
| 700 or above | 5% | $500 |
| 600-699 | 10% | $1,000 |
| 500-599 | 20% | $2,000 |
The actual cost of a specific marijuana retailer license bond can vary widely depending on the risk associated with legal precedent in the jurisdiction, the language in the bond form and the retailer’s license history, experience and creditworthiness. Marijuana retailer bonds required by a local government (city or county) tend to have the lowest cost, while state requirements have potentially higher costs and/or more strict underwriting requirements.
Is a Credit Check Required for Marijuana Retailer Bonds?
Credit checks are required for marijuana retailer license bonds. Ultimately, the surety insurance company determines how it will underwrite and price a surety bond.
How Does the Wording in the Bond Form Impact the Cost of a Marijuana Retailer Bond?
The bond form is a tri-party agreement which defines the rights and obligations of the government agency (obligee), surety company (obligor) and retailer (principal). While many bond forms use similar language, each bond form can be customized by the government agency requiring the specific bond and may contain provisions that increase potential costs for the surety company, which will ultimately be passed on to the retailer via higher bond premiums, stricter underwriting or collateral. The primary text to consider in a retailer license bond surrounds (1) aggregate limits, (2) cancellation provisions and (3) forfeiture clauses.
Aggregate Limits
Bond forms always specify the penal sum defined as the maximum amount of financial damages any single party can recover from the bond related to a single claim occurrence. Most bond forms also contain a clause which limits the amount of financial damages from all parties and all claims to a specific amount (“aggregate limit”), usually the same amount as the penal sum. For example, a $15,000 marijuana retailer bond with an aggregate limit of $15,000 will pay out no more than $15,000, regardless of the number of damaged parties or claim occurrences. Retailer bonds without an aggregate limit will be more expensive than a bond with similar coverage containing an aggregate limit.
Cancellation Provisions
Most bonds contain a provision allowing for the surety company to cancel the bond (“Cancellation Provision”) by providing a notice to the retailer and government agency requiring the bond with the cancellation taking effect within a set period of time, usually 30 days (“Cancellation Period”). Cancellation provisions allow the surety company to cancel the bond for any reason, but most often due to the retailer failing to pay premiums due, claim payouts, or material changes in the retailer’s credit score. Marijuana bonds with no cancellation provision or cancellation periods greater than 30 days will be more expensive than a bond with similar coverage containing a standard cancellation provision.
Forfeiture Clause
Surety bond claims are paid by surety companies to damaged parties to reimburse that party for the financial loss incurred up to the bond penalty amount. Certain bonds contain a clause which requires the surety company to pay the full bond penalty to the damaged party, regardless of the actual damages incurred (“Forfeiture Clause”). Marijuana bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.
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