Your Cannabis Lease Can Bankrupt You: Indemnification and Insurance Risk in NY

What this page covers

• What indemnification means in commercial leases
• How lease language shifts liability to dispensary tenants
• Why landlord insurance requirements exceed OCM minimums
• What Additional Insured status does and does not do
• How insurance exclusions and sublimits affect lease obligations
• Vendor contract indemnification risk
• How to review your lease before execution

The Hard Truth Most First Time Owners Miss

Regulatory compliance does not protect you from lease liability.

You can meet every OCM requirement and still sign a lease that exposes you to six or seven figure risk.

OCM regulates your license.
Your lease governs your financial survival.

Those are different systems.

How Indemnification Works in a Cannabis Retail Lease

Indemnification is a contractual obligation to compensate another party for loss, damage, or liability.

In a New York cannabis retail lease, indemnification typically requires the tenant to:

• Defend the landlord against lawsuits
• Pay legal defense costs
• Cover settlements or judgments
• Protect the landlord from claims connected to the premises or tenant operations

Indemnification can apply even if the landlord is named in the lawsuit.

The obligation exists because it is written into the lease, not because fault has been determined.

Insurance may fund this obligation. Insurance only responds if the loss falls within the scope of the policy.

If coverage is excluded or limited, the indemnification obligation may still remain enforceable under contract law.

How Lease Language Shifts Liability to Dispensary Tenants

Most commercial cannabis leases contain broad language such as:

The tenant shall indemnify and defend the landlord from claims arising out of the premises or tenant operations.

This language can include:

• Customer injury
• Property damage
• Theft incidents
• Security failures
• Employee injuries tied to premises conditions
• Fire or water damage
• Third party lawsuits
• Regulatory violations

If the lease includes a duty to defend, you may be responsible for funding the landlord’s legal defense from the start of a claim.

Defense costs in commercial litigation can be significant even before fault is determined.

OCM Minimum Insurance Is a Regulatory Floor, Not a Lease Standard

Under 9 NYCRR § 118.4, retail dispensaries must maintain specified insurance coverage as part of licensing compliance.

Landlords often require more.

Lease insurance requirements may include:

• Higher general liability limits
• Umbrella or excess liability coverage
• Property coverage at defined limits
• Additional Insured endorsements
• Waiver of subrogation endorsements
• Specific policy forms

If OCM requires one million dollars and your landlord requires two million dollars, the lease requirement controls your exposure.

Failure to meet lease insurance requirements can trigger default under your lease even if regulatory minimums are satisfied.

Licensing compliance and lease compliance are separate obligations.

What Additional Insured Status Does and Does Not Do

Naming a landlord as an Additional Insured allows the landlord to access your liability coverage for claims arising out of your operations.

It does not:

• Expand your coverage
• Remove policy exclusions
• Increase sublimits
• Override a breach of warranty
• Create coverage where none exists

If your policy excludes employee theft, that exclusion applies to both you and the landlord.

If your theft sublimit is two hundred fifty thousand dollars, that is the maximum payout for both of you combined.

Additional Insured status shares your coverage. It does not broaden it.

How Insurance Exclusions and Sublimits Affect Lease Obligations

Insurance policies contain exclusions and sublimits.

Exclusions remove certain losses from coverage.

Sublimits cap payment for specific categories of loss, such as theft or cash.

If your lease requires you to indemnify the landlord for a loss that your policy excludes, your insurer may deny the claim.

If your lease exposure exceeds a sublimit, the remaining balance may fall on you.

Example:

Your lease requires full indemnification for theft-related losses.

Your policy has a theft sublimit of two hundred fifty thousand dollars.

If the loss is seven hundred fifty thousand dollars, the policy may only pay the sublimit. The remaining balance may still be your responsibility under the lease.

This gap between lease obligation and insurance coverage is one of the most common financial risks for first time dispensary operators.

Waiver of Subrogation and Risk Allocation

Many cannabis leases require a waiver of subrogation.

A waiver of subrogation prevents your insurer from seeking reimbursement from the landlord if the landlord contributed to the loss.

If agreed to, your insurer pays the claim but cannot recover funds from the landlord.

This shifts more financial risk to you and your insurance program.

Confirm that required endorsements are included in your policy and understand their impact before signing.

Vendor Contract Indemnification Risk

Liability exposure is not limited to your lease.

Vendor agreements with:

• Security companies
• Contractors
• Equipment installers
• Consultants

may include indemnification clauses that shift liability to you.

These agreements may also:

• Limit the vendor’s liability
• Cap their financial responsibility
• Require you to indemnify them
• Require insurance endorsements beyond your current coverage

If a vendor failure contributes to a loss, your ability to recover may depend entirely on how the contract was drafted.

Insurance responds based on policy terms. It does not correct unfavorable contract language.

The Five Lease Clauses You Must Review Before Signing

Before executing a lease, review these clauses carefully:

Indemnification clause
Understand what events trigger your obligation to defend and pay and whether it is limited to your negligence.

Insurance procurement clause
Confirm required limits, umbrella coverage, and endorsements.

Additional Insured requirement
Confirm which coverage parts must include the landlord.

Waiver of subrogation
Understand whether your insurer’s right to recover from the landlord is being waived.

Defense obligation language
Determine whether you must defend immediately or only after fault is determined.

Do not assume your broker has reviewed your lease language. Brokers review policies. Attorneys review contracts.

How to Review Your Lease Before Execution

Before signing, confirm:

• Your insurance limits match lease requirements
• Umbrella coverage is in place if required
• Required endorsements are issued
• No policy exclusions conflict with indemnification obligations
• Indemnification language can be narrowed or capped where possible
• Legal counsel has reviewed the lease

Signing a lease without confirming insurance alignment can create uninsured financial exposure.

Key Point for First Time Operators

Insurance protects against covered losses.

A lease creates contractual obligations.

If indemnification is broad and your insurance coverage is narrow, the difference becomes your responsibility.

Understanding this interaction before signing is critical to the financial stability of your cannabis retail business.

Related pages

• The Insurance Fine Print That Destroys Cannabis Claims in New York
• ‍Do NY Dispensaries Need Product Liability Insurance?
• ‍Why cannabis insurance is so expensive in NY

Source material

• New York General Obligations Law § 5-321 (limitations on certain indemnification clauses in leases)
• New York Insurance Law § 3420 (liability insurance provisions, including notice and disclaimer rules)
• New York Insurance Law § 3106 (warranties and the effect of breach on coverage)
• New York Insurance Law § 3425 (commercial policy cancellation and renewal notice requirements)
• New York Department of Financial Services, Office of General Counsel Opinion No. 06-02-11 (Certificates of Insurance do not alter policy terms)‍