The five kinds of cannabis surety bond
Cannabis bonds, which many operators and several statutes call marijuana bonds, sit in the commercial surety class. Most are simple, transactional license instruments. A few are manuscript obligations with decommissioning, reclamation or production guarantees. Knowing which one you have tells you how it will be underwritten.
License and compliance bonds
This is the most common cannabis bond. It guarantees that the licensee will comply with the cannabis statutes and regulations of the jurisdiction that issued the license. California's $5,000 Department of Cannabis Control bond, required of cultivators, manufacturers, distributors, retailers, testing laboratories and microbusinesses, is the archetype. Massachusetts, Vermont and Montana use the same idea at similar size. Compliance bonds are inexpensive, fast to underwrite and renew annually or every two years depending on the obligee.
Tax and excise bonds
A tax bond guarantees timely filing and payment of cannabis specific taxes. The Anchorage marijuana sales tax bond and the cultivation tax bonds of Humboldt and Trinity counties in California belong here. The tax debt sits in front of the bond, so claims are well documented and the surety's recovery against the principal is predictable. That is why tax bonds are among the easier cannabis obligations to place.
Reclamation, decommissioning and performance bonds
This is the growing subset, and it carries the larger penal sums, because the bond secures the cost of restoring cultivation land, decommissioning a facility or completing a stated level of production. Oklahoma's commercial grower bond under Senate Bill 913 secures disposal of unused cannabis, hazardous materials and other waste and reclamation of the permitted land. Utah's production establishment bonds, Alabama's $2,000,000 integrated facility bond, Florida's $5,000,000 MMTC bond and Connecticut's construction and supply bonds are similar in structure. All of them require business and personal financial statements.
Bonds that keep your capital working
Several regulators will not license a cannabis business until money is set aside for them: Ohio from $50,000 for a dispensary to $750,000 for a Level I cultivator, Illinois $50,000 for a dispensary and $2,000,000 for a cultivation center, Arkansas a showing of assets at application. In each of those states a surety bond satisfies the rule, and for almost every operator it is the right way to satisfy it.
- Capital stays in the business. A bond costs a small fraction of the penal sum each year. The alternative is the full amount, in cash, out of reach for the life of the license. In an industry that cannot borrow normally and pays tax without ordinary deductions, idle cash is the most expensive asset an operator owns.
- Bank credit stays free. A letter of credit is charged against your borrowing capacity dollar for dollar, where a bank will issue one to a cannabis business at all. A bond is not bank debt and does not appear as a draw on your lines.
- There is a process before anyone is paid. Funds held by a state or drawn under a letter of credit can be taken on demand. A surety investigates a claim, notifies you and gives you the opportunity to respond and cure.
- It grows with you. When you add a license or a state, a rider or a second bond is issued in days. Funding another escrow means finding the cash again.
- It comes back faster. When a license ends, a bond is simply released or cancelled. Deposits are returned on the agency's schedule.
New York's medical program used the same logic when it accepted a $2,000,000 bond from applicants that had not yet secured their sites. If a regulator gives you the choice, choose the bond and let us quote it.
Hemp and CBD bonds
After the 2018 Agricultural Improvement Act removed hemp from the Controlled Substances Act, several states began bonding hemp cultivators, processors and commodity handlers. See hemp and CBD bonds for the list.
How a claim unfolds
If the obligee believes the principal has violated the bond, it files a written claim with the surety. The surety opens a file, asks for documentation and notifies the principal, who has the opportunity to respond and to cure the violation. If the claim is valid and unresolved, the surety pays the obligee up to the penal sum and then pursues recovery from the principal and the indemnitors under the general indemnity agreement.
Cancellation and reinstatement
Most cannabis bond forms let the surety cancel on written notice to the obligee, typically 30 or 60 days. The licensee must replace the bond before the effective date or face suspension. A paid loss does not end access to bonding, but it changes the conversation. Reinstatement usually means settling the prior surety's recovery, showing corrective measures and posting limited collateral while a new record is built. Our non-standard program exists for exactly that situation.
A liability policy protects the operator. A surety bond protects the government and the public from the operator. A loss under a fidelity bond is absorbed by the carrier. A loss under a surety bond is recovered from the principal.
Written and reviewed by C. Constantin Poindexter, MA, JD, CPCU, AFSB, ASLI, ARe, AINS, AIS, CPLP, CICS. Founder of Surety One, Inc., Cannabis Insurance Coverage Specialist, attorney and surety underwriter for more than thirty years. Author of The Contractor's Guide to Surety Bonds. View his cannabis insurance credentials. Last reviewed .
Get your cannabis bond quoted today
Application review and quoting are free, and there is no obligation to buy. Bonds of $25,000 or less are usually issued the same business day.