The insurance market is keeping pace with cannabis legalization and providing coverage, even while facing challenges from differences in state laws, limited insurer participation, and lack of federal governance.
Laws legalizing marijuana use have been passed in a majority of states, with 33 states and the District of Columbia allowing some form of medical use or recreational use. With these laws – and more to come – the need for specialized insurance solutions for growers, dispensaries, retailers and manufacturers of cannabis products has expanded rapidly.
The most pressing cannabis-related insurance needs currently stem from those businesses involved in production, with the biggest risk being product liability, according to TJ Frost, US cannabis segment leader for Hub International. A product liability claim can affect all parties involved from the grow operation to the cultivation to the dispensary. Depending on state laws governing vertically integrated operations, this can be one business handling all aspects or relationships with multiple parties.
Outside of product liability, cannabis touches nearly every line of insurance coverage, including property, auto, workers compensation, employment practices liability, and crime, Frost told Advisen. As the industry expands, it could conceivably affect nearly every property/casualty line of business.
The cannabis insurance market has been around for awhile, dating back to the mid 1990s, but it hasn’t been an easy road for brokers working with cannabis companies. In 2015, Lloyd’s of London pulled out of the U.S. cannabis market entirely, nonrenewing all business because of conflicts between state law and federal law.
Under U.S. federal law, marijuana remains a Schedule 1 substance that is illegal to manufacture, distribute, or sell for medical or recreational use. This key issue creates a host of worries for cannabis companies and the businesses that work with them.
About 29 insurers now offer coverage to the cannabis industry, Frost explained, and expertise from carriers varies since pricing and loss history has yet to mature. Over the last several years, some insurers came into the market, “thinking it was the next oil and gas,” he said, but found the market too difficult.
“Everything is new on the cannabis stage,” said Frost. “We’re still in the preseason baseball game, we’re not even in the majors.”
While coverage for cannabis operations tends to be priced high, it’s important to verify the high premiums come with appropriate coverage, rather than “just throwing a number in the air.”
“If it’s high and you’re providing excellent coverage, that’s one thing. But to pay for coverage that isn’t going to pay out is ridiculous,” said Frost. He said Hub International, having been in the business for many years, works extensively with clients to craft customized programs and help reduce risk.
Norman Ives, a broker for Worldwide Facilities with over 20 years of experience in the cannabis sector, compared the cost difference for insurance coverage for cannabis products to other health/wellness or “nutraceutical” products. While both are “consumables” that aren’t regulated food products – or that have inconsistent state-to-state regulation – insurance coverage for cannabis will likely cost twice as much what it would be to insure a nutraceutical business.
Advisen’s loss database contains over 700 cases with some connection to cannabis with a wide range of insurance impacts. Some of these relate to cannabis-specific businesses; others reveal the risks traditional businesses face as marijuana legalization expands.
For example, an August 2019 class action lawsuit against Curaleaf Holdings alleges the cannabis company, one of the world’s largest, violated federal securities law by making false statements about the uses of its products to treat Alzheimer’s disease, cancer, pain, opioid addiction, and pet anxiety.
In another case, a builder hired to expand the premises of an Oregon cannabis company’s property sustained serious burns when a flash fire occurred during a cannabis extraction procedure. Other workers compensation cases tracked by Advisen involve either workers seeking coverage for injuries sustained while testing positive for marijuana use as well as injured workers seeking reimbursement for medical marijuana used to alleviate pain.
Multiple cases in the database illustrate the risk for employers of terminating or disciplining workers who use or test positive for marijuana, particularly in states where recreational or medical use is permitted.
Claims are few
For cannabis companies, however, the prime concern is product liability and there do not appear to have been any substantial claims, though attorneys say they are inevitable.
A large product liability claim would “shake up the market,” Frost said.
It’s a “pre-claim environment” for the most part, according to Ives. The claims for cannabis businesses that do occur are usually fire-related property damage. However, he noted dispensary thefts appear to be rising, along with the threat of product liability from e-cigarette and vape batteries. Although vape battery claims tend to be more related to tobacco, the threat of loss and product liability is “infiltrating” cannabis, Ives said.
The risks of vaping made news recently with links to six deaths and at least 380 cases of lung ailments reported by users of e-cigarettes for both nicotine and cannabis. The Centers for Disease Control (CDC) is currently investigating, but warned the public not to buy e-cigarettes “off the street” or to modify products for any use other than intended by the manufacturer.
With high prices, lengthy and legally complex applications, and no federal guidance cannabis businesses face significant obstacles to doing business. A bill in the United States House of Representatives (H.R. 4074, the Clarifying Law Around Insurance Marijuana (CLAIM) Act) would create a federal safe harbor for insurers doing business with cannabis companies. Introduced in July 2019 by Rep. Nydia M. Velázquez (D-NY) and Rep. Steve Stivers (R-OH), the measure is designed to expand the insurance market and foster growth in the cannabis industry. Similar legislation has been introduced in the U.S. Senate.
“Without this legislation, insurers will understandably be reticent to insure businesses operating in the cannabis sector,” Velázquez added. “This means a legal cannabis distributor whose product is ruined from a flood or fire could lose all their capital and their livelihood.”
Federal legislation would go a long way toward making placing cannabis coverage more easily, according to Ives. In addition, cannabis businesses still face banking restrictions (making them a target for theft), problems securing rental space, and none of the standard federal business tax deductions.
There’s a lot at stake with the progressive legalization of marijuana and cannabis-related products and significant room for the insurance market to develop. A recent report from the National Association of Insurance Commissioners (NAIC) estimated 2017 sales of $9 billion, adding, “sales of medical and recreational cannabis in the U.S. were nearly nine times higher than Oreo cookies and almost on par with Americans’ collective spending on Netflix subscriptions. With the addition of California’s recreational market sales in 2018, cannabis sales could easily eclipse McDonald’s annual U.S. revenue.”
Research from Harvard University also indicated states with medical marijuana laws see a positive impact on opioid prescribing trends, lowering them by nearly six percent.
Given the state-by-state nature of cannabis, the NAIC has studied the issue extensively, with a working group focused on the insurance and regulatory issues stemming from legalized marijuana. Most of the existing insurance market for cannabis operates on a nonadmitted basis, but Colorado, Oregon, and California have state-admitted workers compensation markets of last resort for the risk. State regulators are also eyeing the potential impact of cannabis use on the auto insurance market and the effect on drug-free workplaces policies.
“Despite the risks, state insurance regulators should encourage insurers who choose to enter the cannabis market to do so on the admitted market to drive the costs of policies down and make cannabis insurance more accessible for the cannabis industry,” stated the NAIC in a May 2019 report.
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