Currently, 33 states have legalized medical marijuana, and 14 allow marijuana for adult recreational use. The trend toward legalization is expected to continue in 2020 with at least 19 other states considering adult recreational use or medical. This is driving rapid expansion of the cannabis industry, which is expected to have a compound annual growth rate of 14% over the next six years, reaching nearly $30 billion by 2025, according to the U.S. Cannabis Report.
While the sector is growing, insurance coverage has not kept pace with its risk management needs. Conflicting state and federal laws have made insurance carriers reluctant to write cannabis policies—due in large part to the U.S. Drug Enforcement Administration still classifying it as an illegal Schedule 1 substance.
The National Association of Insurance Commissioners’ Center for Insurance Policy and Research newsletter noted that, “Insurers looking to provide commercial cannabis insurance to this budding market should understand its rapidly shifting landscape. They must contend with legal uncertainty, evolving regulations, lack of data, and developing business practices. Insurers will also need to understand how the cannabis industry’s first and third‐party coverage needs are unique from other industries.”
Insurance carriers are slowly beginning to enter the cannabis market, navigating regulatory complexity and gathering data to address industry demand for coverage of its unique risks and exposures in areas such as product liability, general liability, theft, and crop loss.
Product liability exposures for cannabis businesses encompass a wide range of areas, including breach of warranty, deceptive practices, edibles, failure to warn, label claims, misrepresentation, mold and fungus, pesticides, and vaporizers.
Claims can involve bodily injury or property damage resulting from product misuse (particularly for many who are trying cannabis for the first time), including illness caused by inhaled, edible, or infused products; manufacturing or product-related defects that result in a loss; and faulty or misused equipment, including vape cartridges, batteries, and lighters.
A major area of exposure concerns accidents resulting from impairment. A cannabis cultivator, distributor, processor, or retailer may be considered liable if a product defect results in injury after reasonable use or when label defects fail to warn users that a product may have psychoactive effects.
The recent vaping crisis also points to risk management implications all along the cannabis product supply chain. For example, if a plastic vape pen explodes, a lawsuit could have repercussions beyond the manufacturer of the pen. This can include ingredient manufacturers, delivery companies, distributors, and retailers. Seed-to-sale tracking systems also make it easy to find incident-related parties to potentially be named in a lawsuit.
Cannabis companies are experiencing fallout from the vaping crisis in the form of increased risk exposure and coverage gaps. Insurance carriers are adding more exclusions for vape products, specifically where the potentially dangerous additive vitamin E acetate is present. The crisis has also caused insurance premium rate hikes for product liability coverage.
Theft and Fraud
A significant part of risk exposure for the industry relates to many cannabis businesses being cash-only, which makes them prime targets for theft and fraud. This risk exposure will continue as long as federal laws subject financial institutions to criminal prosecution for working with cannabis-related businesses.
Passage of the Secure and Fair Enforcement (SAFE) Banking Act would reduce this risk exposure, allowing financial institutions to work with cannabis companies. This legislation would protect financial institutions from liability and federal prosecution arising from servicing cannabis-related businesses authorized under state law.
Until banking regulations let the cannabis industry operate as legitimate businesses with the stability and safety that would deter criminal activity, some degree of crime and theft coverage is needed to help manage the risks associated with a cash-based business.
Cannabis-related businesses need the same general liability coverage as other businesses to protect their premises and operations from lawsuits involving public contact. However, standard general liability policies—which exclude Schedule 1 substances from coverage—were not created with cannabis businesses in mind. It is still difficult for insurers to offer these businesses adequate general liability as a result of the legal uncertainty associated with the industry.
Crop loss holds another area for risk exposure in the cannabis industry due to its differences from traditional crops, such as corn or soybeans. Fire, theft, and sprinkler leakage are common threats most indoor crop insurance policies cover. However, many cannabis growers experience threats beyond those and other common issues like mold, rot, disease, changes in climate, or fertilization problems. Most insurance policies generally do not cover these threats, resulting in growers positioned to absorb losses.
Due to recent natural events, outdoor crop coverage has become increasingly scarce. For insurance companies that do have policies, the cost is prohibitive. For example, the California wildfires essentially eliminated any potential for writing outdoor crop insurance for the cannabis industry. These devastating fires highlighted the pressing need for property damage and business interruption coverage for growers, dispensaries, and other downstream businesses whose supply was disrupted. This lack of available outdoor crop insurance is one of the more notable gaps in available cannabis business coverage.
While more insurance carriers are beginning to write cannabis coverage, the limited insurance options and policies with restrictive plans currently offered today do not meet the needs of the cannabis industry. U.S. lawmakers are looking to help cannabis companies obtain insurance products and encourage insurers to enter this market with the passage of the Clarifying Law Around Insurance Marijuana (CLAIM) Act, introduced by Representatives Steve Stivers (R-OH) and Nydia M. Velázquez (D-NY). The CLAIM Act establishes a federal “safe harbor” that protects insurers and insurance agents from federal prosecution when doing business with the cannabis industry.
“Without this legislation, insurers will understandably be reticent to insure businesses operating in the cannabis sector,” says Velázquez. “This means a legal cannabis distributor whose product is ruined from a flood or fire could lose all their capital and their livelihood.” The bill is designed to correct these problems. As the cannabis sector matures and new regulations are adopted, the insurance market will evolve to provide a range of coverage that addresses the unique risks and exposures in this sector.