The cannabis industry continues to grow rapidly. Just two years ago, the global market was valued at nearly $18 billion dollars. Expected to expand at a compound annual growth rate of more than 25% over the next several years, the industry is expected to be worth a staggering $134.4 billion by 2030 (source 1). Although still federally illegal, the cannabis business is attracting entrepreneurs and investors across the U.S., fueled by state legalization measures, growing sales, and a need for tax revenue. While the cannabis industry seems to be shedding its taboo market status in some areas, many financial institutions, including insurance carriers, still remain hesitant to offer cannabis coverage, with the majority of professional, casualty, and property insurance business finding a home in the E&S marketplace (source 3). In 2023, the insurance market for cannabis organizations is continuing to evolve and present opportunities across all lines.
PROFESSIONAL / MANAGEMENT LIABILITY
After years of a general hard market environment, the Directors and Officers (D&O) and Management Liability segment of the insurance marketplace is starting to transition, and that change is bleeding into the cannabis space. Increased capacity is becoming available and coverage restrictions historically in place are loosening, allowing for broader coverage overall. A transitioning insurance market comes as good news for many.
As the cannabis industry continues to grow, from a legalization standpoint, some cannabis companies are struggling. Many licensed entities have experienced top-line revenue decreases as the price of their products have fallen and the competitive landscape has sharpened. This decrease has put pressure on the operations of the entity, pushing insureds to seek savings wherever possible, including in their insurance programs.
However, cutting insurance programs can lead to coverage issues later. Dispensaries providing advice and guidance to their customers will find that they have greater Errors & Omissions (E&O) exposure, especially on the medical cannabis side. Testing laboratories also have a higher E&O exposure when it comes to errors in testing which can lead to the destruction of whole batches of product as well as loss of revenue for the owner of the products side. In addition, mistakes, or falsely reported metrics on lab reports, (i.e., potency, strain, traces of chemicals, etc.) and product recalls can cause financial losses along the whole supply chain.
Several new carriers have entered the Management Liability space for cannabis business. Additional capacity is available from a combination of these new insurance carriers, incumbent insurers expanding their product offerings, and from MGAs. While existing carriers are still facing increased loss costs and inflationary pressures remain unknown, pending legislation could contribute to a further softening of the market.1
Two pieces of cannabis-related legislation, including the SAFE Banking Act and the CLAIM Act, have been passed by the U.S. House of Representatives and were awaiting a Senate vote as of March 2023. The SAFE Act would protect financial institutions from liability or regulatory action for conducting business with cannabis companies. The CLAIM Act would also create a safe harbor for insurers working with a cannabis-related business. If either bill were to pass the U.S. Senate, it would have a material impact on the cannabis industry, inspiring further growth, and likely increasing insurer appetite for the business.1
The Internal Revenue Service (IRS) also recently confirmed it won’t automatically challenge a Section 199A qualified business income deduction claimed by the owner of a cannabis business. Simply put, some qualified cannabis business owners can deduct income from a qualified business on their personal tax return, which reduces individual tax liability. While there are limitations, it generally equates to 20% of Qualified Business Income from a domestic sole proprietorship, partnership, or S corporation. This is important to cannabis businesses because until now there has been widespread uncertainty around the issue and updated guidance assists both business operators and tax preparers in avoiding surprises in the event of an IRS audit.2
The casualty market also remains navigable with adequate capacity and several carriers eager to write the business. Rates and premiums vary with the needs and risks of each insured. For example, a cultivator will see significantly different rates than a dispensary because required rate depends largely on where the business is in the cannabis product or service chain. This can make it difficult for insureds to maintain accurate expectations around pricing.
The cannabis market is constantly evolving, and new products, services, or related businesses are emerging that impact exposure and cost. When it comes to product liability, carriers are available to cover anything from the growing of the plants, to the pre-rolls, vapes, or the processing equipment, among other items or services. Market appetites can vary around specifics such as THC percentages contained in products (some prefer products containing less than 3%) or specific psychoactive cannabinoids like Delta-8. Others differentiate between hemp cultivation and traditional cannabis. There is some current uncertainty around appropriately insuring Delta-8 and Delta-9 THC-O as the Drug Enforcement Administration (DEA) recently indicated the two cannabinoids that have emerged in state markets do not meet the federal definition of legal hemp because they don’t occur naturally in the cannabis plant and can only be generated synthetically. There are still a few carriers willing to provide coverage, but the future of coverage is unknown.7
Much like the cannabis industry itself, the property market for the sector is constantly evolving. The current marketplace looks very similar to that of the general property market, which has seen significant changes based on reinsurance capacity and costs. Capacity is continuing to change, and property placements with a large schedule or TIV require a layered program with more markets involved. Each carrier is generally offering lower limits, sometimes up to $10M per location. Accounts that include cultivation coupled with manufacturing and dispensaries are now often completed on a loss-limit basis or assembled in a tower. For smaller risks, it’s typically not advantageous to take a monoline property approach and the business is better addressed using a package. In fact, most carriers are moving away from mononline property for cannabis unless it’s a larger schedule. Most prefer General Liability (GL) to be packaged with property on smaller risks and it’s significantly harder to place standalone property in partnership with GL-only markets.
The property marketplace is further complicated by issues of valuation and differing risk appetites. Cultivators seek to insure plants, but carriers vary in how plants are valued and in claim response. There are also very limited markets for Builders Risk, new construction, or renovation. There are some carriers working on products that will roll into a package policy for cannabis clients, but those options are not yet on the table.
WHAT TO WATCH: EMERGING ISSUES & COMMON CLAIMS
Policies can be as diverse as the cannabis clients who purchase them, and no two policies are the same. It’s important that brokers and agents compare the coverage available as it can mean the difference between having sufficient coverage for a claim or none at all.
Management Liability lines have seen some substantial Employment Practices Liability (EPL) related claims, especially from grow facilities or dispensaries that have experienced issues with maintaining appropriate employment practices policies and procedures, especially around hiring or terminations. The sector has also seen some traditional D&O claims. It’s worth noting that because cannabis is not legal at the federal level in the U.S., publicly traded cannabis companies can’t be traded on the NASDAQ stock exchange. They’re commonly traded on the Canadian exchange because cannabis has been federally legalized in that country. Many clients fail to realize that Management Liability coverage should actually be purchased in the country in which the company is headquartered rather than the one it’s traded in. Large fines can be assessed on insurers that fail to follow appropriate procedures. It’s vital that insureds partner with agents and brokers dedicated to adhering to all applicable regulations and utilizing cross-border partners to place business correctly.
Other claims hitting the cannabis industry stem from light bulb issues in grow facilities. There have been many instances in which light bulbs spark or explode and ignite a crop fire. It’s also not uncommon to see claims due to employee theft of funds or products. Across the board, insurers want to see submissions that detail the security measures in place to prevent theft, loss, or damage. Coverage for theft will likely be excluded if an insured cannot demonstrate that appropriate safety and security measures such as safe storage, alarms, sprinkler systems, and cameras are in use. Markets also want to see cannabis accounts transition to the use of LED light bulbs to help mitigate the risk of fire.
HOW AGENTS CAN HELP
Because cannabis is not federally legal in the U.S., those states that have legalized it for medicinal or recreational use each have their own regulations and legislation in place around the industry. Agents handling cannabis business must make sure they fully understand each state’s legal requirements. In addition, cannabis is a highly nuanced insurance market with a unique clientele. Many potential insureds purchase coverage only if and when pushed to do so by legislation or industry partners. In that environment, it can be tempting to purchase the cheapest coverage available; however, that can mean coverage isn’t there when it’s needed due to overlooked restrictions, exclusions, or other policy requirements.
Cannabis underwriters are often overwhelmed with submissions, so only the most complete and clear submissions will rise to the top of the stack. Submissions should contain a detailed description of the insured’s operations, a complete Statement of Values (SOV), including information on central alarms, cultivation lighting, and any updates to buildings as well as 5 years of currently valued loss runs. Business income worksheets are key for larger accounts and providing target or expiring premium and retention amounts can help brokers develop an effective approach for placing the business.
As the cannabis industry evolves, agents and insureds will be best served by working closely with those capable of navigating challenging conditions and obtaining the coverage needed to mitigate risks and support continued growth.1 Carriers often require very specific applications and the right wholesale broker can best determine which application is suited to a specific account. The best wholesale partners also maintain strong market relationships, know where emerging opportunities lie and have a finger on the pulse of market appetite, which can help agents set appropriate expectations with insureds. CRC Group is a well-respected wholesaler with deep product knowledge, extensive market access, and the years of experience agents depend on to get the job done for a diverse clientele across a wide variety of industries. Reach out to your local CRC Group producer today.
- Michele DeLuca is an Associate Broker with CRC Group’s San Francisco office where she specializes in Casualty placements.
- Mckenzie Gaglianese is an Assistant Vice President & Broker with CRC Group’s San Francisco office where she specializes in Financial Services.
- Dixie Noel is a Senior Broker with CRC Group’s San Francisco office where she focuses on business development for the team and specializes in D&O.
- Tracy Ruchty is an Associate Broker with CRC Group’s Bothell office where she specializes in Property risks.
- Drew Taylor is a Vice President & Broker with CRC Group’s San Francisco office where he focuses on helping clients find solutions in new and emerging sectors like digital assets, cannabis, and fintech.
- Andrea Ward is a Senior Vice President and E&S Casualty Broker with CRC Group’s San Francisco, CA office where she specializes in peer-to-peer/app-based insureds, tough-to-place Products, Cannabis, Habitational, OL&T, Life Science, and Construction.
- Navigating the Cannabis D&O Insurance Market, Risk Management, January 11, 2023. http://www.rmmagazine.com/articles/article/2023/01/11/navigating-the-cannabis-d-o-insurance-market
- Finally, Good News from the IRS: Cannabis Operators Could Be Eligible for the Qualified Business Income Deduction, Holland & Hart, February 15, 2023. https://www.hollandhart.com/finally-good-news-from-the-irs-cannabis-operators-could-be-eligible-for-the-qualified-business-income-deduction
- Taking the High Road with Property and Casualty Cannabis Insurance, AAIS, https://aaisonline.com/taking-the-high-road-with-property-and-casualty-cannabis-insurance.
- Where is Cannabis Legal? A Guide to all 50 States, Forbes, January 6, 2023. https://www.forbes.com/sites/willyakowicz/2023/01/06/where-is-cannabis-legal-a-guide-to-all-50-states/?sh=690227aa1619
- Cannabis Industry Statistics 2023, Flowhub. https://flowhub.com/cannabis-industry-statistics
- 53 Fascinating Cannabis Industry Statistics: 2023 Data Analysis & Market Share, Finances Online, https://financesonline.com/cannabis-industry-statistics/
- DEA Classifies Novel Cannabinoids Delta-8 and -9 THCO as Controlled Substances, Even When Synthesized from Legal Hemp, Marijuana Moment, February 13, 2023. https://www.marijuanamoment.net/dea-classifies-novel-cannabinoids-delta-8-and-9-thco-as-controlled- substances-even-when-synthesized-from-legal-hemp/