The commercial cannabis industry is booming. It now employs more than 250,000 people, with legal marijuana sales reaching an estimated $9.7 billion across North America in 2018.
That number is expected to double, reaching more than $20 billion annually by 2023 (source). To date, 33 states and the District of Columbia have legalized medical marijuana and 10 states have legalized recreational use (source). Several other states that have not legalized marijuana for medicinal or recreational use, do allow use of cannabis-based products such as cannabidiol (CBD) oil (source). CBD alone is projected to earn $2.3 billion worldwide by 2025. Already the oil can be found in many places including beauty products, vaping pens, organic restaurants, pharmacies, and pet stores (source). While the cannabis business is skyrocketing, with 64% of Americans favoring legalization, issues surrounding the industry’s insurance coverage and the development of standard business practices have proven complicated due to changing regulation, lack of data, and banking restrictions (source, source).
The last decade has seen the cannabis industry achieve a level of sophistication unknown in the previously illicit market. Modern cannabis businesses now employ scientists, farmers, engineers, high-tech laboratories, and accountants (source). While the sector’s growth has brought increased regulation that supports insurability, many insurers are still hesitant to enter the market (source). In 2015, insurance giant Lloyd’s of London stopped insuring the U.S. cannabis industry due to continuing legal uncertainty; however, there are now approximately 25 insurers willing to provide coverage for the cannabis market across the U.S. and Canada and that number continues to grow (source). Most are specialty insurers with the majority of coverage being found in Surplus Lines because of the difficult-to-place risks innate to cannabis-based businesses (source). Those willing to provide coverage for this emerging market often remain cautious, offering lower coverage limits (source).
In addition, many brokers lack knowledge and experience in this new sector, failing to ask questions of clients that can help underwriters through the decision making process. Underwriters have overcompensated for a lack of knowledge by creating extensive applications that lack uniformity between markets, making it more challenging for brokers to submit to multiple markets.
Another obstacle keeping some out of the market are the differences between state and federal law. Although medical or recreational marijuana use is legal at the state level in more than half of the U.S., it is still considered a Schedule 1 substance with “no currently accepted medical use in treatment in the U.S,” under the federal Controlled Substances Act (CSA), which makes it federally illegal (source, source). Even if a state has legalized cannabis, it can still be difficult to find insurance coverage due to differing levels of risk tolerance in each state. For example, cannabis-related businesses (CRBs) in California generally have no trouble finding coverage because insurers in California consider CRB risk to be on par with the kind of exposure that would apply to other commercial enterprises. Meanwhile, cannabis is also legal in Delaware, but operations there have greater difficulty obtaining coverage because cannabis is still considered federally illegal. This difference between states demonstrates that some insurers are treating CRBs like other commercial businesses despite federal law, while insurers in other states, aren’t yet ready to insure cannabis industry risks (source). The contradiction in laws also generate potential legal risks because insurance policies exclude coverage for criminal acts (source).
When it comes to CBD, the 2018 Farm Bill declassified hemp as a Schedule 1 substance and recognized the plant as an agricultural crop so that CBD products are now regulated by the USDA and FDA (source). Insurers often view CBD products as high-risk because of tight FDA regulations. It can be easy for businesses to infringe on those regulations without realizing it, resulting in costly damages and legal fees (source). In fact, the most common insurance policy exclusions for cannabis-related businesses often revolve around the issue of health hazards (source).
In addition to issues of legality, a lack of available data needed to drive accurate pricing and underwriting is another barrier for a still-developing industry without standardized business practices (source). While the industry is continuing to mature, some cannabis business owners hesitate to share information with organizations like insurance companies because they fear it may be easily accessible to federal authorities, making data gathering difficult. The new industry also hasn’t seen significant litigation or claim activity that would provide a loss history, making pricing more challenging (source).
Along with skepticism about sharing data, some cannabis business owners also feel insurance coverage is simply too expensive. While coverage rates are similar to those of industries with similar risks, many CRBs go uninsured entirely, which leaves assets unprotected and exposes business owners to personal liability, while others end up underinsured in an attempt to lower costs (source). Basic coverage for cultivators in California can cost an estimated $20,000 – $30,000 a year while product retailer insurance rates can range from only a few thousand dollars to $200,000 annually (source). In addition to higher costs, often cannabis-related operations who opt for insurance coverage need to assemble a plan from lines in several different markets, which can be complicated and time consuming (source). Most startup CRBs seek out Property and General Liability first and then enter the market for Product Liability or D&O coverage as the business grows. It’s vital that CRBs collaborate with brokers who are skilled at guiding the application process and can help underwriting correctly assess potential risk and quote the business. While insuring marijuana and CBD companies may involve a more complex application process or higher premium costs, complying with state laws and best business practices, such as obtaining appropriate insurance required by many states, can actually help bring greater legitimacy and stability to the sector (source).
Like most commercial manufacturing or agricultural businesses, cannabis-related businesses experience exposure to third-party general liability and product liability as well as first-party property losses such as recall or theft (source). However, the potential for loss is greater when compared to other businesses of equal size due to higher risk. CRBs are also likely to face increased product liability exposure across diverse sectors of the industry as legalization becomes more widespread and there are more retailers with greater access (source). If consumers purchase a product that is contaminated or mislabeled, CRBs can be charged with violating state regulation, and because state regulations are burdensome, it can be very difficult for operators to be fully compliant (source). Businesses in this sector can help mitigate product liability risk and bring greater credibility to the industry by adhering to state regulations for product testing and labeling, creating effective product recall plans, and obtaining appropriate insurance (source). Underwriters are looking for secure sites that utilize locks, surveillance and security plans as well as product safety plans and controls such as recall protocols because such measures ensure that the business owner knows how to operate securely, adhere to regulation, and has business expertise.
Cannabis operations also experience increased risk due to limited banking access. While a cannabis operation may be functioning within state law, federally regulated banks are still unable to accept deposits from cannabis operations due to federal restrictions (source). Research indicates that 70% of cannabis businesses have no relationship with a financial institution (source). This forces CRBs to keep large amounts of cash on hand, increasing the risk of theft, extortion, and ransom (source, source). Lack of access to the banking system also makes it difficult for cannabis-based businesses to engage in standard business practices such as paying employees and vendors and makes many CRBs targets for criminal activity (source). In early 2019, the House Financial Services Committee advanced the Secure and Fair Enforcement (SAFE) Banking Act, which seeks to protect financial institutions from federal prosecution when working with cannabis-based businesses compliant with state laws. The SAFE act would also protect support services—like insurance companies—from being charged with related financial crimes, making it easier for insurers to enter the marketplace with confidence; however, it is unclear if or when this law will be passed by Congress (source).
The rapid growth of the cannabis industry brings both challenges and new business opportunities to the insurance field. Insuring these businesses can be complicated and demands that insurers possess deep knowledge of the legal issues, emerging risks, and changing regulations involved (source). When it comes to insurance, business owners should exercise due diligence to explore available coverage that meets their industry’s unique needs (source). Without the expertise of brokers and agents who truly understand the complexities of the industry, cannabis-related businesses could face significant reputational damage and heavy financial losses (source).
While many large carriers have not yet entered the market, as state laws change, more and more markets are opening and there is growing competition to underwrite the risk. CRC Group has a network of nationwide, market partnerships to help your client’s access carriers and navigate the underwriting process. CRC Group producers are highly-skilled at putting together meaningful submissions that make all the difference in helping your clients obtain the best possible solution.
Contact your CRC Group Producer for more information.
- Jason Howard is a Senior Vice President located in the San Francisco, CA office where he specializes in construction, environmental, life sciences, cannabis and excess limits.