Cannabis Insurance: a blue ocean
Marijuana legalization is a very hot topic in many areas of the country, political discussions, business news, etc. More than half of U.S. states have legalized some form of medical or recreational marijuana, and the demand for cannabis is increasing dramatically.
According to Forbes, legal sales in the U.S. grew by 30% in 2016 – annual growth bypassing even broadband internet. This is an exciting form of commerce that is sparking great growth and taxable revenues for the states who are embracing.
This presents a blue ocean opportunity for Cannabis Insurance and our sharks love blue oceans.
As the industry grows, the need for standardization and legal protection in the form of cannabis insurance is magnified. Insurance ebbs and flows with the underlying businesses in the economy, therefore why should Marijuana be any different?
Unfortunately, the division between state and federal status makes it difficult for businesses to receive inclusive, affordable coverage and often leaves individual policyholders with restrictive plans.
Or does it? Which states are adjusting accordingly?
Depending on what state you reside, regulation can be seen as strangling or supporting this industry.
As a background, Cannabis is recognized federally as an illegal substance under the Controlled Substances Act(CSA), in which it remains a Schedule I drug and is stated “to have no currently accepted medical use in treatment in the United States”. It also lacks Federal Drug Administration (FDA) approval and is subject to the Federal Food, Drug, and Cosmetic Act, which requires any marketed substance to be ruled both safe and effective.
These conditions prohibit the cultivation, possession, and distribution of cannabis and violators of the law are subject to prosecution. Considering conflicting state and federal laws and the lack of product standardization and regulation, insurance companies are sometimes discouraged from offering plans with medical marijuana treatment options and providing businesses with proper coverage (until 2014).
The Rohrabacher-Farr amendment, passed in 2014, prohibits the Department of Justice from interfering with state medical marijuana laws. In 2016, the Federal Appeals Court affirmed the Department of Justice cannot spend funds on the prosecution of individuals cultivating, distributing, or using medical marijuana in accordance with state law. However, the amendment must be renewed each fiscal year to remain in effect, and it currently only applies to the states of the Ninth Circuit. That being said, the ruling may influence other circuits to follow suit and shelter the industry from federal offense. States currently enforcing the amendment can offer individuals and CRBs protection from DEA prosecution and therefore ease concerns of federal prosecution for both insurance companies and policyholders.
Allowing the insurance market to be more resilient and appropriate resources allocated, removing fear of risk/legal issues. Thus helping the local economy of the CRBs and developing products to support the growth.
Watch also: Cannabis Insurance coverage and Insurance Law
New product as a result of regulation
Here is an example:
The official implementation of the Medicinal and Adult Use Cannabis Regulatory and Safety Act (MAUCRSA) — all cannabis businesses are required to show proof of a $5,000 surety bond in order to get a state license.
Surety bonds are required by the licensing agencies as a way to guarantee the behavior and compliance of licensees. It’s also a way to guarantee payments related to the cost incurred for the destruction of cannabis goods and materials in the event of a violation of the regulations. If a company’s product was contaminated, for instance, a surety bond would cover the costs of destroying or properly disposing of the product, as canna-goods — by law — can’t be thrown in the trash.
Surety bonds are a product that the industry has provided for generations, now with a new spin.
There is plenty of opportunity for carriers, brokers, agents and MGAs to come up with interesting ways to help CRBs and support their growth in the cannabis industry.
Companies functioning within state legality face severe banking restrictions due to federal regulations. CRBs may be forced to handle large sums of cash and for this reason they can be subject to a higher risk of theft.
Some people think this regulatory environment is being overblown, for example, the Insurance commissioner of California (Commissioner Jones) says he believes there’s a misplaced concern, particularly among insurers, about federal law enforcement intervention.
In the states with state-level cannabis laws — where insurance is being written for those industries — the Federal Government has yet to seize premiums from insurance companies coming from cannabis businesses.
This regulation is creating opportunity for insurers to be relevant and support their clients with this slow to update regulation.
Cannabis Related Businesses (CRBs) face many risks and obstacles many are similar to the traditional retail or brick and mortar businesses of the last few generation but now with a different spin.
Similar to traditional businesses, some of the biggest risks involve theft, general liability, and product liability. Regulation has also increased some of the risks for these businesses.
CRBs share the same general liability and other risks agricultural and manufacturing businesses face. This includes workplace accidents, damage to property, and crop failure.
CRBs are especially prone to fires from both wild and internal sources. The popularity of edibles and other infused products increases the risk of product liability and safety recalls. Products may be deemed mislabeled, misrepresented, or harmful especially given the psychoactive effects of marijuana and the wide range of people drawn to edibles.
These risks could be characterized into a few categories:
- Crime and Security
- Product Liability
- Workers Compensation
- Cash Management
- Auto Liability
- Business Continuity
Another crucial service withheld from cannabis businesses is insurance (in addition to banking).
Standard general liability plans account for these claims in non-CRB businesses, but most insurance companies will not write policies for CRBs due to uncertainty about the legality of these businesses. Policy language specifically tailored to the cannabis industry is crucial in providing adequate coverage.
MGA’s and other carrier partners are rapidly evolving to keep up to date with the laws, risks, and needs of this growing sector. The beauty of new coverages/forms/etc. is the ability to customize coverage to customer.
Hopefully the industry embraces this opportunity to be customer centric focusing more on external constituents needs.
Cannabis Insurance Consumer needs
The needs of those involved in cannabis industry need to be addressed by the insurance industry.
Cannabis-using consumers also face insurance challenges ranging from legality issues to coverage deficiencies. Users may be faulted in workers’ compensation claims or subject to employment-disqualifying drug screening. In addition, insurance companies offering medical treatment options often have strict policies that may be insufficient in treating a patient’s condition.
This may require new first party insurance products created to cover individuals to are cannabis consumers and not covered under Workers compensation or a health provider wont recognize cannabis as qualified medical treatment.
The creation of cannabis insurance in California is a leader in the market. But there are still major gaps in coverage.
Crop insurance for the cannabis industry is an area that needs to be filled. Although, after the Northern California wildfires last October that scorched homes, vineyards and pot farms, some headway’s been made regarding coverage for cultivators with claims being paid.
Some coverage is better than no coverage. But until the cannabis industry has the same insurance options that every other business and industry has, much work still remains to be done.
Drivers may also experience increases in auto insurance rates due to elevated risks associated with drivers under the influence. In a 2017 report, the Governors Highway Safety Association linked marijuana use with a slightly increased crash risk in experimental settings, citing the impairment of psychomotor skills and cognitive functioning in the drug’s presence.
Frequency of accidents may tick upward, but it will be tough to prove causation (not correlation) with Cannabis.
California is leading the way from the insurance perspective.
Dave Jones, California’s Insurance Commissioner, has aimed to change that since the beginning of 2017. After a year and a half of encouraging insurers to write insurance for the legal cannabis industry, various forms of protections are now available to cannabis businesses.
Commissioner Jones also was responsible for the approval of the first Cannabis Business Owners Policy (CannaBOP) in California. Crafted by the American Association of Insurance Services, the CannaBOP program is a package consisting of property and liability coverage for dispensaries, processors, manufacturers, distributors, cannabis storage facilities and other relative businesses operating in the state.
As of now — even with the new program in place — the majority of cannabis businesses have no choice but to absorb the cost when something goes awry, which can mean losing millions of dollars. No other legalized businesses or industries face that kind of financial risk.
But the CannaBOP isn’t the only major announcement regarding insurance coverage for the cannabis industry. Commissioner Jones approved California Mutual Insurance Company as the first provider in the state to add lessor’s risk coverage for property owners who are exposed to risks from renting to tenants who use the space for commercial cannabis-activities.
This coverage is important for allowing the business to expand without extensive capital investment into real estate. The lessor’s risk coverage policy provides liability and property insurance for commercial property owners who lease building space for cannabis labs, product manufacturing, cultivation, and dispensary operations.
Again, California is leading the way in the inclusion and specification of CRB insurance coverage.
Once large insurance companies in California successfully offer and provide specified coverage to CRBs and patients, state carriers across the board may be encouraged to enter the market. While the drug may remain technically illegal at the federal level until the FDA approval, industry protection by the state under the Rohrabacher-Farr amendment and commercial carrier coverage can solidify medical marijuana’s place as a local legality.
The regulatory and growth should be modeling this effort to get insurance for the cannabis industry on the success they experienced with getting insurers to write coverage for ride-sharing companies and drivers.
Though medicinal properties of cannabis have been federally unproven, controlled research projects in association with the DEA and FDA are still testing for medical potential. Two synthetic substances containing compounds similar to those of marijuana have received FDA approval, paving the way for clinical trials on cannabinoids and relevant legislation.
The Medical community will play a big role in the development of insurance products, legalization, alternatives, and ways to test for use. See more as this evolves.
Routine traffic stops are currently unable to test for or confirm a driver is under the influence without biomarkers, such as blood or oral fluid. Even with proper testing, the results may be unreliable.
Tetrahydrocannabinol (THC), the primary psychoactive chemical compound in cannabis, is fat soluble and can be released into the bloodstream for over 30 days after consumption, potentially misidentifying a driver’s status at the time of the incident.
On the other hand, detectable amounts may dissipate before lab testing is performed even hours after a crash.
Due to the variability of side effects and physiological reactions in each user – largely dependent on the frequency of use – there is currently no standard method of roadside detection as there is with alcohol intoxication.
Therefore attributing Cannabis as the cause of losses and tracking the negative impact is premature for the insurance industry. Right now, it appears to be a blue ocean.
See also…Marijuana DUI’S Ambiguity
As with other products, all stakeholders need to understand the insurance needs and gaps as the insurance industry evolves to provide protection for new risks.
This emerging industry is changing rapidly and the industry is evolving to help support given the federal regulation restrictions/concerns.