Marijuana & Insurance: What to Expect with Cannabis Business in 2022
By Michael Giusti
This is a pivotal time for the cannabis industry. With 17 states legalizing marijuana for adult recreational use, and 37 legalizing it for medical use, the table is being set for major growth in the estimated $30 billion industry.
The U.S. House of Representatives even just passed a bill that would de-list marijuana as a Schedule 1 drug nationwide, opening the door for the possibility of nationwide legalization, though passage in the Senate is far from certain.
Still, even without federal decriminalization, industry watchers say it is likely that in 2022, states including Delaware, Ohio, and Oklahoma could each enact adult-use laws.
With such robust growth throughout such a wide breadth of the industry, insurance issues abound.
From business insurance for marijuana-facing companies, to implications for personal lines of coverage, cannabis is finding its way into many aspects of day-to-day insurance. This report aims to discuss many of the most relevant current issues.
First, a quick note about terminology: marijuana is a type of cannabis, but so is hemp. Many industry observers encourage the use of the more precise term “marijuana” over “cannabis” so that regulatory changes don’t inadvertently sweep up the legal hemp industry. This report will use the more specific terminology when referring to the THC-bearing marijuana plant and its derivatives.
Marijuana Business Insurance
The first thing to know about commercial marijuana insurance is there are policies to be had, and the industry is working to come up with standards and practices to unify those polices.
One company, ALM, is even developing a cannabis insurance coverage specialist designation for insurance professionals who work in the marijuana and hemp spaces.
Business insurance lines available include:
- Commercial property/business interruption/crime
- Commercial General Liability
- Products Liability
- Recall Coverage
- Directors and Officers
- Employment Practices (EPLI)
- Professional/Errors and Omissions
- Workers Compensation
- On Premises Consumption
While available, the amount of coverage available is limited, mainly because there isn’t a robust reinsurance market yet.
Most marijuana policies are being written on the non-admitted market, meaning they are much less regulated by their state insurance commissions. The few policies available through the admitted market tend to be much more expensive.
And since marijuana is still federally illegal and listed as a Schedule 1 drug, there are no uniform national regulations for insuring it. Instead, each policy is regulated on a state-by-state basis, resulting in a mishmash of rules.
It is not uncommon to find exclusions apply in one state that may not in another.
For cannabis cultivators, the most important lines are crop insurance, premises insurance, and coverage for their crop while in transit to the processor.
Premises insurance is essential for indoor facilities because the high-wattage grow lights have been implicated in a large number of fires, leading to some truly huge insurance claims.
For marijuana processors and manufacturers, the two biggest issues are premises insurance and product liability.
Product liability coverage is extremely limited. Most insurers don’t want to take on the liability for products with such a short history that present a still largely unknown risk.
That product liability is a huge issue for the consumer brands, as well. The flower itself has liability — with some high-profile recalls leading to hundreds of millions in losses — but so do other marijuana-infused products, like beverages, edibles, and the like.
At the retail level, marijuana business insurance needs mimic any other storefront business — a business owner’s policy, premises liability, general liability, sewage backup, among others.
The higher-profile insurance issue faced by retail stores is the risk of robberies, with several heists grabbing national headlines. That risk, while partially covered by their insurers, also leads the retailers to adopt stringent risk management strategies, such as tightly controlled ingress and egress, centrally monitored alarms at every point of entry, and limited access to the back rooms and safe.
As the businesses grow, errors and omissions insurance and directors’ and officers’ coverage are growing increasingly important, especially as the biggest marijuana businesses look to either go public or pursue mergers and acquisitions, leading to liability for each player who might not properly disclose everything fully or properly.
And from an insurer’s point of view, medical marijuana businesses and recreational marijuana business look largely the same. Medical marijuana may get a slightly lower premium because of a perceived less risky clientele, but the insurance challenges remain largely the same.
The Money Problem
Because of its Schedule 1 status, federally regulated banks have been hesitant to work with marijuana-touching businesses.
Without having easy access to credit card payments, retail marijuana is still a largely cash-based business.
Some dispensaries have found creative work arounds with debit transactions, classifying the transaction as a cash withdrawal, rather than a point-of-sale purchase. But they are still handling exorbitant amounts of cash.
Dispensaries have gotten a lot of news coverage in the past year, as robbers target them, either in the store, or as employees are transporting the cash after business hours. In response, many dispensaries have been looking for countermeasures, like hiring high-end armed security and using diversionary tactics, such as having three employees with identical duffle bags each leave at the same time, get into different cars, and each head a different direction to shield which one is actually carrying the night’s deposit.
That doesn’t mean there aren’t banks available for marijuana businesses, though.
Some smaller banks have chosen to do limited business with dispensaries, but not the big players. Having at least a limited access to banking has let these companies pay for things like vendors, and potentially employees.
Congress has at various points put forward bills to loosen access to the financial markets for licensed marijuana businesses, such as through the SAFE Banking Act, but those bills have all languished in Washington to this point.
Private Insurance & Marijuana
Marijuana-based businesses aren’t the only ones that need to worry about marijuana as it pertains to their insurance. Other private lines have been affected as well.
In the health insurance world, some policies see smoking marijuana through the same lens that they see tobacco — a detriment to lung health.
Health plans have also so far refused to cover medical marijuana, regardless of whether a doctor has recommended it as a treatment for a legitimate illness.
Even if the federal ban is lifted, industry watchers say it is still unlikely that health insurance will coverage medical marijuana, at least until extensive studies have been conducted and business models have been worked out.
With homeowners’ policies, many contracts include exclusions, either saying they won’t cover damage to home-grown crops, or damage done to the home through at-home cultivation.
Just like in commercial operations, high-wattage grow lights can easily overwhelm electrical systems that weren’t designed to handle them, leading to fires. Inadequate ventilation can also lead to problems, such as mold growth, which may not be covered by a homeowner’s policy.
In some states with legalized marijuana, some policyholders have sued to force their insurers to cover claims for things like damaged crops, but the results of those cases have been mixed, at best.
And just like with any commercial use, if the homeowner ended up selling any of the crop that they grew, that would likely trigger a commercial use exclusion, negating homeowners’ policy protections, which don’t cover commercial uses of a home.
In the auto insurance world, the biggest concern with marijuana is driving under the influence. From a legal standpoint, a marijuana DUI would be just as serious as an alcohol DUI, and would carry just as costly insurance ramifications.
The challenge with DUIs, though, is that someone with alcohol in their systems is most likely going to be intoxicated, while marijuana intoxication ends within hours, which is days, or even weeks before detectible levels of THC fully leave a driver’s body.
So, if there is an accident, determining if the driver was intoxicated simply through a blood test would be difficult at best.
Much like health insurance, many life insurers see marijuana as they do cigarettes — potentially detrimental to longevity. But that doesn’t mean someone would necessarily be excluded from a life insurance policy if they used marijuana.
Some underwriters don’t assign casual marijuana use much penalty, while others exclude users from coverage all together, so the treatment varies greatly between carriers.
The most important thing, though, is to not lie on an insurance form, because if the company finds out an applicant misrepresented themselves, that could be grounds for canceling the policy, and even potentially not paying it out after a death.
Worker’s compensation is another line that is complicated by marijuana. Just like with an auto accident, if a worker has an on-the-job accident, say with a forklift, and they have marijuana in their blood, that would complicate the claim, especially if the use was days earlier.
As marijuana use and commercial marijuana activity becomes more widespread, users and companies need to pay close attention to documents they sign, including insurance policies and leases, for example.
Many of those contracts are beginning to have marijuana exclusions written in. And one potential pitfall is the interchangeability many people have with cannabis and marijuana. While marijuana is a form of cannabis, so is hemp. So, if a state or a landlord meant to exclude marijuana, but said cannabis, some perfectly legal operators, such as hemp processors, could be caught up in that language if there is a loss.
There are even some ambiguous clauses that can bite policyholders, such as noncompliance with the law, or noncompliance with the FDA. It is best to clarify what the policy exclusion means, and get it in writing if it is ambiguous.
And while there is coverage available for many commercial lines, that doesn’t mean that businesses’ marijuana insurance needs are being met. That is because, often, the policies that are available are prohibitively expensive. Those high rates come from the fact that the industry is still young — just about a decade old — and there just isn’t a lot of claims data on it yet. There is a premium for coverage to compensate for the lack of loss information.
It is also costly because there isn’t enough capacity industry wide to cover all the insurance-related business needs, meaning the fewer policies that are available don’t have a ton of pressure from competition pushing their prices down.
Further complicating business insurance issues is the fact that in many cases, businesses need policy limits in the millions of dollars range, and many of the standard policies available today don’t come close to those limits.
Without enough capacity to cover all the risks out there, excellent risk management and best practices become essential for every stage of the industry.
One area that could emerge is with best practices from other industries, such as food manufacturers, which could find their way into the marijuana business realm.
The Future of Insurance & Cannabis
At its core, insurance is just insurance, and even in the marijuana business world, the most costly claims so far have been fires. As the marijuana-specific risks become better understood, there will likely be more insurers getting into the market because they will have seen that there is money to be made.
If more reinsurers get involved, that will open up more capacity for the other lines. And as risks become better understood, some new lines for things like cash coverage if there is a robbery may become more available.
But the big picture for the marijuana industry, and the insurance industry that serves it, is that these issues and these policies don’t look like they are going away any time soon.
Michael Giusti, MBA, is a senior writer and analyst for InsuranceQuotes.com