Cannabis Insurance: A Look at the Year Behind Us
2020 was a good year for marijuana legalization. In November, several states across the country put forth ballot initiatives aimed at decriminalizing, or legalizing cannabis. They passed in every case. Arizona and New Jersey voters opted to legalize recreational marijuana for adult use, South Dakota voted to legalize it for both medicinal and recreational use, and as recently as March 31 of this year New York state passed legislation making it legal for individuals 21 and older to possess and purchase up to three ounces of marijuana.
Capping off a decade of sweeping marijuana reforms, 16 states—along with the District of Columbia—have now legalized recreational marijuana, and 36 states now permit its use for medicinal purposes.
Nonetheless, the insurance industry continues struggling to keep pace with marijuana legalization, largely due to myriad state laws that conflict with the federal government’s official position on the production, possession, and consumption of cannabis. What’s more, the particulars of individual state laws are anything but uniform, and what’s considered legal in one state may be unlawful in another—even if they both allow for some degree of marijuana possession or consumption.
“It’s generally been a challenge for cannabis businesses to obtain adequate insurance coverage,” says attorney Frank Borger Gilligan, a member of the cannabis team at the Dickinson Wright law firm in Washington D.C. “Part of the problem has been the reluctance by the insurance industry due to federal banking restrictions and the illegality of marijuana under federal law. That said, there has been a great deal of progress in the last couple of years. The relationship is mutually beneficial. The cannabis industry needs insurance, and the insurance industry understands the opportunities that exist in the emerging cannabis markets.”
To help navigate these muddy waters, this year's report offers some of the key considerations for marijuana’s impact on various components of the insurance industry.
And now, let's take a look at what all this means now that we're into 2021...
Cannabis Insurance for Businesses
It’s undeniable that the legal cannabis industry is thriving—and injecting a lot of money into the U.S. economy in the process. According to a July report from Marijuana Business Daily, the total economic impact of legal cannabis sales is projected to increase from $15 billion in 2020 to as much as $37 billion by 2024.
But despite the positive momentum and bullish economic indicators, cannabis-related businesses, or CRBs, still face a substantial problem in their effort to function as legitimate retail operations when it comes to business insurance. Insurers remain reluctant to write policies aimed at protecting CRBs from all manner of financial losses, including fire, theft, vandalism, and product liability.
According to industry experts and analysts, the CRB insurance quandary has several influencing factors, the most obvious being the conflict between states that have legalized cannabis and current federal law, which still considers marijuana illegal under the Controlled Substances Act (CSA) and classifies it as a Schedule I drug with “no currently accepted medical use in treatment in the United States.”
According to attorney Meghana Shah, partner at Eversheds Sutherland LLP and co-founder of the firm’s cannabis industry team, this conflict could expose marijuana businesses and their ancillary service providers (such as insurers) to federal criminal liability.
“Business owners and insurers alike remain concerned about the risks associated with doing business in the cannabis industry,” said Shah. “For cannabis-related businesses, the inability to secure insurance denies them a vital service, rendering them unable to protect themselves against common business risks, some of which have the potential to irreversibly cripple their business.”
In an effort to try and bridge this gap, legislation was introduced to Congress in March that would open the door to insurers who want to cover CRBs without the looming threat of federal penalties. According to the online industry publication Business Insurance, the Clarifying Law Around Insurance of Marijuana Act of 2021 (CLAIM) aims to “create a safe harbor for insurers engaging in the business of insurance in connection with a cannabis-related legitimate business, and for other purposes.”
The legislation has broad bipartisan support and, according to Business Insurance, “is the first of what should be several steps to provide a federal regulatory framework for the cannabis industry, which could include oversight and regulation, such as the Food and Drug Administration overseeing quality and compliance with cannabis edibles.”
“Current federal law prevents these small business owners from getting insurance coverage, and without it, they can’t protect their property, employees, or customers,” said Sen. Bob Menendez (D-NJ), sponsor of the marijuana insurance legislation, in a press release. “Our legislation simply levels the playing field for legal cannabis businesses, allowing them to fully operate just as any other legal small business would by permitting insurance companies to provide coverage to these enterprises without risk of federal prosecution or other unintended consequences.”
According to CRB experts, CLAIM is sorely needed right now. But they also recognize that it won’t be an overnight fix to the current insurance problems faced by cannabis business owners—and the problems are myriad.
For the National Association of Insurance Commissioners (NAIC), there are currently just six insurers offering cannabis coverage. What’s more, because of federal marijuana laws, “insurers and brokers do not formally advertise their services to CRBs. Instead, most CRB owners hear about insurance options through word-of-mouth in the cannabis community.” Finally, the NAIC says there is the substantial issue of inadequate policy limits on coverage.
“Currently, most insurers are offering $1 million per occurrence/$2 million aggregate policies in commercial and general liability, property damage, and product liability coverage,” says the NAIC. “However, insureds may need limits up to $5 and $10 million, or more.”
“Things are definitely going to look different in a few more years, but right now so many marijuana business owners are working without a harness or safety net,” says Anthony Bonfiglio, a Colorado-based lawyer who specializes in marijuana law. “That means they have to be fearful of everything from crop fires to business theft, liability, or vandalism. It’s a stress that no other industry has to bear, and it’s unsustainable in the long term.”
Cannabis Insurance for Personal Property
CRBs aren’t the only entities contending with the uncharted intersection of insurance and legalized weed. U.S. consumers are also increasingly seeking answers about how marijuana possession and use will be handled by their own personal insurance policies.
Consider, for instance, homeowner’s insurance. The budding question on the minds of those who live in a state with legalized cannabis is simple: If I have some marijuana and it’s damaged in a fire or stolen from my property, will homeowners insurance cover the loss?
The answer to that simple question, however, produces a staggering variety of anecdotes, opinions, and legal vagaries that fluctuate from state to state and from insurer to insurer.
The hesitancy of personal insurance carriers to set firm rules around coverage of marijuana losses stems from the same quandary faced by those in the cannabis industry. And it’s not only fear of federal reprisal that’s keeping them in limbo. Additionally, the disparity between state and federal law can wreak havoc on the enforcement of contracts between an insurer and its clients, according to attorney Richard Blau.
Blau is a shareholder at GrayRobinson and heads the firm’s medical marijuana team, which focuses on the rules and regulations governing medical marijuana and related cannabis products. To emphasize his point, Blau cites a now-infamous 2012 Hawaii federal court ruling that said a homeowners’ insurance policy did not cover the theft of one woman’s marijuana plants grown for medicinal use.
The homeowner, Barbara Tracy, was allowed to grow and possess marijuana for personal use, and after twelve plants were stolen, she submitted a claim to USAA for $45,600. USAA initially agreed to pay Tracy $8,801 for the claim, but Tracy sued, claiming the plants had a far greater value. USAA argued that because marijuana is federally classified as an illegal Schedule I substance, they were under no obligation to cover the loss at all. The court ultimately agreed with USAA, stating even though Hawaii law permits the use of marijuana for medicinal purposes, it is illegal under the Controlled Substances Act and therefore not subject to homeowners’ insurance coverage.
“So, on the one hand, you have a lot of insurance companies that operate in many different states, which means they arguably fall under federal jurisdiction. They’re worried their charters could be challenged under federal law if they write policies the include coverage for cannabis loss,” said Blau. “But you also have what I think is the larger issue of judicial precedence that says insurance contracts are not enforceable under federal law.
“The good news is courts are beginning to recognize we’re not living in the world of Reefer Madness anymore, and we now have an alternative line of cases where judges have ruled that as long as the claimant stayed within the scope of state law the insurance contract is valid and enforceable. But the split of judicial opinion needs to be reconciled, and the only way that’s going to happen is if marijuana is withdrawn from its Schedule I classification.”
At the end of the day, whether a loss is covered or not will most likely be up to the individual insurer, says Blau.
Life Insurance and Cannabis Use
Similarly, life insurance providers are contending with an increased number of policyholders who use marijuana recreationally or for medicinal purposes, forcing them to grapple with its impact on the application and underwriting process. At the heart of the discussion is whether or not smoking marijuana carries the same health risks as smoking cigarettes.
“Life insurers are still all over the place when it comes to determining what rate class to offer marijuana users—and the guidelines can change at any time,” says Gordon Conwell III, owner of the life insurance agency American Term. “For example, American General/AIG will offer their lowest ‘preferred plus’ rates for use up to eight times per month—but they'll only offer a table B smoker rate for nine to 16 times use per month, which is a rate that's about seven to eight times higher in cost than their lowest ‘preferred plus’ rate. Meanwhile, AIG will decline for use more than 16 times per month.”
The list of conflicting options in life insurance policies runs long. Mutual of Omaha, for instance, will offer preferred (the second-best tier) for use up to two times per week. Pacific Life will offer preferred for use up to 11 times per month. John Hancock will offer preferred for use up to four times per week as long as marijuana is not smoked or vaporized and you have a prescription card. And Prudential, which is one of the more competitive insurers for marijuana users, will usually offer their non-smoker a plus rate (third best tier) for use up to three times per week—but they will usually decline for use of seven or more times per week.
“The legalization of marijuana in many states has definitely impacted the life insurance industry,” says Randy VanderVaate, president of Funeral Funds of America. “Life insurance underwriting in states with legalized marijuana use is now more lenient than before, and a handful of life insurance companies don't even ask about marijuana use in their health questionnaire.”
Cannabis, Insurance, and Your Car
When it comes to the intersection of legal marijuana and auto insurance, things have been fairly uncomplicated thus far, and that’s because the insurance ramifications for getting caught driving high are no different than those associated with driving under the influence of alcohol. In other words, if you’re convicted of driving under the influence of marijuana your insurance rates will go up, just like they would if you were charged with a traditional DUI.
However, one of the most significant questions concerning legalization is whether or not more recreational pot legalization has led to more car accidents involving "drugged" driving.
According to the Centers for Disease Control and Prevention (CDC), in 2018, 12 million U.S. residents—4.7 percent—age 16 years and older reported driving under the influence of marijuana during the past 12 months, and 2.3 million—0.9 percent—reported driving under the influence of illicit drugs other than marijuana during that time.
What’s more, the AAA Foundation for Traffic Safety published a study in early 2020 titled “Cannabis Use Among Drivers in Fatal Crashes in Washington State Before and After Legalization.” It concluded that the number of drivers in Washington who test positive for marijuana after a fatal crash has doubled—from about 9 percent to about 18 percent—since the state legalized cannabis in 2012.
However, according to analysis by the National Conference of State Legislatures, “the authors pointed out that the study found only a correlation between legalization and an increased number of drivers involved in fatal crashes who tested positive, not a causative link.”
Whether legalized marijuana will have any relevant impact on auto insurance premiums remains to be seen.
"There have been several studies linking cannabis use to higher risk of accidents. Ultimately, it will depend on whether there are actually higher losses on the roads, which will lead insurers to file increases in their rates—which the regulator would approve because of higher losses,” says Nestor Hugo Solari, co-founder and CEO of Sigo, an auto insurance provider for immigrants and the working class.
"It's unlikely that there will be an immediate uptick in the cost of insurance with the legalization of cannabis. One argument being that legalization may not necessarily increase frequency of use in certain states or regions."
Cannabis Insurance and Medical Marijuana
Finally, when it comes to health insurance, don’t expect your provider to cover the cost of medicinal marijuana, even if you live in one of the states that have legalized it for medical use. Because of its federal designation as a Schedule I controlled substance, health insurance providers have their hands tied when it comes to reimbursing patients using medicinal cannabis.
“Health insurance companies are definitely behind the times when it comes to medical marijuana,” says Rex Freiberger, CEO of License to Vape. “Even though cannabis has been a licensed treatment for things like cancer and glaucoma for decades, insurance companies refuse to cover it. Once marijuana is legalized on a federal level, I think it will still be some time before insurance companies decide to cover it.”
What’s more, marijuana is not an approved medical treatment by the FDA, and because of its Schedule I classification extensive clinical research on its medicinal efficacy has been difficult to obtain.
“Right now, it's considered an ‘alternative’ treatment and the profit insurance companies see isn't as high as it is with pharmaceuticals,” says Freiberger. “It will take widespread change—and likely incentives—to get them to cover it. But once the big providers start to do so, we might see an avalanche as others follow suit.”
Cannabis Insurance in 2021: Beyond 4/20
Though it may seem like the insurance industry and legal frameworks that guide it are still in uncharted waters, enormous progress has been made in recent years as marijuana, for both medical and recreational use, is legalized. It's important to rmember that the US is still in the midst of a revolution in consumer interest in this product, and their are ramifications from the politcal to the cultural.
By this time next year, we will have ever more updates on the context, and precidents that are unfolding, as everyone gets a little more comfortable with cannabis becoming a normal fixture of American life.
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