Cannabis & Highly Needed Business Insurance in 2024
by Brian O’Connell
The US cannabis industry is in full growth mode in 2024 and the sky appears to be the limit for sector expansion over the next decade.
The data backs that sentiment up, according to a summary of cannabis industry statistics for 2024 by Flow Hub.
Key points listed in the report include:
· Half of Americans have tried cannabis.
· 79% of Americans live in a county with at least one dispensary.
· The US cannabis industry is expected to reach almost $40 billion in 2024.
· 1 in 3 women over 21 consume cannabis.
· Cannabis will add $115.2 billion to the economy in 2024.
· Adult-use cannabis is now legal in 24 states.
· Support for legalizing cannabis hit a record 70%.
· Ranks of women and minority cannabis executives are rebounding.
· Cannabis earns higher tax revenue than alcohol in 9 states.
· Average retail cannabis prices have dropped -32% since 2021.
· Dispensaries accepting debit earn an average of $4,627 more than cash-only retailers.
The cannabis sector is also starting to rake in significant revenues, but business owners say regulatory compliance is a rising issue.
Overall, the global cannabis market’s revenues stood at $27.28 billion USD in 2022, with an expected compound Annual Growth Rate of 24.3% by 2029, to $82.3 billion USD. The North American cannabis market is also in double-digit territory, estimated to rise at a 14.5% growth rate over the same time frame.
“As a business operating inside the sector, the cannabis market is vibrant and growing, despite complex regulatory issues and its current classification as a Schedule III drug,” says Tyler Browne, founder and CEO at the ToTheCloudVaporStore.com in Carlsbad, Cal.. “Profits are possible, but navigating regulatory red tape requires expertise and patience.”
A Capsule Look at the Cannabis Insurance Sector
The cannabis industry has experienced its growing pains, but the sector is gaining strength and the insurance industry is fully aware of that strength.
“Starting in early 2023, there was a notable rise in cannabis insurance accessibility, marked by more carriers providing coverage and reduced premiums, particularly in policies like directors and officers insurance,” says Michael Benoit, founder and a certified financial insurance bond advisor at ContractorBond.org in San Diego, Cal.
“That’s good news for cannabis companies, who need to be cognizant of their insurance obligations in the state where they operate. That list includes direct, plant-touching businesses and non-contact product and service suppliers.”
Even so, getting good cannabis insurance isn’t always easy, and industry companies have a hard time getting affordable price quotes, as states don’t generally regulate cannabis insurance pricing. “Additionally insurance companies are unsure of what products to offer and how to offer admitted market products,” says the American Bar Association in a recent cannabis industry report.
“However, some states—such as California, which has a more mature cannabis market—publish a list of brokers and insurance companies that offer insurance products for cannabis-related industries so they may be more readily accessible to cannabis licensees and ancillary businesses,” the ABA reports.
Another big issue is the limitations of federal insurance programs due to cannabis’ current Schedule I classification, the lack of standardization in coverage and pricing, and the evolving regulations for cannabis businesses (see more on the Scheduling issue below).
“These challenges make it difficult for insurers to assess risks and offer comprehensive coverage at affordable rates accurately,” Benoit says.
The primary issue is that cannabis business insurance is as crucial as it is complex, especially for cultivators and retailers. “Policies should ideally cover product liability, property damage, and business interruption. However, underwriting these policies remains challenging due to regulatory uncertainties,” Browne notes.
Medical Marijuana Insurance Gets a Green Light in New York
Cannabis and insurance industry experts contacted for this story say the cannabis insurance market is slow to solve premium pricing due to risk factors, coverage limitations, and policy exclusions. Once again, that issue is mainly driven by the evolving and unsettled regulations attempting to govern the cannabis sector.
One of the biggest evolving issues is the coverage of medical marijuana in U.S. states, with New York state first out of the gate. The Marihuana Regulation & Taxation Act (MRTA) was signed into law on March 31, 2021 legalizing adult-use cannabis in New York State.
An add-on bill, passed in March 2023, added medical marijuana to four publicly funded New York state health programs, including Medicaid, Child Health Plus, workers compensation, and EPIC – and the heavily publicly funded Essential Plan.
The legislation amends New York state law to deem cannabis as a “prescription drug,” “covered drug,” or “health care service” for health insurance purposes,” according to the bill summary. Medical marijuana is covered by in-state insurers “regardless of federal financial participation” in any state health care coverage services. Private companies would be exempted under the new law but are encouraged to offer medical marijuana coverage to insurance consumers.
“The relationship between the licensed cannabis industry and insurance companies is still forming,” Browne says. “Legislation like the New York bill covering medical cannabis under insurance will be a huge milestone, which should trigger similar laws elsewhere.”
The larger problem remains, as cannabis business insurance is crucial as it is complex, especially for cultivators and retailers. “Ideal insurance policies should cover product liability, property damage, and business interruption,” Browne says. However, underwriting these policies remains challenging due to regulatory uncertainties.”
The Pending Reclassification is a Non-Issue
While every insurer looking to cover marijuana companies should follow their state regulations and licensing requirements and reach out with any questions, the recent U.S. government recommendation to reclassify marijuana as a Schedule III drug doesn’t impact insurance coverage.
In fact, the change in classification should benefit the cannabis industry and the insurers that cover it.
Currently, cannabis is a Schedule I substance and thus is viewed by federal regulators to have no medical value and a high risk of abuse. That’s why the October, 2023 decision by the U.S. Department of Health and Human Services (HHS) to recommend class III statusto the U.S. Drug Enforcement Administration (DEA) is a big deal.
“The FDA’s recommendation that marijuana be moved to Schedule III reflects a determination that instead, cannabis has a moderate to low potential for abuse, an accepted medical use in the United States, and a moderate or low potential for physical dependence or a high potential for psychological dependence,” says Caroline D. Kessler, a cannabis compliance expert and attorney with Akin in Washington, D.C., in a recent client note. “In other words, FDA no longer believes it is appropriate for cannabis to be included with drugs like heroin, LSD, and Ecstasy under Schedule I and instead that it should be classified as Schedule III along with certain acetaminophen products that include codeine, as well as ketamine and anabolic steroids.”
That signals the insurance industry that covering cannabis companies and consumers is a clear “green light.”
“The classification has no effect on insurance acceptability,” says Matt Hernandez, assistant director of sales and partnerships at Insureon in Lafayette, La. “As long as a licensed entity is selling it, then the cannabis industry market is generally okay with it.”
State Challenges to Cannabis Insurance in 2024
As of now, 38 states have legalized cannabis for medical use, while 24 U.S. states have legalized it for recreational use. More states are being added all the time, so this understandably means a massive opportunity for small businesses and, by extension, business insurance companies attempting to meet rising demand.
“The biggest issue for many small businesses is wading through unchartered territories based on state regulations,” Hernandez says. “Government agencies are releasing new legislation for a completely new industry. This can be a bit confusing for small cannabis business owners seeking to meet all the requirements for dispensaries, cultivators, and other cannabis businesses.”
The good news for company owners is that cannabis insurance requirements don’t differ too dramatically from those of other business insurance policies. “Some states, like Arkansas, Florida, and Illinois, require performance or surety bonds. Others, like Washington, California, and Massachusetts, require general liability insurance,” Hernandez notes.
Other states require product liability insurance, which covers a business if a cannabis-related product or service harms a customer or damages their property. Still others have no insurance requirements beyond the standard commercial auto policy if a business has vehicles or workers’ comp policy if it has employees.
“Cannabis business owners need to stay aware of all the changes that are still ongoing,” Hernandez says. “Since the industry is so new, legislation is changing constantly. Some counties and cities are loosening restrictions, while others impose them or even ban cannabis businesses in their districts despite being legal within the state.”
In an emerging market, it’s better to be overprepared rather than underprepared, and cannabis company owners must understand that reality.
“Cannabis business owners need to stay engaged and monitor the news for regulation changes, restrictions, and insurance requirements,” Hernandez advises. “Getting involved in a new industry can be exciting, but it can also require flexibility that other, more established industries don’t need to worry about as much.”
There are also some policies that cannabis business owners might not be aware of that could help them during uncertain times, such as business interruption insurance, product recall insurance and finished stock insurance.
“Some insurance companies are adapting traditional agricultural policies to cover cannabis, such as cannabis crop insurance or cannabis cargo insurance,” Hernandez adds. “These policies might have an extra monthly cost, but they can be highly beneficial if something does happen.”
Take These Steps to Maximize Your Cannabis Insurance Experience
There’s no doubt that cannabis business insurance is expanding, with a variety of available products tailored to the unique risks of growers, retailers, and other cannabis-related businesses.
The best practices for both insurers and cannabis companies are to get engaged and be transparent in dealing with one another as policies are formed, vetted, and offered to industry companies. Overall, these three action steps can help create the best insurance policies for cannabis companies.
Insurers must plan ahead.
Sebastian Hov, CEO of 18 Insurance, a small business insurance services provider in Sacramento, Cal., advises cannabis insurers to stay compliant with regulations, maintain robust risk management strategies, and leverage technology to improve underwriting and risk assessment.
“There will always be caveats,” Hov states. “For example, the slow retail store rollout in New York may have implications for insurance coverage, as insurers may require additional security measures or risk mitigation strategies for cannabis retailers.”
Additionally, social equity licensees, where states grant cannabis usage licenses to underrepresented consumer demographics, may face different insurance implications. “That’s because recipients may be eligible for special programs or incentives designed to support underrepresented communities in the cannabis industry,” Hov adds.
Businesses should talk openly with insurers.
Cannabis companies may face challenges in obtaining insurance coverage due to the high-risk nature of the industry and the federal prohibition of cannabis.
“However, the market is evolving, and insurers are increasingly offering specialized cannabis insurance products,” Hov says. “The impact of extreme weather events (e.g., droughts, floods, storms, and wildfires) can also affect the availability and cost of insurance coverage for cannabis growers. A candid conversation between business owners and insurers can help tailor the best coverage for specific sector companies.”
Consumer issues need to be addressed.
Cannabis use can impact consumers’ personal insurance policies, particularly in the areas of auto insurance and homeowners insurance.
“Insurers may consider cannabis use as a risk factor when underwriting policies, as it can potentially increase the likelihood of accidents or property damage,” Hov adds. “However, the specific impact on personal insurance policies may vary depending on the insurer’s risk assessment methodologies and the state’s regulations regarding cannabis use.”
