New High, New Low

Insurance and Cannabis Meet in the Middle

More and more states across the country are opening up to the idea of allowing cannabis-related businesses to operate, and with business comes risk, and with risk comes insurance. But insuring cannabis-based businesses introduces some tricky areas to navigate, especially as this market is quickly evolving.

Getting the insurance question right is in the best interest for everyone because the potential market for cannabis is huge – estimated to be approaching $40 billion or more by 2024.

But, because federal law still lists cannabis and marijuana as a schedule 1 controlled substance, a highly addictive substance with no medical use, insurance is a sticky subject. Federal banking laws originally drawn up to go after cartels and money laundering within the illegal drug trade now put banks and insurers who deal with otherwise legal cannabis-based businesses in legal jeopardy.

While there are some startup and smaller-scale insurance companies that insure cannabis-based businesses, and a few mainstream insurance carriers dipping their toes in the market, by and large, business insurance is exceedingly difficult to find.

Estimates vary as to how many carriers nationally are offering the coverage, but most agree that insurance for cannabis-related businesses is much more expensive and hard to come by than comparable coverage for similar businesses in other industries.

And even those that are offering policies tend to offer less coverage than many businesses need – with $1 million per occurrence / $2 million aggregate policy limits common, as opposed to the $5 million/ $10 million policies most businesses say they need.

It is unfortunate, because that coverage is essential for cannabis-based businesses that face the same risks any other business faces — general liability, product liability, fire. And because banking laws drive many of the cannabis businesses into cash-based transaction, the threat of theft, whether by employees or by someone outside the business, is especially large.

On the production side of the cannabis business, the lack of insurance is particularly problematic. That is because, similar to most vegetable oil extraction processes, hemp oil and cannabis oil extraction commonly uses flammable chemicals like hexane and butane. The storage of the crop can also present a potential for spontaneous combustion. Most successful growers are mechanically drying their crops before the product is sold or delivered, which also presents a high risk for fire.

Transporting the crop, especially near state lines and on federal highways, presents significant risk.

Add potential product liability and food safety liability for any edible cannabis products, and the need for insurance is at near emergency levels.

The situation isn’t quite so dire for cannabis’s botanical cousin – hemp. In 2018, the federal government granted some protections for hemp as part of that year’s Farm Bill, so hemp producers now do qualify for crop insurance and some other protections, but that was only if the psychoactive content of their product stayed low — a distinction that can only be made in a laboratory setting.

So, what is a budding cannabis business to do?

The first thing insurance industry professionals stress is to set the underwriters’ minds at ease by doing as much as possible to prove their business practices are above board. Look for ways to project outward signs of being reputable, like association membership, industry designations, and credentials wherever possible. Many community colleges are offering certification programs. All that that can offer a shine of legitimacy.

And what about employee coverage?

Here, it really comes down to personal cannabis use. So, first off, make sure that the workplace is cannabis free for safety purposes, because if there is an on-the-job accident and the workers’ compensation investigators find cannabis in the employee’s system, even if they weren’t intoxicated at the time, that could cause trouble with the claim.

Because there is little research being done due to cannabis remaining on the schedule 1 list, it is unclear if marijuana smoke is comparably harmful with tobacco smoke, so likewise, it is unclear how insurers will treat cannabis smokers for health or  life insurance purposes.

And when it comes to prescription coverage, no major health insurance is yet offering coverage for medical marijuana prescriptions — even if it is legal in their state. There just isn’t enough peer-reviewed research on the topic.

The state-by-state patchwork of insurance questions could easily be solved if the federal government took action to clarify things. And that is just what the Clarifying Law Around Insurance of Marijuana Act of 2021 and the Secure and Fair Enforcement Banking Act were designed to do.

The proposed laws aim to create a safe harbor for bankers and insurers who want to offer services to cannabis-related businesses.

While Canada-based and London-based insurers have been working out underwriting standards for a few years, the American cannabis market has been largely deemed too risky. With the CLAIM and SAFE Banking acts working through congress, more insurers may likely be encouraged to enter the market and expand the products on offer, and with luck, increase competition to lower premiums.

Industry observers are particularly hopeful that an expanded insurance market would mean that specialty lines, such as directors and officers policies, as well as errors and omissions policies will be more accessible for the cannabis market moving forward. Those more specialty policies are especially difficult to find right now, and that is causing some trouble for businesses as they look to expand their operations.

Michael Giusti, M.B.A., is an analyst and senior writer at InsuranceQuotes.com. He has worked as a journalist for more than 20 years, including as a reporter at a daily newspaper in Florida, as an editor at a regional business journal, and as a writer for national and international publications. He specializes in business, technology, finance, insurance, automotive and industry-focused writing.