No Smoke Without Fire: Cannabis, Confusion and Insurance

Illinois recently joined Alaska, California, Colorado, Washington, D.C., Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont and Washington in legalizing recreational marijuana. Most other U.S. states also allow for limited use of medical marijuana under certain circumstances and by varying amounts.

In 2019, retail cannabis sales were on pace to eclipse $12 billion by the end of the year, up from an estimated $10 billion in 2018, according to the 2019 Annual Marijuana Business Factbook, a leading resource for information and statistics on the marijuana industry, which projects that annual retail marijuana sales in the U.S. will surpass $28 billion by 2023. For context, in 2017, total U.S. wine sales were $62.7 billion, according to Wines & Vines, a source for wine industry data.

The legalization of cannabis is having a significant impact on state economies, as well as the national economy. As ancillary businesses flock to support the new market, millions of dollars are paid in taxes, and as investors move to prop up new ventures, the economic impact has the potential to exceed $100 billion, according to the 2019 Annual Marijuana Business Factbook. For every $1 consumers spend at dispensaries or stores, another $2.50 in economic benefit is created, the report says.

Moreover, “The SAFE Banking Act,” which passed the U.S. House and is currently awaiting consideration in the U.S. Senate, would reconcile conflicting federal and state laws and provide a federal “safe harbor” to financial services providers, including insurers and agents and brokers. The legislation would also prevent criminal prosecution and civil liability against agents and brokers who choose to engage with legitimate cannabis-related businesses and provide clarity for transactions, boosting the industry further.

The burgeoning U.S. cannabis industry represents a tremendous opportunity for insurance. However, with an enormous demand for cannabis products, removing the barriers to ease of doing business in the space could leave the insurance industry with a lot of catching up to do—and not much time to do it.

Currently, business owners are “very discontented with the quality of the insurance product,” says Rocco Petrilli, chairman of the National Cannabis Risk Management Association (NCRMA). In an NCRMA survey of over 800 cannabis-related business owners, respondents complained that there were “very few insurance options,” which were “extremely overpriced” and that “the exclusions certainly outnumbered the inclusions.”

Furthermore, survey respondents were “equally discouraged by the quality of their insurance agent,” Petrilli says. “They felt that the agents weren’t prepared from a knowledge standpoint and were trying to oversell products in the interest of participating in an early part to the money grab.”

The NCRMA survey, which was completed in the fourth quarter of 2019, identified the three biggest risks cannabis businesses face. They were issues concerning people, such as hiring and employment practices; communication concerns, such as finding a trustworthy information source for the rules and regulations of running their business; and financial insecurity, which stems from the state-federal disagreement on cannabis.

NCRMA also implemented an appointed-broker program. The appointment criterion, which was set by their members, is to create a passion for the industry, gain the knowledge necessary to properly represent this product and demonstrate that cannabis is their long-term strategy. Petrilli hopes that these values will counteract any potential influx of investment, which may “truncate some of the natural market evolution that it has to go through to make itself a reputable or longstanding business,” he says.

Enter the Agent

For insurance agents and brokers, their role remains the same: become the trusted adviser. “Realistically, we look at cannabis clients like any other client or insured,” says Stefani Day, marketing manager, sales agent at Colling Insurance Services, Inc. in Denver.

“We ask the usual questions about their operations. What are they doing? Are they manufacturing? Are they growing?” Day says. “Then, we look at their corporate structure. Do they need D&O? How many employees do they have? Can they even afford to purchase D&O or employment practices liability insurance?”

Medicinal-use cannabis has been legal in Colorado since 2000 and recreational cannabis has been legal since 2014. However, most markets are still not writing the liability or executive risk lines, while some carriers are only willing to cover finished stock and property, and some won’t consider vegetative crops, Day explains.

“There are still major coverage limitations and still a lot of gaps in what we can actually get written, even on a national level,” Day says, who is also COO of Cannabis Insurance Services, a company that provides customers with insurance and helpful information related to the cannabis industry.

“The next big hurdle is seeing if this federal bank bill goes through. And then, obviously, the next big jump is federal legalization,” Day explains. “Those two huge hurdles are going to drastically affect the industry, the capacity for underwriting, the limits per location and the maximum insurable value. The bank bill and other carriers coming into the marketplace are going to help alleviate some of that restriction.”

In the cannabis insurance space, understanding the markets and their limitations is “different to any other insurance market” and is “one of the really unique aspects,” says Max Meade, strategic insurance adviser with Brown & Brown in Mount Laurel, New Jersey, a state where cannabis is permitted for medicinal use.

“Unlike other industries, where one carrier can provide everything and package all the property, cyber and EPLI under one roof, cannabis is very different because all the policies are split,” Meade says. “When I first started, we went to every cannabis market to get all their pricing and find out what they do best. After doing that for a while, you start to see what risks they prefer. It’s all about understanding the markets and what coverages you can get.”

Crop

In December 2018, President Trump signed the Agricultural Improvement Act of 2018, more commonly known as the “2018 Farm Bill,” which federally legalized the sale and production of hemp by removing “hemp” from the definition of “marijuana” in the Controlled Substances Act.

However, agents seeking crop insurance for hemp farmers face challenges because carriers are “very picky,” says Sam Boettcher, senior account manager, Colling Insurance Services, Inc. in Denver. Coverage for outdoor growers is “very limited” and “extremely expensive,” she says.

While indoor hemp crops can generally be covered for most incidents, “with outdoor crops, you’re going to have some pretty standard exclusions for things like mold, fungus and grower error, so you’re basically insuring for fire and truly sudden and accidental exposure,” Boettcher says. “We’ve seen minimum premiums as high as $40,000.”

“With corn or other noncannabis crops, they’re going to have some similar exclusions, but there are ways to carve back in certain types of coverages with certain carriers,” she says. “But it’s an even bigger restriction for cannabis and hemp, because the carriers are less likely to manuscript coverage back.”

Additionally, in a state which has experienced some of the costliest hailstorms in U.S. history, wind/hail deductibles “are ridiculous,” Boettcher says, which even extends to “hoop houses”—a farming technique that is generally classified as an indoor crop.

Product Liability

The key areas of product liability exposure—design, manufacturing, marketing and breach of warranty—all apply to cannabis insurance, and agents should be aware of the general regulation requirements in the state an where they’re placing insurance and how violating those regulations can lead to product liability claims.

Amendments to the 2018 Farm Bill are largely responsible for the influx of cannabidiol (CBD), a naturally occurring chemical found in the hemp plant, into U.S. stores. Importantly, CBD hasn’t exhibited any potential for abuse or dependence, according to a 2017 report by the World Health Organization, and there is no evidence of any public health-related problems associated with its use.

The CBD industry is flourishing, conservatively projected to hit $16 billion in the United States by 2025, according to The New York Times, and is being widely marketed as a health product to help with anxiety and insomnia—without U.S. Food and Drug Administration approval. Yet, CBD is being added to a plethora of goods, such as cheeseburgers, toothpicks, beer, donuts, breath sprays and more, leading to major liability concerns.

“Companies are making all types of claims about what it can do and should be used for, which can lead to big liabilities,” explains Phillip Skaggs, assistant counsel, American Association of Insurance. “Also, there’s no regulation toward how it needs to be tested or produced, and there’s no licensing structure for CBD producers, so they can pretty much do what they want.”

“If a retailer isn’t buying a CBD product from a licensed cannabis producer, they’re rolling the dice,” Skaggs says. “The most important thing that agents should look for is routine product testing, consumer safety and the accuracy of the labels and warnings.”

Meanwhile, vaporizers—a battery-operated device that typically heats a flavored nicotine or cannabis solution into a vapor to be inhaled, similar to electronic cigarettes—also pose product liability challenges. “Vaporizers have two issues: the batteries and the cartridges,” Skaggs says. “The battery units are not inherently unsafe, but they can malfunction. If they explode, they can cause injury.”

“Then, the cartridges are another story,” Skaggs continues. For agents and retailers, “whether you’re talking about cannabis, CBD or nicotine, it’s all about knowing the source [of the solution], such as whether it’s from a regulated entity or the black market, as well as if there are any kind of indemnification agreements in place between the retailer and the cartridge producer.”

Moreover, if the vaporizer or cartridge is foreign made, it is difficult for insurers and plaintiffs to recover losses. As a result, “they might attempt to recover against the retailer who sold it to avoid having to pursue a foreign business,” Skaggs adds.

Workers Compensation

With cannabis laws changing across the U.S., matters become even more complicated when workers compensation is involved.

“There are unique issues facing workers comp with respect to the legalization of marijuana,” says Laura Kersey, division executive—Regulatory & Legislative Analysis for the National Council on Compensation Insurance (NCCI). “Key issues include reimbursement for medical marijuana in workers comp, the impact on drug-free workplace policies and hiring practices, and whether medical marijuana could be an alternative to opioids for workers compensation purposes.”

One of the emerging workers comp issues is whether medical marijuana is reimbursable. Some states have authorized it, some do not prohibit or require reimbursement, while some states prohibit it. “Insurers are increasingly receiving requests to reimburse for medical marijuana use for workers comp treatment,” Kersey says. “Given the friction between state and federal law, states and state courts are faced with the challenge of whether to approve medical marijuana treatment for workplace injuries.”

In addition, “there are questions as to what constitutes impairment from marijuana and how to determine if an injured worker was under the influence at the time of an accident,” Kersey says. “Since marijuana can stay in a person’s system for a period of time, it’s possible that the injured worker could test positive for the substance but not be impaired at the time of the accident.”

“There are efforts underway to develop tests similar to breathalyzers and other methods that are currently available to test blood alcohol levels. But until those tests are fully developed and implemented, states are addressing this issue on a case-by-case basis,” she adds. “This is a rapidly changing environment, and workers comp stakeholders have more questions than answers right now.”

As cannabis-related businesses continue to spring up across the U.S., agents like Meade are in the business for more than a slice of the profit. “What drives me is the medicinal side of this. Where I work, it’s all patient-focused—their end goal is to improve someone’s life,” he says. “As an insurance professional, it’s such a rewarding feeling to know that I’m helping to insure their end goal, which is to make someone feel better. You don’t always get that in a lot of industries.”

Will Jones is IA senior editor.