In November 2020, several states across the country put forth ballot initiatives aimed at decriminalizing or legalizing cannabis, and all of them passed. Arizona and New Jersey voters opted to legalize recreational marijuana for adult use. South Dakota voted to legalize both medicinal and recreational use. And as recently as March 31, New York passed legislation making it legal for individuals 21 and older to possess and purchase up to three ounces of marijuana.
Capping a decade of sweeping reforms, sixteen states — along with the District of Columbia — have legalized recreational cannabis and thirty-six states permit medicinal use.
Nevertheless, the insurance industry continues to struggle with the swift pace of 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 is considered legal in one state may be unlawful in another — even if they both allow some degree of possession or consumption.
This has left many within the cannabis industry adrift in an uncertain insurance landscape that sometimes raises more questions than it answers.
“I think the primary concern cannabis retailers like us have regarding insurance is finding an affordable carrier who provides comprehensive policies with standard coverages,” said Shea Hynes, general manager and co-founder at Seattle-based Lux Pot Shop. “Beyond that there are concerns about how a company can maintain affordable insurance, or insurance at all, if something does arise that is a flag to carriers or if the company has to make a claim. Since cannabis is still federally illegal, it creates an environment where having a relationship with an experienced insurance broker can make all the difference in rates and coverage.”
According to a July 2020 report, legal cannabis sales are projected to increase from $15 billion to as much as $37 billion by 2024. But despite the positive momentum and bullish economic indicators, cannabis-related businesses (CRBs) face a substantial problem functioning as legitimate retail operations when it comes to cannabis business insurance, as insurers remain reluctant to write policies aimed at protecting CRBs from all manner of financial losses, including fire, theft, vandalism, and product liability.
“Cannabis stores have been continued targets of robberies, particularly with the rise of mask-wearing, and this creates a unique set of challenges when thinking about insurance,” Hynes said.
Internal and external risks
According to industry experts and analysts, the CRB insurance quandary comprises several influencing factors, the most obvious being the conflict between states that have legalized cannabis and current federal law, which still considers marijuana an illegal Schedule I drug under the Controlled Substances Act, meaning the substance has “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.”
According to Texas-based insurance agent Nick Schrader, the insurance industry recognizes the cannabis industry comprises numerous hazards and brings massive potential liabilities to CRB entrepreneurs if marijuana is transported carelessly or without proper security.
“The hazards in this industry are uncontrollable,” Schrader said. “Unfortunately, there are only limited companies that offer insurance for this industry. Most do not give enough insurance coverage that can support the business needs thoroughly, making the searching and decision-making much more difficult. You have to assess everything, be extra safe, and go for the insurance company that can give you the best possible coverage you need.”
Even if you’re not a cultivator or manufacturer, the process of obtaining affordable and adequate insurance can be “a near nightmare,” said Scott Jennings, chief executive officer at California-based Pantry Food Co., which specializes in infused cuisine.
“As a cannabis brand, we thankfully don’t have to juggle the insurance hassles that cultivators or manufacturers do,” he said. “We do, however, carry cannabis product liability insurance—or PLI—because we have products. So, if anyone were to get sick after consuming something from Pantry, we’d be protected from lawsuits.
“Insurance companies don’t want to work with cannabis businesses… Thankfully, there are cannabis-specific insurance companies like CannGenn and Cannasure,” Jennings continued. “If you’re new to the industry, and even if you aren’t, please consult a lawyer. Because we are handling a controlled substance according to the government, maintaining compliance is 100 times more crucial in this space.”
That compliance is going to be costly, according to Majda Baltic, an independent broker and owner of Majdas Touch Insurance. “The biggest challenge with obtaining cannabis insurance of any kind—whether it’s for manufacturing of products, cultivating, or growing—is that there are only a limited number of insurance companies available at this time to service the industry,” she said. “This means increased premiums due to this product still falling under a specialty market. It will likely remain like this for years to come.”
Types of insurance
Nonetheless, Baltic said obtaining a general liability policy should be of primary concern for anyone operating within the cannabis industry.
“On top of liability insurance, it’s important to protect the crop or product—meaning you also need business property protection,” Baltic said. “When farming, policies become a little more complicated as the life of the crop becomes a huge risk with weather events, in general, being unpredictable. Pricing for growing crops is different from manufacturing products, as other risks are at hand in those activities.”
For example, when manufacturing cannabis goods such as oils, creams, edibles, or cartridges, there are dozens of different methods in place to extract THC and CBD from the crop, each carrying a different rating risk factor. The higher the risk, the higher the premium.
“There is always a huge risk in being underinsured, but that is with any product ranging from personal auto all the way to commercial lines and excess and surplus, such as cannabis industry insurance products,” said Baltic. “It’s always better to be over-insured than underinsured.”
This can get particularly tricky for those trying to calculate crop insurance, said Marianne Cursetjee, co-founder at Alibi Cannabis in Oregon. “At Alibi Cannabis, we developed a calculation based on total days in production and then applied the percent of days remaining multiplied by the replacement value,” said Cursetjee. “It’s important to consider all the risks in a cultivation facility and implement either engineering or insurance to reduce potential losses. Losses can be catastrophic whether from wildfire, equipment failure, unstable plant genetics, or theft. This industry is very risky, so minimizing potential losses is important for us.”
Federal help on the way?
Help may be on the way in the form of federal legislation introduced in 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 insurance industry publication Business Insurance, the Clarifying Law Around Insurance of Marijuana (CLAIM) Act of 2021 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 Senator Bob Menendez (D-N.J.), sponsor of the bill. “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 it won’t be an overnight fix to the insurance problems currently faced by cannabis business owners—and the problems are legion.
According to the National Association of Insurance Commissioners (NAIC), only six insurers currently offer cannabis coverage. What’s more, due to federal 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 said 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,” stated the NAIC. “However, insureds may need limits up to $5 [million] 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,” said Anthony Bonfiglio, a Colorado-based lawyer who specializes in cannabis 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.”
Nick DiUlio is an analyst for InsuranceQuotes.com, which publishes in-depth studies, data, and analysis related to auto, home, health, life, and business insurance. DiUlio studies the insurance industry in order to author editorial content that provides trusted tips, advice, and insights for consumers.