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Insuring the Ever-Growing Cannabis Industry
Roughly six-in-ten Americans (62%) believe marijuana should be legalized, a figure that has doubled since 2000. (Hannah Hartig & Abigail Geiger, Pew Research Center,
About six-in-ten Americans support marijuana legalization
(Oct. 8, 2018),
available at
http://www.pewresearch.org/fact-tank/2018/10/08/americans-support-marijuana-legalization.
)
The legal landscape has also changed dramatically in this time, with 32 states and the District of Columbia legalizing the use of medical marijuana and ten states and the District of Columbia allowing recreational use, with only more states expected to follow. (Matt Ferner, Huffington Post, “3 States Legalize Marijuana for Recreational or Medical Use” (Nov. 7, 2018),
https://www.huffingtonpost.com/entry/midterm-election-marijuana-legalization_us_5be26aa3e4b0dbe871a45fd7.)
Despite the changing tide of public opinion, cannabis is still classified as a Schedule I drug under the federal Controlled Substances Act, the most tightly restricted category reserved for drugs with “no currently accepted medical use.” (
See
21 U.S.C. ch. 13 § 801
et seq,
) To put this in context, cocaine, Adderall, and oxycodone are Schedule 2 drugs, as they are considered to have some medical value despite a “high potential for abuse.” (Drug Scheduling, United States Drug Enforcement Administration (“DEA”),
https://www.dea.gov/drug-scheduling
.)
I. California’s Efforts to Address Insurance Coverage Gaps
Shortly after the vote, California Insurance Commissioner, Dave Jones, made it clear that California aimed to address insurance coverage gaps for California’s legal cannabis business, encouraging insurers to write insurance for that industry. After holding a groundbreaking public hearing to identify such gaps, Jones approved California’s first admission of an insurance company to issue insurance for the cannabis industry. (Nov. 2, 2017 Cal. Dept. of Ins. Press Release: “First commercial insurer to file cannabis business insurance is approved by insurance commissioner,”
http://www.insurance.ca.gov/0400-news/0100-press-releases/2017/release119-17.cfm
.)
On June 4, 2018, California approved the first Cannabis Business Owners Policy (CannaBOP) in the State of California, written by the American Association of Insurance Services (AAIS) for cannabis dispensaries, storage facilities, processors, manufacturers, distributors, and other cannabis-related businesses operating in the state. (June 4, 2018 Cal. Dept. of Ins. Press Release: “California’s cannabis insurance marketplace continues to grow with commissioner’s latest approval,”
https://www.insurance.ca.gov/0400-news/0100-press-releases/2018/release064-18.cfm
.) California has not stopped there, announcing on August 9, 2018, the formation of a working group in conjunction with the National Association of Insurance Commissioners to address cannabis insurance gaps. (Aug. 8, 2018 Cal. Dept. of Ins. Press Release: “California Insurance Commissioner appointed chair of national cannabis insurance committee,”
https://www.insurance.ca.gov/0400-news/0100-press-releases/2018/release089-18.cfm
.)
According to Darrick Cole, President of Skyfront Insurance, a boutique cannabis insurance agency, the insurance market is still largely composed of surplus carriers, with German companies holding the principal market share. Without federal legitimization, Cole does not expect larger, publicly-traded insurers to enter the market. However, California’s push to legitimize a pioneering industry has succeeded before with respect to insurance for ride share companies and, thus, could eventually force federal action on insuring the cannabis industry. (
See
Irene Moore, NBC Los Angeles, “New Insurance Product Announced Meant to Close Gap For Drivers and Rideshare Companies”, May 27, 2015,
https://www.nbclosangeles.com/news/local/New-Insurance-Product-Announced-Meant-to-Close-Gap-For-Drivers-and-Ridershare-Companies-305203761.html
.)
As the saying goes, “as California goes, so goes the nation.”
II. Legal and Coverage Challenges Abound
But even with some insurance available to cannabis companies, the question of the enforcement of these policies is still up for grabs. In 2012, the District Court of Hawaii refused to enforce an insurance policy providing coverage to a cannabis business, finding that “the cultivation of marijuana, even for the State-authorized medical use, violates federal law and the enforcement of an insurance policy under the particular circumstances of this case is contrary to public policy.” (
Tracy v. USAA Cas. Ins. Co.
, No. 11-00487 LEK-KSC, 2012 WL 928186 (D. Haw. Mar. 16, 2012).) More recently, however, the District Court of Colorado upheld coverage under a policy issued to a medical marijuana dispensary, finding that the insurer, well-aware of the insured’s business, would be obligated to honor its policy’s paid-for coverages for harvested marijuana buds and flowers damaged in a fire. (
Green Earth Wellness Center, LLC v. Atain Specialty Ins. Co.
, 163 F. Supp. 3d 821, 834-35 (D. Colo. 2016).)
As the cannabis industry gains legitimacy and carriers start insuring these risks, insurers and cannabis businesses can expect a slew of challenges and issues, including:
- Products Liability: Many well-known businesses and new players are producing a wide range of cannabis products, from edible candies and chocolates, to smoking implements like Chinese-made vapes and pipes. Product liability insurance is currently available at steep premiums, per Skyfront Insurance’s Darrick Cole. There may be hesitation to insure these products, given the “green” nature of the market, the potential for adulteration by mixing of products, the lack of standardized testing for quality, purity and safety, coupled with the importation of supplements, which draws further safety and quality concerns.
- Crop Valuation: A single crop of cannabis can be valued in the millions, depending on its volume and quality. Currently, insurance available for such crops is well-below its market value. It is unclear how these coverage gaps will be addressed, in particular for California cannabis farmers in fire-prone areas.
That said, all signs suggest that federal law will catch up to the public’s softening perception of medical and recreational cannabis use. As the legal cannabis industry continues to grow, the demand for insurance coverage will likely increase. While competition from additional insurers entering the market may address some coverage gaps, market stability and federal legitimization of the cannabis industry will be keys to the availability of insurance coverage for these new risks.
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Nicolaides Fink Thorpe Michaelides Sullivan LLP is a global law practice dedicated to representing the interests of insurers and reinsurers. From offices across the U.S., the firm counsels its clients and litigates complex coverage disputes around the world. The firm's market-leading appellate practice prosecutes and defends a broad spectrum of appeals nationwide, and frequently participates in high exposure trials.
This publication is provided by Nicolaides Fink Thorpe Michaelides Sullivan LLP for educational and informational purposes only and is not intended and should not be construed as legal advice. This newsletter may be considered advertising under applicable state laws.
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