Insuring cannabis companies remains problematic

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Cannabis’ place in U.S. society — and the question of its legality — has been debated since the beginning of the 20th century.  The movement to prohibit cannabis hit its high watermark in 1970 when President Richard Nixon signed the Controlled Substances Act into federal law, which designated cannabis as a Schedule I drug and made its possession, distribution and sale a punishable offense. Since that time, however, the pendulum has swung aggressively in the other direction.

With the successful passage of ballot initiatives in Michigan, Missouri, and Utah in November’s midterm elections, cannabis is now legal for medical use in 32 states and Washington, D.C., and available for recreational use in 10 states and Washington, D.C.

Attitudes toward the substance have shifted dramatically since in 1969, when only 12% of Americans supported the legal use of cannabis. Shortly thereafter, cannabis became outlawed nationwide.

Despite all of this, cannabis, which is the scientific term for marijuana, remains illegal under federal law.  This fact has created a complex legal landscape that property & casualty insurers are now being forced to navigate.

P&C industry concerns

Consider the potential criminal and civil exposures resulting from marijuana’s legal status under federal law, which extends well beyond those individuals or businesses directly involved in the cannabis supply chain. In addition to violating the Controlled Substances Act, doing business with any part of the cannabis industry can run afoul of several federal laws including the Banking Secrecy Act/Anti-Money Laundering Law, and the Racketeer Influenced and Corrupt Organizations Act.

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For example, banks and insurers providing services to enterprises involved in the cannabis industry could find themselves held criminally liable or civilly liable for allegedly causing harm to others by aiding the operation of the business.

Writers of homeowners’, auto, commercial property, workers’ compensation, and many other lines of insurance have faced difficult questions about their role and relationship with such cannabis business entities as growers, manufacturers, retailers and consumers. Sometimes, this relationship has been unbeknownst to the insurer. In these cases, insurance companies that do not have a policy of reimbursing the cost of medical marijuana or that just became aware of the presence of cannabis at a home or commercial property have been taken to court over their denial of claims for lost, damaged, stolen, or “non-covered” medical cannabis.

Evolving legal precedent

Depending on the state and presiding judge, the courts have been unpredictable in their decisions, sometimes favoring the insurance provider and other times favoring the claimant. In most cases, insurance companies have cited that the CSA preempts state laws that permit medical marijuana or adult use. Other courts have in some instances have ruled that the state law is the controlling statute.

Consider another potential issue in which stakeholders along the cannabis supply chain cannot find coverage in the private market and resort to the state’s residual market mechanism, which in many cases is an assigned risk pool.  If a company is required to offer coverage to a “canna-business” through a residual market mechanism, this will put the company between the proverbial rock and hard place, facing a serious and fundamental conflict between state and federal laws.

Even insurance companies interested in offering coverage to the various entities along the cannabis supply chain must content with a complicated legal landscape. It follows that many continue to eye the proliferation of a legalized marijuana industry with caution, hesitation, confusion and skepticism.

It comes as no surprise, then, that there are very few admitted property & casualty insurers writing coverage in the cannabis space. While some growers, processors, retailers, recreational/medical users, and other key players across the cannabis supply chain have found surplus or captives lines of insurance, they have continued to highlight an insurance gap and broad demand for various insurance products and services for their businesses.

Regardless of one’s personal views on the legalization question, it is unquestionable that the cannabis industry presents an enormous potential market for insurance coverages.  Already a $9 billion industry by 2017, it is projected to grow to more than $20 billion by 2020 with canna-businesses accounting for more than 280,000 jobs in agriculture, manufacturing, management, administration and retail operations.

However, until and unless the fundamental legal conflicts surrounding cannabis are resolved, it is unlikely we will see the insurance industry rushing to insure cultivators, manufacturers, users or others across the supply chain.

Pushing policy forward

Last June, Sens. Cory Gardner (R-Colo.), and Elizabeth Warren (D-Mass.) introduced legislation that would amend the existing CSA to say it no longer applies to those following state, territory or tribal laws relating to the manufacture, production, possession, distribution, dispensation, administration or delivery of marijuana. In essence, the Strengthening the Tenth Amendment Through Entrusting States Act, or the STATES Act, intends to protect states’ marijuana laws from federal preemption via the CSA.

No discussion of a potential market for insurers is meant to elide the other questions and externalities for the industry that accompany legalization of marijuana. Among the many examples, the lack of a reliable impairment test for marijuana could prevent law enforcement from identifying impaired drivers.  This also creates a serious issue with determining whether or someone is “high” on the job, which could lead to broader safety concerns for employers, employees, and the general public.

Even if no other states passed legalization laws and the industry stopped growing — a dubious proposition indeed — it is clear property & casualty insurers need to understand how they will potentially interact with the cannabis industry.  As NAMIC outlined in the release of its public policy issue analysis titled “Cannabis: From Criminality to Commercial Enterprise: Understanding the Intersection With Property/Casualty Insurance,” it is equally important that lawmakers at the local, state, and federal levels also understand the potential issues. At the very least, robust safe harbors from any legal liability under controlled substances-related law should be created if insurers are compelled to participate in any way with the cannabis industry.

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