In recent years, the cannabis industry has experienced unprecedented growth and transformation. In 2017, the cannabis industry generated nearly $9 billion in annual sales and by 2022, some project that number will increase to an estimated $80 billion.As the cannabis industry continues to grow and diversify, cannabis businesses will encounter varied risks and potential liabilities. In short order, insurance as a risk management tool will become increasingly imperative in all sectors of the cannabis industry.
To date, insuring the cannabis industry has presented unique challenges, in part, because while cannabis is legal in certain states, to varying degrees, cannabis remains federally illegal as a Schedule 1 substance under the Controlled Substances Act of 1970 (CSA).The CSA conflicts with many state’s decriminalization and legalization efforts of cannabis which raises the question of federal preemption—in short, that states laws decriminalizing cannabis would be pre-empted by the CSA. The uncertainty surrounding cannabis and federal preemption has contributed to a dearth of reputable and admitted insurers to provide uniform, standardized and affordable insurance coverage for cannabis-related risks. Indeed, federal preemptions concerns were the impetus for Lloyd’s of London’s 2015 exit from the cannabis insurance market.
However, with the election of Joe Biden as president, there could be a major turning point, or at least a move in the right direction, in the struggle to insure cannabis-related businesses. As part of his campaign, president-elect Biden has pledged to pursue marijuana decriminalization, moderate rescheduling, federal medicinal legalization, and expungements for people with prior cannabis records. If Biden follows through on these promises, admitted insurers’ fears of federal preemption could decrease and there could be an influx of novel, cannabis specific insurance products.
It is important to note that the decriminalization of cannabis (what Biden has pledged) is not the same as legalization. Decriminalization is the act of removing criminal sanctions against it—in the cannabis context, it would mean that cannabis would remain illegal, but the legal system would not prosecute a person for possession of cannabis under a specified amount. Legalization on the other hand, is the process of removing all legal prohibitions and is dependent upon an act by Congress . While there has been some scuttle of a proposed act in Congress this December to decriminalize cannabis, if and when cannabis may be federally legal remains unknown.
Nevertheless, decriminalizing marijuana at the federal level coupled with an increasing number of states permitting some form of legal marijuana distribution, could prompt “admitted” insurers, rather than “non-admitted” insurers, to dip their toe, or perhaps cannonball into, the cannabis insurance market.
An insurance company that meets a state’s insurance department standards, registers and is authorized to do business in a state is known as an “admitted” or “authorized” insurer. Alternatively, if an insurer does not meet the state’s standards, it is referred to as a “non-admitted” “non-authorized” or “surplus lines” insurer. Insurance available to the cannabis industry has historically been almost entirely on the surplus lines market. Surplus lines insurers are not subject to direct state regulation, they are not required to have their insurance forms reviewed by the state, their rates are not regulated by the state, and are usually not subject to most state’s insurance laws.
States have begun to recognize that insurance coverage for the cannabis industry from admitted insurers is crucial. In 2017, California Insurance Commissioner Davey Jones launched several initiatives to “identify insurance gaps in the cannabis industry,” and to encourage admitted, commercial insurers to write coverage for California cannabis businesses. By November 2017, California approved the first commercial insurance policy from admitted insurer, Golden Bear Insurance. Golden Bear now provides general liability coverage, products liability coverage, property damage coverage, and crime coverage for licensed cannabis businesses operating within the state of California. As an admitted insurer, Golden Bear policies are back by the California Guarantee Association. As of February 2020, California had approved seven other admitted insurers to provide a range of standard and specialized coverage including, surety bonds, commercial landlord insurance and a product liability and product recall coverage form specific to cannabis businesses.
While California was the first state to facilitate the entry of admitted insurers into the cannabis insurance market, it will not be the last. With the election of Biden, the exponential growth of the cannabis industry, new state initiatives to encourage admitted insurer participation and a burgeoning market for underwriters, the availability of insurance and the very landscape of the cannabis insurance market could be on the precipice of substantial change.
Controlled Substances Act of 1970, 21 U.S.C. § 801, et seq.
Dragan Svrakic, “Legalization, Decriminalization & Medicinal Use of Cannabis: A Scientific and Public Health Perspective,” 109 Mo. Med. J. 90-98 (Mar.-Apr. 2012).
This article originally appeared in Cannabis Business Executive on November 16, 2020.