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Conflicting Risks: The Increasing Demand for Cannabis Industry Insurance

Things in the cannabis industry are rapidly changing. The fact that a cannabis industry even exists at all is a rapid change. Seemingly every day, a regulation changes or another state opts for legalization in one way or another. The demand for cannabis is also increasing. With over half of the states in the United States legalizing medical or recreational marijuana, the division is rapidly becoming an issue between state and federal governmental entities. That division makes it very difficult for businesses operating in the cannabis industry to find insurance coverage and to implement risk management plans.


One of the first aspects of the cannabis industry that has manifested in the last few years is an emerging standardization of business practices even amid the ever-changing regulatory landscape. Cannabis is an illegal substance, after all, under the Controlled Substances Act, which designates it as a Schedule I drug with no acceptable medical use. On the other hand, one of the provisions in the 2018 Farm Bill removed hemp from the list of Schedule I controlled substances and, thus, removed CBD as a controlled substance with respect to DEA enforcement.


In light of the divergence between local, state, and federal regulations within the cannabis industry, cannabis-related businesses (CRBs) face unique obstacles. CRBs will face the same issues as many other businesses when it comes to general liability and workers’ compensation, but they also face risks that agricultural and even manufacturing businesses face during the course of their operations.


CRBs in particular face larger than average risks of the following:

· Fires from both wild and internal sources

· Theft

· General liability

· Product liability

· Cyber liability


Companies of all types, even in states which have legalized cannabis, still face banking restrictions due to federal regulations. Federally insured banks often do not want to be involved with these companies in large part due to their own risk management. With an estimated 70 percent of CRBs operating as cash-only businesses with no formal banking relationships, it should come as no surprise that they face much higher risks of theft and liability due to the large amounts of cash that they carry.


With the passing of the Secure and Fair Enforcement Banking Act in April 2021 in the House of Representatives, CRBs would be able to access the products and services offered by financial institutions. Unfortunately, the passing of the Act still requires action from the Senate, where it has been in limbo since March 2021.


Along with the increase in cannabis and CBD products have come many novel cannabis-infused products—including edibles and drinks—which increase risks of product liability and safety recalls. Due to the psychoactive effects of cannabis, the risk that products could be mislabeled or misrepresented and then represent a harm to users is also increased. While standard general liability plans would handle these claims for non-cannabis businesses, many insurers are very hesitant to extend that to CRBs due to all of the uncertain legalities. Often, policy language must be specifically tailored to the cannabis industry for adequate coverage to be provided.


Individuals utilizing cannabis-related products also face unique insurance challenges. Users could be found to be at-fault in workers’ compensation claims or subject to employment disqualification as a result of drug screening. Further complicating the issue could be medical providers and treatment options which prevent the use of cannabis in the treatment of patient conditions.


Automotive insurance rates can be elevated as well due to the influence of drivers using cannabis products. A lack of standardized methods of roadside detection of drug-impaired drivers is also an issue. Cannabis itself, the level imbibed, and the method of intake can all have radically different ways of manifesting in the user. Side effects and physiological reactions in users can also result in increased risk of misidentification of the status of a driver at the time of an incident.


With all of that in mind, insurance companies are left with a lot of uncertainty. Legal issues could arise at any point of the supply chain, and unique hazards are associated with the cannabis industry. The National Association of Insurance Commissioners (NAIC) formed the Cannabis Insurance Working Group in 2018 to make an effort to better understand coverage gaps and regulatory issues within the cannabis industry. Part of that included the adoption of the Understanding the Market for Cannabis Insurance white paper which was published in 2019. Currently, they are placing a focus on the collection of aggregated insurance availability in addition to the coverage gap information mentioned before in an attempt to compile a report for release sometime in late 2021.


Finding companies to provide insurance coverage for CRBs is a difficult issue. Currently, only around six insurers are even formally offering cannabis coverage. Compounding this issue is the federal legality, which has led to insurers and brokers to cease formally advertising services to CRBs. Many owners of CRBs only hear about insurance options through word of mouth from other CRBs. These issues, and all of the legalities surround the cannabis industry as a whole, make contacting an insurance professional an essential step in risk management. It never hurts to ask and can only benefit a CRB to find out what their options are one way or another.


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