The High Risk of Insuring Cannabis

As the billion-dollar cannabis industry continues to develop in the tri-state region and elsewhere, investors, cultivators, retailers and various ancillary businesses are realizing the heightened risks associated with their operations. As such, various lines of insurance are being sought to protect against the common loss, damage, and liability generally presented with operating any business, no less, a cannabis-related business. Insurers and insureds alike, however, should be aware of the unique insurance challenges.

Although many states have legalized the use and possession of a derivative of cannabis known as marijuana, the federal government has not. As of today, marijuana remains a Schedule I drug under the Controlled Substances Act (“CSA”). Due to the Schedule I classification, any “manufacturing, possession, sale or use of marijuana” is a federal crime. The conflict between federal and state cannabis laws cause significant issues with respect to criminal liability, because in some states where the sale and use of cannabis is in compliance with state law, such activity may nevertheless violate the CSA.

The tension between federal and many states’ laws regarding cannabis likewise presents high risk for insurers. For example, insurers that provide coverage to cannabis businesses engaged specifically in selling marijuana can be criminally liable for aiding and abetting in the sale of marijuana or conspiring to violate the CSA – even when the business’s activity is legal under state law. Further, intrastate issues may also cause complication if marijuana is not regulated uniformly within a state. Certain municipalities in a state, for instance, may restrict the cultivation or sale of marijuana within its locality even though the state generally allows it.

The production and use of hemp and its derivatives (including CBD), present far less complications with respect to insurance. This is due to the passage of the Hemp Farming Act of 2018, which was incorporated into the 2018 U.S. Farm Bill (the “Farm Bill”). The Farm Bill effectively decriminalized the production or use of hemp and cannabis derivatives with lower than .3% THC concentration on a dry weight basis. Therefore, unlike marijuana, the sale and possession of hemp is legal under federal law and there is no risk of prosecution under the CSA (though it is not that simple; see The ABC’s of CBD Regulation – Cannabis Legal at the Federal Level?)

Whether a business is involved in hemp/CBD or medical or recreational marijuana, it should seek to obtain insurance coverage. Fortunately, there are multiple insurance carriers that provide different types of coverage to businesses in the cannabis industry. Some examples of coverage options include commercial property insurance, employment practices liability, product liability, workers compensation, commercial general liability, and automobile insurance. Businesses involved in recreational marijuana, however, are mainly insured by surplus lines carriers which are unlicensed and provide limited protection.

Underwriters must be careful and, depending on the type of business being insured and insurance product, attempt to explicitly explain what is covered and/or excluded. For example, when crafting a policy to cover a business involved in CBD, an insurer should explicitly state that coverage will not apply to, among other things, the cultivation, manufacture, storage, sale, possession or disposal of marijuana (as opposed to the type of hemp afforded federal protection under the Farm Bill) – rather than more generally just excluding “illegal activity” or “contraband.”

Because insurance options are typically limited and expensive, some cannabis companies are opting for captive insurance. Captive insurance is a form of self-insurance typically formed by one or several parent companies. This option can be appealing to certain companies conducting business in the industry because it provides specialized coverage tailored to the company’s specific needs that may not be offered by other carriers. A captive can also enable the parent company to better manage the profitability of the cannabis business by permitting the parent company to pay premiums to its own insurance subsidiary.

In short, these are heady days for insuring cannabis companies as the legal and regulatory dimensions continue to constantly evolve. Insurance and cannabis companies should fully understand the risks the industry presents and consider ways to best navigate through the haze.

For questions about this article, please reach out to Partner Charles J. Messina, Esq. via email here.