P&C the May 2019 issue

Budding Business

Marijuana business insurance is growing in sophistication but features the hallmarks of emerging coverage.
By Annmarie Geddes Baribeau

Legal cannabis has fueled one of the fastest-growing industries in the United States, with sales expected to surge from $10.5 billion in 2018 to $22 billion in 2022, according to a report released in January by Arcview Market Research in partnership with BDS Analytics.

“If Council members are not in it, they are looking at it,” says Scott Sinder, The Council’s chief legal officer and Steptoe & Johnson partner.

Placing cannabis business coverage, however, is not easy. It’s tough entering a business that’s transitioning from the illicit market to legitimacy. State laws vary, lawsuits loom and the federal government’s classification of marijuana as an illegal drug makes banks and insurers reluctant to come on board. And despite the buzz about marijuana’s benefits, its reputation for impairment and dependence also raise ethical concerns in the age of the opioid crisis.

Billion Dollar Business

Even though all things marijuana are wholly illegal under federal law, most states—-33, at last count—nevertheless purport to allow intake for specific medical purpose. Ten states and Washington, D.C., permit recreational use by adults, and other states are considering legalization. Moving from medical use only to recreational use by adults creates a tenfold increase in the number of potential customers, according to Arcview.

In 2017, there were 1.9 million Americans using marijuana as medicine and 21 million monthly consumers, Arcview says. Another growth area is Canada, which legalized marijuana use last fall and is attracting business from the United States. Sales in Canada are expected to reach $5.9 billion in 2022, up from $569 million in 2017, according to Arcview.

Despite the overarching illegality under federal law, marijuana is losing its social taboo status. “People two or three years ago who would never try it are willing to try it,” says Ian Stewart, chair of Wilson Elser’s cannabis law practice team. More people are switching from alcohol to cannabis as well, he added. Ironically, marijuana is gaining social acceptance as the potency of tetrahydrocannabinol (THC), which causes pot’s euphoric high and impairment, has doubled.

Product development and marketing is making pot more approachable to mainstream America. Inhalation via pipe, bong or rolling papers remains popular, but there are plenty of other options as well. For “health-conscious” customers desiring the THC high sans smoking, there are edibles galore in the form of candies, baked goods and beverages available at dispensaries and online. The Atlantic reported last year that, as the stigma of marijuana use recedes with expanded legalization, sublingual sprays, among other products, are gaining popularity with mothers.

Americans are also turning to cannabidiol (CBD) for the benefits of cannabis without the THC. Practically unheard of three years ago, CBD is said to prevent anxiety and stress, relieve nausea, help fight cancer, reduce the incidence of diabetes and promote cardiovascular health.

And while the medical benefits of marijuana opened the doors to legal use in the first place, proving its medical effectiveness is tricky. Gold-standard clinical studies required by the U.S. Food and Drug Administration (FDA) are practically impossible when marijuana is illegal in the eyes of the federal government, though the agency has approved two synthetic THC-based medications and CBD-based Epidiolex.

To identify promising areas of marijuana’s medical potential, the National Academies of Sciences, Engineering, and Medicine conducted a review of 10,000 marijuana-related studies published since 1999. Its 2017 report, “The Health Effects of Cannabis and Cannabinoids: The Current State of Evidence and Recommendations for Research,” found significant statistical evidence that cannabis is effective for treating chronic pain in adults but that it also carries the risk of psychological addiction and other problems. For most other ailments, the study calls for more research.

Meanwhile, recreational access may be affecting the demand for medical marijuana. In California, demand for recreational marijuana is cutting into medical market sales because people don’t need to purchase a medical marijuana card for recreational use, Stewart says. Nationwide, adult-use sales rose from $2.7 billion in 2017 to $6 billion last year while medical use shrank from $5.9 to $4.5 billion, largely due to new recreational-use markets in California and Nevada, Arcview reported.

Growing Pains

Like any emerging industry, the marijuana field faces growing pains. Though fraught with the dangerous risks of criminality, running a company free of taxes, liability, laws and regulations is arguably less complicated.

Legitimate cannabis businesses are also being undercut by those that are not above board, especially in California. “The difficulty of overcoming the well-established illicit market is a major factor that will keep retail sales this year [in California] to a mere $2.5 billion,” the Arcview study reported. The Golden State is unique in that it grows an estimated 70% of illicit cannabis sold in the United States, the report said, and the state’s tax and regulatory burdens are high.

Just getting the marijuana industry away from being cash-based is difficult due to federal laws and guidelines, Stewart says. (See the sidebar “Navigating Federal and State Laws.”) Local banks and credit unions are available, he says, but fees are high and services are limited. Some online marijuana businesses use bitcoin or wire transfers.

Brokers play a critical role in morphing marijuana companies into legitimate businesses, says Kieran O’Rourke, vice president and director of underwriting for Cannasure, a marijuana insurance wholesaler and general agency that has served the cannabis industry for nine years. Part of the brokers’ role is trying to make insurance and risk management as easy to understand as possible. “A lot of [marijuana businesses] have not bought commercial insurance,” O’Rourke says.

The difficulty of overcoming the well-established illicit market is a major factor that will keep retail sales this year (in California) to a mere $2.5 billion.
Arcview Market Research study in partnership with BDS Analytics

What legitimate cannabis enterprises do get is the risk of liability exposure, says Michael Aberle, senior vice president of U.S. and Canadian program development for CannGen Insurance Services, a managing general underwriter. Aberle has been a marijuana commercial business broker for several years.

Liability, Aberle says, has a “chain of custody” that involves any business that has “touched the product.” Labeling issues, misleading statements, the actual product or allegations that the product has caused injury are all potential concerns, he says. “The plaintiff’s bar is training people on how to sue the cannabis industry,” he says, and regardless of a complaint’s legitimacy, marijuana companies in court “are already perceived as a drug dealer in effect.”

Navigating Federal and State Laws

Financial institutions face a quagmire of federal and state laws and regulations that discourage insurers from entering the cannabis market.

For more than 80 years, marijuana has been illegal due to its classification as a Schedule I drug under the Controlled Substances Act. In 2016, during President Barack Obama’s administration, the Drug Enforcement Administration refused a petition to reclassify it as a Schedule II drug, which includes opioids. The reason: the U.S. Department of Health and Human Services concluded marijuana’s risks outweigh its potential benefits.

The Cole Memorandum in 2013 relaxed criminal enforcement in states that legalized marijuana possession and established regulation governing its production, processing and sale, which encouraged more states to allow its use. Although former U.S. attorney general Jeff Sessions rescinded the memo in 2017, most states are continuing to expand legalization. State legalization is not welcome by everyone. The New Jersey legislature is considering a bill to legalize recreational marijuana—in March the state’s lawmakers postponed a vote on the issue when it became clear that it lacked enough support in the Senate—but 60 towns in the Garden State plan to ban sales within their borders.

Meanwhile, other federal laws and policies discourage banks and insurers from serving cannabis businesses. Financial institutions could find themselves held liable for aiding and abetting an unlawful marijuana business or be subject to civil asset forfeiture laws. And businesses also have the Bank Secrecy Act/Anti-Money Laundering Law and the Racketeer Influenced and Corrupt Organizations Act to worry about.

The U.S. Treasury Department’s Financial Crimes Enforcement Network’s guidance is another concern. Scott Sinder, The Council’s chief legal officer and Steptoe & Johnson partner, says although the network intended to give financial institutions a path forward to service marijuana-related businesses, the suspicious activity reports and broader federal prohibitions are enough to discourage banks and insurers from entering the market.

The Internal Revenue Code Section 280E is also a problem because it prohibits businesses “involved with illegal activities from taking tax deductions,” says Ian Stewart, chair of Wilson Elser’s cannabis law practice team.

Congress has been considering ways to reduce or eliminate federal barriers. Several bills, which are either pending or awaiting reintroduction from previous sessions, fall into three general categories, Sinder says. The first, he says, would “legalize banking and offer broader financial services access for the cannabis industry.” The second would protect states that have enacted laws legalizing marijuana from federal prosecution by exempting them from the Controlled Substances Act. The idea, he says, is not to disrupt the overall federal framework but to “find room for states to do what they want.”

The third approach, which Sinder favors, would remove marijuana from the purview of the Controlled Substances Act completely and regulate marijuana in a manner similar to alcohol. The Food and Drug Administration, Sinder says, “would have little regulatory authority, and it would create an excise tax regime,” similar to what it created for cigarettes.

Evolving Coverage

Marijuana business insurance is growing in sophistication but features the hallmarks of emerging coverage: few insurers, underwriting hesitance and policy limitations. Wilson Elser’s Stewart says the marijuana insurance market “began to gel” in early to mid-2016. “Larger retail outfits [that] did not want to touch cannabis a few years ago are now entering the space,” Stewart says.

Brokers that have been specializing in the marijuana industry for years welcome newcomers. “If you need markets, that is what Cannasure does,” O’Rourke says.

Bolton & Company, which began offering coverage in California three years ago, has more than 200 clients today. For the midsize brokerage that specializes in agriculture, manufacturing and retail, the marijuana industry is a good fit, says Corey Tobin, vice president and lead of Bolton’s cannabis practice. “We saw more and more clients one way or another in the business,” Tobin says, such as large property owners leasing buildings for marijuana-related companies.

Although brokerages can be hesitant about entering the cannabis industry due to broker liability issues, Tobin says, Bolton decided it was okay because California regulates the insurance and marijuana industries. The firm now offers coverage in states where it is legal and in Canada through Assurex Global relationships.

Of the thousands of agents and brokers selling commercial marijuana insurance, Aberle says, about 25 to 50 brokerages truly specialize in the cannabis industry. “There are a lot of agencies now that think they need to jump in,” Tobin says. “This is not a get rich quick thing. You really need to know what you are writing to protect the client, as there are a lot of warranties and subjectivities.”

This is not a get rich quick thing. You really need to know what you are writing to protect the client, as there are a lot of warranties and subjectivities.
Corey Tobin, VP, Bolton & Company

Although the brokers are willing, the insurers are few. Currently, about 25 to 30 insurers offer various commercial lines. Nearly all of them are excess and surplus (E&S) carriers. The list includes United Specialty Insurance Company, Kinsale Insurance, James River Insurance Company, Protective Insurance, Knight Insurance Group and Hanover Reinsurance. The advantage of E&S insurers, Stewart says, is they provide the nimbleness necessary in a fluctuating market. Some carriers, including Lloyd’s of London, Markel and XL Catlin, pulled out of the market due to discomfort with federal laws or because former attorney general Jeff Sessions rescinded the Cole Memorandum in 2017. (See sidebar.)

There is also insufficient claims experience to develop actuarially sound rates, O’Rourke says. As a result, insurers willing to offer coverage are hedging their bets through limitations and exclusions. For brokers, that could mean patchworking or layering coverage to meet client needs.

Coverage gaps are one reason that Dave Jones, a former California insurance commissioner, last year started the National Association of Insurance Commissioners’ Cannabis Insurance Working Group. The group is exploring insurance regulatory issues concerning availability and scope of coverage, workers compensation issues, and consumer information and protection.

While commissioner, Jones encouraged brokerages and carriers to cover the cannabis industry. “I want to see admitted carriers, more competition and more consistency,” Jones says. California’s guarantee fund also backs admitted insurers, which protects customers.

Tobin doesn’t see more admitted carriers entering the cannabis industry “until something major happens at a federal level.” For his part, he would like to see more excess carriers but is even more in favor of a “true insurance product [in] quality and name.”

Ethical Considerations

Brokers looking into the marijuana industry are also considering the ethical implications, Sinder says. “Some brokers have a moral opposition to cannabis legalization,” he says, “and hence the dilemma.”

Cannabis is a mixed bag indeed. Studies show it can be beneficial in some circumstances, but dependency carries high societal and economic costs. Researchers estimate that 30% of users may have some degree of marijuana-use disorder, though its physical addiction is debatable.

Some studies indicate the legalization of marijuana is increasing use by teenagers, which can permanently harm their brain development. Among 19- to 28-year-olds, marijuana use rose by 7.2% from 2012 to 2017, according to the National Institute on Drug Abuse’s “Monitoring the Future” report, published last July.

At the workplace, Quest Diagnostics’ Drug Testing Index shows a relationship between marijuana legalization and positive tests for cannabis. Positive blood tests for pot increased 4% in the general workforce from 2016 to 2017. For jobs considered safety sensitive by the federal government, including drivers and nuclear power plant workers, positive testing rose 8% in the same period.

There is also mounting evidence that marijuana legalization threatens road safety. The Insurance Institute for Highway Safety reported last fall that the frequency of collision claims rose a combined 6% following legalization in Colorado, Nevada, Oregon and Washington compared with four neighboring states where recreational use remains illegal. (The report did not specifically link the increase in the collision rate to driver impairment due to marijuana use.)

More than half of marijuana users for chronic pain admit to driving soon after using the drug, according to a survey published in the scientific journal Drug and Alcohol Dependence in January.

The legal cannabis industry’s coming of age will create opportunities for brokers looking to specialize in an exploding market. Although brokers are willing to offer insurance coverage, both the cannabis and insurance industries are experiencing growing pains. Therefore, brokers looking to specialize in the marijuana field require the commitment and adaptability to grow along with it.

Annmarie Geddes Baribeau

Contributing Writer

Read More

More in P&C

Don't Make Dangerous Decisions
P&C Don't Make Dangerous Decisions
Knowing what to look for when developing your internal cyber-security reporting ...
P&C Swiss Re Identifies Large Nat Cat Insurance Gap
While man-made disasters are largely covered, the gap between natural catastroph...
The Impact of “California’s GDPR” from Cyber Insurance Industry Perspective
P&C The Impact of “California’s GDPR” from Cyber Insurance Industry Perspective
We found two key takeaways to help brokers better prepare for the new year.
Silent No More
P&C Silent No More
Cyber claims made under traditional P&C policies that may be silent on the subje...
Warring Factions
P&C Warring Factions
Citing war and terrorism exclusions for cyber claims could g...
Trade Credit Digital Market
P&C Trade Credit Digital Market
Trade credit insurance is seeing growth via an online market...