Cannabis is officially big business. Many are flocking to this fast growing, high risk/high reward industry. The profits to be gained by the cannabis industry are substantial. The Wall Street Journal valued 2018’s legal marijuana sales at $10.2 billion. Even with increased market activity, many insurers are not willing to write cannabis insurance products due to the cannabis industry’s inability to bank, the federal illegality, and the unknown risks associated with insuring cannabis businesses. The lack of insurance for the cannabis industry creates unnecessary risk and exposure for all market participants.
Cannabis is legal for medicinal use in 33 states and in the District of Columbia and for recreational use in 10 states and the District of Columbia. However, cannabis remains illegal under federal law. While a majority of the U.S. population supports legalization of marijuana, it remains a schedule I substance under the Controlled Substances Act. This conflict between state and federal laws on cannabis makes it difficult for cannabis businesses to obtain inclusive, affordable coverage. Rapidly emerging standardization of business practices and evolving regulations have largely discouraged insurers from participating in the market. Due to severe banking restrictions from federal regulations, cannabis businesses are forced to handle large sums of cash, creating a higher risk of theft.
Cannabis is legal for medicinal use in 33 states and in the District of Columbia and for recreational use in 10 states and the District of Columbia.
There are a few admitted insurers issuing policies in the cannabis industry. Most other available insurance products for the cannabis industry are insured through the non-admitted (surplus lines) market. Moving toward an admitted market for cannabis business insurance is a key objective for states that have legalized.
Recently, the National Association of Insurance Commissioners issued a white paper to provide a regulatory guide for understanding the market for cannabis insurance and to provide information to state insurance regulators and insurers about the architecture of the cannabis business supply chain, the types of insurance needed by the cannabis industry, the availability of cannabis business insurance in state insurance markets and the extent of insurance gaps, and the best practices that state insurance regulators can adopt to encourage insurers to write insurance for the cannabis industry.
The primary challenge in engaging admitted insurers in many states to write any coverage type is the requirement of a “lawful purpose.” Because cannabis continues to be illegal under the Controlled Substances Act, the argument is made that there can be no legal contract or insurance policy. Staying up-to-date on federal and state cannabis-related legislation is critical to understanding the industry and its insurance needs to ensure the insurance industry complies with recently passed laws and regulations. There are legislative efforts underway at the federal and state levels to address the conflict between state and federal laws.
The Senate Banking Committee recently scheduled a hearing to consider steps to make it easier for marijuana related businesses to obtain banking services. The Secure and Fair Enforcement (SAFE) Banking Act would enable financial institutions to serve state-authorized marijuana businesses without fear of federal punishment.
On July 23, 2019, U.S. House Judiciary chair Jerrold Nadler and U.S. Senator and presidential hopeful Kamala Harris filed legislation to decriminalize marijuana across the nation by removing from the Controlled Substances Act. The Marijuana Opportunity Reinvestment and Expungement (MORE) Act of 2019 would remove marijuana as a Schedule 1 drug and would tax cannabis sales at 5%. Money generated by the tax would fund small-business loans and other programs that assist the socially and economically disadvantaged.
With new regulations, rising consumer demands and the market landscape constantly changing, the cannabis industry is booming and needs insurance protections. It is hopeful that the proposed policy changes at the federal level will influence the readiness of admitted insurers to write cannabis insurance.
Nicole Graham is a partner in the Philadelphia and New Jersey offices of Freeman Mathis & Gary, LLP. Her practice focuses on the defense of professional liability claims.
Nicole represents individuals and organizations in disputes arising out of the performance of professional services. She defends accountants, lawyers, law firms, real estate brokers, title agents, architects, engineers and other professionals in actions involving claims for malpractice, breach of contract, breach of fiduciary duty, wrongful use of civil proceedings, violations of the Fair Debt Collection Practices Act and Unfair Trade Practices and Consumer Protection Law, and other tort actions. Nicole handles all aspects of litigation from the inception of the claim through trial and has successfully first chaired jury trials earning her reputation and as a compelling advocate.
In addition, Nicole counsels clients in prevention techniques for avoiding litigation and other risk exposures. She also defends all types of homeowners association claims, including board of governance disputes, directors and officers cases, construction defects and eviction proceedings.
Attorney Graham can be reached at 267-761-9310 or ngraham@fmglaw.com.
The Landy Agency is a national leader in providing non-medical, professional liability and cybercrime insurance for accountants, attorneys, and real estate professionals. John can be reached at 781‐292‐5417 or johnt@landy.com. Visit www.landy.com for more information.
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