Let’s be clear: The United States is no longer dealing with the hypothetical possibility of a thriving cannabis industry. It already has one. For more than a decade states across the country have been reforming marijuana laws and perceptions, opening the economic floodgates for a legal cannabis industry that now wields undeniable financial clout. According to Fortune, the United States’ legal marijuana industry grew to $10.4 billion in 2018—up from $6.5 billion in 2016—and employed more than 250,000 people. What’s more, Fortune estimates investors will “funnel more than $16 billion into the industry” in 2019.
It’s easy to see why projections are so bullish. To date, thirty-three states and the District of Columbia have legalized medical marijuana, and ten states—Alaska, California, Colorado, Massachusetts, Maine, Michigan, Nevada, Oregon, Vermont, and Washington—plus the District of Columbia have legalized the use of recreational marijuana for adults 21 and older. What’s more, the Illinois legislature recently approved recreational use, and New York and Connecticut are poised to pass legislation this year. Movements to get a legalization initiative on the ballot in 2020 are underway in Arizona, New Jersey, and Ohio.
Despite all the positive momentum, cannabis-related businesses (CRBs) face a substantial problem in their effort to function as legitimate retail operations: insurance. Insurers remain extremely reluctant to write policies aimed at protecting CRBs from all manner of financial losses, including fire, theft, vandalism, and product liability.
This means the cannabis industry, on the whole, operates without a financial safety net, with many of the big-name insurers explicitly steering clear of providing insurance to CRBs, including Allianz SE, Nationwide Mutual Insurance Co., and Hartford Financial Services Group Inc. “We do not underwrite any business that sells, grows, transports, or distributes marijuana or products derived from marijuana cannabinoids,” Hartford said in an official statement in late 2018.
To be sure, a handful of niche carriers and subsidiaries have begun filling the gap. For instance, Brown & Brown Insurance now offers marijuana business coverage through a new division called Cannabis Insurance Professionals (CIP), which is based in California and licensed in all fifty states. CIP garnered national headlines last year after the company paid more than $1 million to one of its clients whose marijuana crop was destroyed in the 2018 Thomas wildfire.
Nonetheless, finding substantive and affordable insurance remains a significant problem for CRB entrepreneurs.
“There are small, private insurers trying to fill the gap, but not many. And most of these companies are non-admitted, coverage is limited, and the price is expensive,” said Dawna Capps Evans, executive director of the National Cannabis Risk Management Association (NCRMA), a membership-based trade organization that provides risk management and insurance solutions for CRB owners and investors. According to Evans, the current insurance landscape leaves business owners with tough choices.
“They can either purchase very costly insurance, they can go uninsured or under-insured—which leaves assets unprotected and exposes them from a personal liability perspective—or they have to piecemeal a plan together from many different insurers, which can be extremely time-consuming,” said Evans. “Today, whatever the solution is, it’s not an easy one.”
Legal disparities
According to industry experts and analysts, the CRB insurance quandary comprises several influencing factors, the most obvious being the conflict between states that have legalized cannabis and current federal law, which still considers marijuana illegal under the Controlled Substances Act (CSA) and classifies it as a Schedule I drug with “no currently accepted medical use in treatment in the United States.” According to attorney Meghana Shah, partner at Eversheds Sutherland LLP and co-founder of the firm’s cannabis industry team, this conflict could expose marijuana businesses and their ancillary service providers (such as insurers) to federal criminal liability.
“Business owners and insurers alike remain concerned about the risks associated with doing business in the cannabis industry,” said Shah. “For cannabis-related businesses, the inability to secure insurance denies them a vital service, rendering them unable to protect themselves against common business risks, some of which have the potential to irreversibly cripple their business.”
Some attempt has been made to ease concerns about this legal disparity. As states legalized marijuana to varying degrees over the past ten years, the U.S. Department of Justice issued a series of non-binding guidance memoranda, the most recent of which indicated the DOJ would not enforce federal marijuana prohibition with respect to legitimately operating, state-licensed marijuana businesses unless they operated in a way that undermined established federal priorities, such as selling to minors or across state lines.
While not having the force of law, the guidance provided stakeholders—including cannabis businesses and ancillary services like insurance companies—some degree of comfort about their protection from federal prosecution. And while the guidance was rescinded by former Attorney General Jeff Sessions in January 2018, current Attorney General William Barr emphasized during his confirmation hearing he would not “upset settled expectations” arising from prior reliance on DOJ guidance.
Nonetheless, insurance providers remain hesitant to get into the cannabis industry, not only for fear of federal reprisal, but also because the disparity between state and federal law can wreak havoc on the enforcement of contracts between an insurer and its clients, according to attorney Richard Blau. Blau is a shareholder at GrayRobinson and heads the firm’s medical marijuana team, which focuses on the rules and regulations governing medical marijuana and related cannabis products. To emphasize his point, Blau cited a now-infamous 2012 Hawaii federal court ruling that said a homeowners’ insurance policy did not cover the theft of one woman’s marijuana plants grown for medicinal use.
The homeowner, Barbara Tracy, was allowed to grow and possess marijuana for personal use, and after twelve plants were stolen, she submitted a claim to USAA for $45,600. USAA initially agreed to pay Tracy $8,801 for the claim, but Tracy sued, claiming the plants had a far greater value. USAA argued that because marijuana is federally classified as an illegal Schedule I substance, they were under no obligation to cover the loss at all. The court ultimately agreed with USAA, stating even though Hawaii law permits the use of marijuana for medicinal purposes, it is illegal under the Controlled Substances Act and therefore not subject to homeowners’ insurance coverage.
“So, on the one hand, you have a lot of insurance companies that operate in many different states, which means they arguably fall under federal jurisdiction. They’re worried their charters could be challenged under federal law if they write policies for CRBs,” said Blau. “But you also have what I think is the larger issue of judicial precedence that says insurance contracts are not enforceable under federal law.
“The good news is courts are beginning to recognize we’re not living in the world of Reefer Madness anymore, and we now have an alternative line of cases where judges have ruled that as long as the claimant stayed within the scope of state law the insurance contract is valid and enforceable. But the split of judicial opinion needs to be reconciled, and the only way that’s going to happen is if marijuana is withdrawn from its Schedule I classification.”
Cash = risk
Adjacent to this concern is the limited access CRBs have to the banking system. Consider, for instance, that in 2014 Colorado’s Fourth Corner Credit Union was chartered to serve the “unique financial needs” of cannabis-related businesses. But despite operating within the boundaries of Colorado’s legalized marijuana framework, the application for a master account from the U.S. Federal Reserve System was denied because of marijuana’s continued illegality at the federal level. This is just one example of how the disparity between state and federal law have forced the legal cannabis industry to operate within a cash-intensive “gray market,” bringing with it all manner of concerns, including theft, the risks of currency transportation, money laundering, and cash hoarding.
“The lack of banking options is a unique and significant risk for the cannabis industry right now, because so much of this economy is being fueled by large, cash-based operations, and that leads to significant exposure,” said Evans. “Banking and financial institutions play a critical role in our economy, and most businesses take for granted the way they use these institutions in a secure way. Without access to safe banking in the cannabis industry, insurers are going to be very reluctant to get on board.”
To address this particular problem, the House Financial Services Committee voted 45-15 in March to advance the Secure and Fair Enforcement (SAFE) Banking Act, making it the first piece of major federal cannabis reform legislation to emerge from a key congressional committee. The bipartisan legislation aims to protect banks and other financial institutions from federal prosecution when working with cannabis-related businesses operating in compliance with state laws. What’s more, the act would prohibit federal banking regulators from sanctioning financial institutions that work with CRBs and also would protect ancillary businesses—like insurance companies—from being charged with money laundering or related financial crimes.
While the SAFE Banking Act still faces an uphill battle—particularly as Idaho Sen. Mike Crapo, the Republican chairman of the Senate Banking Committee, said in late April that he would not commit his committee to considering the legislation—many in the industry are extremely optimistic about what the bill foreshadows.
“Yes, politics is going to play a role in this, but I’m not worried because there is just too much future money to be made,” said Jeff Kleid, owner of the California-based Elite Green Insurance Solutions, which provides a suite of insurance products to the cannabis and hemp industries. “There’s no way in hell companies like Bank of America or Chase are going to let billions of dollars not go into their banks. Maybe it’s going to take a few more months, maybe until the end of the year, but I have no doubt the SAFE Act will help banks establish rules in each state and the industry will continue to flourish.”
His steadfast optimism aside, Kleid is quick to point out insurance problems facing the U.S. cannabis industry include factors beyond banking and disparities between state and federal marijuana laws. For instance, because of the industry’s history of prohibition there’s a significant dearth of claims and risk data essential to underwriting any insurance product. Furthermore, because legal cannabis is such a relatively new business enterprise, Kleid said the insurance industry currently lacks nuanced, on-the-ground knowledge of the industry’s peculiarities and the needs of the communities that compose it. Still, Kleid sees an ultimately vibrant future for the insurance of CRBs.
“This whole landscape is evolving and changing literally day by day,” he said. “But I predict that a year from now you’re going to see three or four times the number of insurance companies occupying this space. And many of them will already be late to the game.”
