The cannabis industry is growing at a compound annual rate of 25.3 percent in 2023. By 2030, the global market should reach $134.4 billion—up from $17.8 billion in 2021.
As the United States industry continues to expand, business leaders seeking protection for their assets are examining new insurance strategies that cover the unique business needs of companies in a fast-moving sector. Fortunately, both the public and private sectors are clearing a regulatory and financial path for more accessible and robust business-insurance options.
“As the cannabis industry continues to grow and enter the mainstream—with recreational, adult-use marijuana now legal in nearly half of all U.S. states—we expect to see some significant changes impacting the industry in 2023,” said Eric Rahn, managing director at Florida-based S2S Insurance Specialists. “The industry outlook remains positive, but we are seeing several important trends that will impact the insurance coverage cannabis businesses need to ensure they are fully protected against the top risks they could face in the imminent future.”
According to Rahn, those trends include a rise in litigation spanning “all sectors,” especially with investor suits, trademark violation claims, employment practices, and contract disputes.
“In addition, the cannabis industry should brace itself for a surge in product-liability lawsuits and consumer class actions in 2023 as the market matures and new studies emerge on the health and safety of high-THC products,” he said.
But those aren’t the only areas of concern.
“The industry faces a number of unique risks,” according to Gerard Lee, a senior intelligence analyst at European American Supplement Sciences (EURASC), a Brooklyn-based company providing analysis and reviews in the health-and-wellness space. “In 2023, cannabis businesses are looking for insurance that can protect them from a variety of risks, including theft, cybercrime, weather-related damage, and workplace injuries.”
States also are becoming more aggressive about making insurance a mandate, not a choice.
“The expansion of the industry has resulted in substantial growth in the cannabis insurance business, largely due to state regulations requiring businesses to obtain insurance in order to comply with licensing requirements,” said Lauren Ybarra, a cannabis insurance specialist at McGlinchey Stafford. “This also means insurance products available to businesses are increasingly sophisticated, full-service products offering vast coverage for a wide range of business activities.”
Areas of concern
As in most other emerging industries, cannabis businesses need insurance to attract investors, who provide the financing that enables companies to grow. Also like in most other nascent industries, business insurance takes a big bite out of a young company’s budget. The scenario leaves entrepreneurs with two choices, neither of them all that positive. They can pay up for needed insurance, which may require more funding, or they can skip the insurance and hope the company won’t suffer any negative consequences.
Fortunately, there is some middle ground as the sector matures, with three key supporting factors in play.
Two bills winding their way through Congress—the Secure and Fair Enforcement (SAFE) Banking Act and the Clarifying Law Around Insurance of Marijuana (CLAIM) Act—could reshape the insurance landscape. Combined, the two bills make it easier for banks and insurance companies to do business with and lend support to the cannabis sector. Currently, financial institutions risk compliance issues by servicing cannabis accounts, especially because the federal government outlaws the sale and use of marijuana.
If the legislation passes this summer as some expect, cannabis firms will be able to obtain the business insurance they need more easily and at a more equitable price point.
Regardless of federal statutes, states are leaning into the cannabis amnesty trend. Early adopters like California, Colorado, and Washington are making it much easier for cannabis companies to work more closely with banks and insurance companies without fear of running afoul of federal narcotics laws, local regulations, or compliance mandates.
Because governments are making it easier for companies to land good policies, more insurers are expanding their cannabis business insurance services. As the sector stabilizes, insurance companies can conduct better risk assessments, set fairer rates, and provide more coverage options. Insurers also are beginning to offer specialized policies for various channels within the industry, such as dispensaries, distributors, medical product providers, and hemp producers, among others. In doing so, insurers provide policies that meet companies’ specific and unique business needs.
“It’s becoming clear the cannabis industry continues to face unique challenges and risks related to legal and regulatory issues, product liability, and property damage,” said Jon Morgan, chief executive officer at Venture Smarter, a consulting firm in Washington D.C. “These issues are particularly relevant as more states legalize medical and recreational use.
“It’s important for businesses to work with insurers that understand the unique risks and challenges of the industry and can provide tailored coverage,” he added.
More coverage options
With access to insurers opening up, businesses are looking for a range of insurance coverage in 2023, including general liability, product liability, property damage, and crop insurance.
“Insurance companies specializing in cannabis coverage offer policies that cover the unique risks associated with the industry, such as theft, fire, and other forms of property damage,” Morgan said. “Additionally, some insurers also offer coverage for regulatory violations and product recalls, which can be critical for cannabis businesses.”
For growing companies, the trick is matching the type of insurance coverage they need with their biggest areas of risk. “Currently, the biggest risk issues vary depending on the nature of the business and its operations,” Morgan said. “For example, cybersecurity and traditional theft are significant concerns, as are weather-related or crop-failure issues, workplace injuries, and bodily injuries and property damage accidentally caused to others.”
As far as the biggest policy needs, Morgan pointed to general liability, product liability, property damage, and crop insurance. “In addition, it’s important for cannabis businesses to have cybersecurity protocols in place to protect against cyber threats,” he said.
Insurance carriers also will have to do some heavy lifting to get on the same page as cannabis companies. “Basic insurance for cannabis businesses, like a business-operations policy, is becoming fairly easy to acquire as long as the company is well-run,” said Justin Kahn, CEO and co-founder of Reepher, one of the first companies to offer behavior-based cannabis insurance coverage. “However, it’s still difficult to attain coverages like directors and officers (D&O) and errors and omissions (E&O), especially if the business is plant-touching.”
Having gaps in coverage leaves an exposure risk. This is a solvable issue that needs to be addressed by the carriers in the space, Kahn said. “Federal prohibition of cannabis is the biggest driver of these issues, and until there is more movement at the federal level, these coverage issues likely will remain,” he said.
4 tips for landing the best deal
With the floodgates opening and more insurers entering the cannabis market (about thirty U.S. insurance companies offer coverage, up from five or six only a few years ago), it’s up to industry players to do their homework. Take these tips to the table when you sit down to purchase business insurance.
- Work with a broker or agent who knows your company, market, and unique needs. When interviewing brokers and agents, ask what coverages they can offer and where they see coverage gaps. “Ask what we can do to fill those gaps,” said Justin Kahn of Reepher. “Also, make sure you have a thorough understanding of the coverage—what is included and what is excluded—before you sign anything.”
- Specialize when necessary. “One insurance broker or agent may not be able to meet all your needs,” Kahn said. “You may need to seek out specialty coverages directly to make sure your business has the most comprehensive coverage possible.”
- Don’t just accept what an insurance company recommends. “Ask questions and keep asking them,” Kahn advised. “Insurance is something that needs to be adjusted at least once a year. Establish a good relationship with your broker or agent and be in communication with them regularly.”
- Focus on claims. Preferably, find a broker who has experience in placing a policy with an insurer that has had to pay a claim for a cannabis policyholder. “This will ensure the broker and insurer understand how the claim was assessed and ultimately paid or denied,” said Lauren Ybarra at McGlinchey Stafford. “This information can be passed on to the cannabis business to assist it in making a decision regarding obtaining useful insurance.
“The experience of paying a claim is a great way to comprehend how your business will be treated when and if an issue arises and you need coverage, especially if a claim ever needs to be paid under the policy,” she added.
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