While some cannabis operations were deemed essential businesses during the COVID-19 lockdown, similar operations a few miles away across a state line were forced to close. Nothing highlights the inconsistencies between state and federal cannabis law more.
But things are about to change.
In March, the Secure and Fair Enforcement (SAFE) Banking Act and the related Clarifying Law Around Insurance of Marijuana (CLAIM) Act were reintroduced in Congress. If passed, the duo will provide a safe harbor for financial institutions and insurance companies seeking to serve cannabis businesses without the threat of federal penalties.
As it stands, few insurance carriers are willing to write policies, and financial institutions rarely lend capital or secure the earnings of cannabis businesses because their operations are not federally legal. Cannabis businesses have been viewed as too risky by many; organizations worry they might harm their reputation, or they are unable to move into the space due to agreements with their insurers or reinsurers.
If passed, the SAFE and CLAIM acts will breathe new life into an already burgeoning $20-billion industry, bringing legitimacy to distributors, retail outlets, extraction operations, and the multitude of ancillary service providers that support cannabis businesses.
First introduced in 2019, the SAFE Act has gained bipartisan support and recently was endorsed by multiple industry organizations. Passage in the Senate looks promising.
The act will protect financial institutions that offer banking services to cannabis businesses and account holders affiliated with cannabis businesses. The law also will protect lenders who work with people and entities associated with plant-touching and ancillary businesses. If SAFE passes, new federal guidance will follow about how financial institutions can work with cannabis businesses within United States law.
The CLAIM Act, also first introduced in 2019, would open the insurance market and drive more underwriters to write cannabis insurance policies. More competition means greater capacity and lower premiums for all. The act could have a significant impact on hard-to-source policies like directors-and-officers (D&O) insurance, cyber coverage, errors-and-omissions (E&O), and other management liability products to which cannabis businesses have had extremely limited access.
In today’s difficult insurance market, cannabis could prove to be a new revenue source for insurance companies bogged down by costly catastrophic weather events and nuclear verdicts of the past few years.
The CLAIM Act will:
•Protect insurance companies that provide coverage to state-sanctioned and -regulated cannabis businesses or associated businesses.
•Prohibit the federal government from terminating policies, encouraging insurers not to engage in the business of insurance, or taking corrective supervisory action on policies issued to cannabis businesses or cannabis-related businesses.
•Protect insurers’ employees from liability due to backing cannabis businesses or cannabis related businesses.Because the industry is growing so rapidly, it’s easy for cannabis businesses to view risk-management and insurance safeguards as an afterthought. Don’t fall into this trap. Treat your business as you would any other venture when building from the ground up. Start with protection—both safeguards available for purchase (insurance) and those based on your operations (risk management).
Keep these precepts in mind:
Employ risk management proactively. During routine COVID-19 inspections in 2020, state officials found a host of other issues at cannabis operations, from incorrect labeling to poor safety and health practices, lack of personal protective equipment compliance by staff and customers, incorrect cash counting, and more. In some cases, inspections resulted in regulatory fines and shutdowns. Engage risk-management best practices at all times to maintain cannabis compliance. Cannabis operations risk losing their licenses for even small infractions. Know cannabis licenses are location-specific and don’t allow owners to set up shop elsewhere.
Build out the right insurance coverage. The right liability policies are critical to sustaining all business operations—even more so in the cannabis industry, as companies face greater risk. Extraction risk, theft, and the large amounts of cash cannabis businesses deal with can make traditional property policies more costly, while rapid growth has made D&O and employment practices liability (EPL) claims common. Consequently, these policies are difficult to come by. Cyber risk is also a rising concern for cannabis organizations.
Leverage industry experts for both safeguards. Unlike construction or real estate, insurance policies for cannabis businesses are not one-size-fits-all form policies. Instead, because cannabis remains federally illegal, each policy is written and negotiated individually. That means language nuances and exclusions are easy to miss. For this reason, it’s a lot easier to purchase any policy that will “check off” the insurance box than to source a policy that actually will cover what it should.
Cannabis risk management also is not like risk management in other industries. Without the research-and-development knowledge to build a safe extraction operation or the understanding of local cannabis laws when it comes to building a supply chain, the risks are great. Engage industry experts in both risk management and insurance to avoid major liability potholes.
Jay Virdi is chief sales officer for Hub International’s cannabis insurance and risk services in the United States and Canada. He focuses on developing Hub’s expertise and resources to serve the cannabis industry across the two countries. Hub comprises a network of risk, insurance, employee benefits, retirement, and wealth management specialists.