Since states began regulating cannabis for medical and recreational use, more demand has been placed on insurance companies to create or adjust the language in their products, both for commercial and individual needs. Though the insurance industry has been slow to respond, it would be a mistake to assume that nothing had been done. In fact, insurance companies have been more accommodating than banks when it comes to cannabis businesses, in spite of federal prohibition.
A large part of the business model used by insurance companies involves assuming risk. A sustainable business plan involves bringing in more revenue from premiums than it spends on conditional payments. By combining internal and external data, underwriters decide the likelihood a prospective buyer is to trigger conditional payment for the purpose of pricing products. Economic forecasting, wages, industry trends and market stability are all factors when considering the risk of a policy.
The insurance sector has been slow to respond to emerging marijuana markets, essentially because there is very little hard data an underwriter would normally rely on to assess risk. The industry is just too new. Verified hard research data is not available, though the information is being collected, and has been since states began to regulate cannabis.
However, this lack of hard data has not stopped progress as insurance products are now available in select states for cannabis growers on a commercial level. Policies are now being written to protect crops from theft and damage. Automobile policies have adopted language protecting delivery drivers from product theft, and liability policies are now on the market in case consumers fall ill or sustain loss of life. Liability insurance assumes the most risk because should consumers become ill from the product, insurance companies are not only contractually bound to pay out claims, but also to defend the company in court.
In the 2017 case of Richard Kirk and Colorado-based company Gaia’s Garden, insurer United Specialty petitioned to be absolved of its obligations to indemnify the company’s losses after Kirk testified that partial consumption of a cannabis-infused candy, Karma Kandy Orange Ginger, caused temporary insanity, the reason he gave for killing his wife Kristine. The insurer cited a clause in the policy excluding risk from psychotropic substances, including cannabis and cannabinoids, as one of several reasons to deny claim payout, according to Courthouse News. In the case of product liability, hard data is unavailable and payout depends greatly on the language of the policy. Legal review of policies is recommended to ensure full coverage.
While specific homeowner policy products are not yet available for at-home growers, several medical marijuana patients have recently tested the limitations of their homeowner policy to include protection for cannabis plants cultivated in the home. In the case of Tracy v. USAA (2012, HI), the insurer denied a claim payout to the patient when their home and plants were destroyed by a house fire. The patient had been allowed to possess and grow cannabis under Hawaiian state law, but ultimately the court sided with the insurer due to the placement of cannabis on the Drug Enforcement Administration’s Schedule I, which classifies the plant as a harmful drug with no medicinal value. A change in cannabis’s placement in the DEA’s Diversion Control Division by the Food and Drug Administration, or a repeal of federal prohibition working with state voter-approved regulation initiatives, would remove the ability for insurers to deny coverage based on the illegality of the substance at the federal level.
Insurance underwriters have many other issues when it comes to homeowner coverage of cannabis. Most homeowner policies have a “trees, shrubs and other plants” clause offering an average payout of $500 per plant. However, cannabis is considered a “growing crop,” as the value of the plant is determined by the final product. Most plants average 2lbs of dry flower, valued at approximately $3,000, and there is an assumption that medical marijuana patients are not selling the product for profit. If they were, the plants would not be eligible for coverage in an individual residential policy.
It will take time for insurance companies to create and amend policy to fully accommodate the needs of fast-emerging cannabis markets, but they are working with businesses and individuals to bridge the coverage gap. Most conflicts come down to policy language, so thorough analyzation and legal consultation is recommended to ensure full coverage.
Michael Aberle, senior vice president of US and Canadian program development and education at CannGen Insurance Services, has for more than a decade worked with cannabis businesses to get the best coverage possible. He’s seen the policy changes firsthand, as more products have been made available to commercial growers.
“The need for policyholders and their legal team to read each of the standard policy forms is more relevant today than in the past, with carriers offering insurance to cannabis, hemp and CBD business owners, with little clarity as to what is covered,” he says. “I tell business owners that all carriers offering insurance to the cannabis industry are offering coverage for product liability suits arising from your cannabis operation.
“Carriers are very clear in their intent and all policy forms are standardized and very easy to understand,” Aberle continues. “In a perfect world, all insurance brokers selling insurance to the cannabis industry would understand each of the policy forms and be able to explain each of them to the policyholders. But that is just not the case.”
Clear language is not available in all policy coverage. Many business owners thought they were covered, then found a loophole in the coverage that allowed the insurer to deny claims.
“I cannot stress it enough that the business owners and their legal team need to review each of the forms and know how it applies to that insurer’s operations, and always make sure you ask a question in writing, with an answer from the insurance carrier and broker back in writing,” elaborates Aberle.
The lack of hard data has not stopped progress as products are now available in select states for commercial cannabis growers. Indeed, commercial insurance products have expanded to include:
- Living plant material defined as seeds, cannabis is the vegetative state and clones.
- Harvested plant material defined as mature material not growing but in the process of drying or curing.
- Finished stock defined as processed material ready for sale.
Policies generally provide protection from theft, fire, lightning, explosions, hail/wind storms, smoke, and water damage from plumbing discharge. New policies being offered for growers, processors, transporters and retail establishments include the following:
- Cargo, including property, monies and securities in transport ($500,000 in long-haul coverage).
- Auto policies have actual language in the policy for delivery service and now cover product being delivered.
- Third-party care, custody and control for products in the possession of a third-party carrier.
- Product recall (i.e., product that doesn’t pass tests for pesticides or molds).
- Delivery under auto insurance policies.
Looking forward, Aberle sees a lot of changes for the better in the relationship between cannabis businesses and insurance companies, while acknowledging there is still a long way to go.
“I believe the cannabis industry has learned a lot over the years about insurance and what to look for,” he says. “With a black cloud of bad faith and fire claims looming over the insurance industry, to forms that exclude cannabis products and its derivatives, I wish I could say the insurance industry has grown from the early days, but that again is just not the case. I have seen the insurance industry offer the same coverage for many years with no changes to their offerings. But in recent years, a few carriers are starting to offer coverages outside of just the basic general liability. My hope is for insurance carriers to start looking to offer beyond just your basic general liability and property [coverage].”
Recently, CannGen Insurance has finalized yet-to-be-released coverage plans for outdoor crops. “This is a much-anticipated coverage and we are proud to be the first to offer this coverage to cannabis cultivators after what happened in recent years to growers and business affected by fires,” explains Aberle. “This coverage is intended for cannabis cultivators who are growing outdoors. This will include none-approved hoop houses and greenhouses. I believe the coverage forms and underwriting that was developed will become the standard and staple for the insurance industry.”
Regardless of the many changes to cannabis insurance coverage, there is still a long way to go to cover all businesses within the space. While insurance is not yet available in all states with implemented cannabis regulation, it is expanding nonetheless. Cannabis businesses still need better product liability and product/equipment coverage, as well as key-person life insurance, but the future looks bright. The more businesses with coverage, the more risk data collected, the more comfortable insurance companies are to expand coverage to the cannabis industry.
