The U.S. market for legal cannabis exceeded $10 billion in 2018 and is expected to see a compound annual growth rate of more than 28 percent. According to BDS Analytics, the market could surpass $23 billion and create nearly half a million full-time-equivalent jobs by 2022. Statista reports that 20,000 to 28,000 cannabis businesses were in operation in 2017, including growers, retailers and dispensaries, distributors, and testing labs.
Like any business, these entities need insurance coverage for a wide range of risks, from property damage to automobile accidents to slip-and-fall injuries. Most organizations need commercial general liability and property liability coverage. Those that manufacture or sell goods will also need product liability insurance.
However, cannabis-related businesses also have other insurance needs:
- Growers should have coverage for living plants; the recent wildfires that devastated California’s cannabis crops are a testament to this risk.
- Cannabis businesses may also need commercial auto coverage for vehicles.
- These businesses may also need directors and officers insurance, which protects owners from liability related to claims of misrepresentation or other deceptive business practices.
- Dispensaries that maintain patient data may need cyber insurance in the event of a data breach.
Until recently, only surplus lines insurance was available to cannabis businesses. Surplus lines insurers are not admitted, or licensed, by state insurance agencies, and provide coverage for risks that admitted carriers won’t touch. Lloyd’s of London is a famous example, although even Lloyd’s won’t cover cannabis businesses in the U.S.
Surplus lines insurance is not a good long-term solution for the industry because it’s expensive and unregulated. As a result, many cannabis businesses do not obtain insurance at all, leaving them exposed to losses as well as potential legal and regulatory risks.
As State Marijuana Laws Change, Marijuana Businesses Become More Insurable
In November 2016, California voters passed the Control, Regulate, and Tax Adult Use of Marijuana Act, better known as Proposition 64, legalizing recreational use of cannabis by individuals age 21 or over. Proposition 64 added Section 26070 of the Business and Professions Code, establishing processes for licensing cannabis retailers and distributors and ensuring security and transportation safety in the commercial distribution of cannabis products. The law required the state to begin accepting applications for cannabis business licenses as of January 1, 2018.
California is 1 of 10 states and the District of Columbia that have legalized marijuana for both medical and recreational use. Another 23 states have legalized medical use, and 14 allow medical use of products that have limited amounts of THC, the psychoactive component of cannabis. Only three states—Idaho, Nebraska, and South Dakota—prohibit any use of marijuana as of this publication date.
Marijuana remains illegal at the federal level under the Controlled Substances Act of 1970, 21 U.S.C. 13, creating significant challenges for the budding legal cannabis industry. For example, many financial institutions refuse to work with marijuana-related businesses, forcing them to operate on a cash basis because they are unable to accept credit cards. This makes them an even greater target for criminal activity.
If they do suffer losses, cannabis businesses might not be able to turn to insurance to offset some of the costs. According to a March 2019 report by AM Best Company, only about 25 carriers offer marijuana-related coverage. Furthermore, the policies aren’t always affordable and don’t adequately address the risks faced by the cannabis industry.
Types of Insurance for Dispensaries, Growers
The market is slowly changing, however. In November 2017, California approved the first insurance company to cover the state’s marijuana industry. Golden Bear Insurance now offers policies covering general liability, products liability, property damage, and crime to licensed cannabis businesses operating within the state. Because it’s an admitted insurer, Golden Bear is backed by the California Insurance Guarantee Association.
Other commercial carriers include NFP, which offers coverage for producers, processors, and retailers in Alaska, Colorado, Illinois, and Oregon, and Continental Heritage, whose cannabis products liability and recall insurance was approved by the California Department of Insurance in May 2018. So-called “pure play” insurers include Cannasure and New Growth, which offer a wide range of policies exclusively to the cannabis industry in multiple states.
Additional insurers will undoubtedly enter the market and coverage with higher limits should become available. Currently, most products liability, property liability, and commercial general liability policies have limits of $1 million per occurrence and $2 million aggregate, which are generally inadequate for cannabis businesses. However, carriers are finding it difficult to obtain reinsurance for cannabis policies and maintain low limits to mitigate their risk.
David Jones, California’s insurance commissioner, actively pushed for commercial carriers to enter the cannabis market. Like other states that have legalized recreational use, California is looking to shift marijuana from an illegal market to one that can be regulated—and taxed. The success of these initiatives will depend in part on the availability of business services that other industries take for granted. Insurance may be prosaic, but it’s essential to the success of the cannabis market.
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