Instead, carriers are exiting the market, premium costs are increasing, and claims are being denied.
Despite bellwethers Lloyd’s of London and Mutual of Omaha’s negative stance, favorable opinions such as Green Earth Wellness Center v. Atain Specialty Insurance, 13-CV-03452 (D. Colo. Feb. 17), and options like captive insurance suggest that robust and accessible coverage is on the horizon.
Cannabis Industry Insurance Demand and Supply
Like other agribusinesses, cannabis grow, processors and sellers’ insurance needs include life and health, property (farm, dwelling and homeowners), casualty, cargo, equipment breakdown, automobile, business owner, commercial, general liability, business interruption and workers’ compensation coverage.
However, because of industry-specific risk factors such as theft (cash-only businesses carrying high value inventory), security, regulated waste disposal, and neighbor complaints, marijuana-related businesses have additional needs including theft coverage for valuable crops, professional liability coverages for prescribing doctors, and products liability policies for product growers and processors.
Further, because marijuana is a “data-driven” industry, cyberliability and electronic data policies are critical for patient-personal-information-storing dispensaries in the event of a client database breach or theft.
Canna Insurance Overview
Despite cannabis businesses’ overwhelming need and paying of above-market rates for common insurance products, in mid-2015, Lloyd’s of London exited the industry vowing to only return if the U.S. government legalized marijuana.
With the federal government declaring it illegal, but 26 states and the District of Columbia having legal marijuana programs, confusion exists over which law prevails and whether insurance agreements are enforceable.
The Controlled Substance Act, 21 U.S.C. Sections 801, (1970), prohibits marijuana’s “manufacture, distribution, and dispensation” and lists marijuana as a “Schedule I controlled substance” which, pursuant to the U.S. Constitution’s Supremacy Clause, pre-empts and voids conflicting state law.
However, the McCarran–Ferguson Act,15 U.S.C. Sections 1011-1015 (2005), leaves regulation of insurance up to individual states and guarantees freedom from federal interference as long as states regulate insurance transaction. (“State law shall govern the regulation of insurance and that no act of Congress shall invalidate any state law unless the federal law specifically relates to insurance.”).
Exclusions, Coverage Denial and Green Earth Decision
While other carriers are emerging and assuming insurance policies that Lloyd’s abandoned, it is unclear whether an anticipated high number of claims or feared revenue losses will doom these insurers or adversely affect policies’ underwriting and enforcement.
“Property claims” are the most commonly made particularly for theft of product and money. Concerns exist that a greater than usual portion of these claims have turned out to be fraudulent or involved employees colluding with thieves. Other property claims include damage to businesses by competing companies, such as theft and arson.
Liability claims have also been made ranging from “product recall” of flower, edibles and oils to slip-and-falls. Products liability claims are on the rise, often stemming from pesticide usage during the growing process.
On the other end, plant touching marijuana-business policy holders are often frustrated both by policy “exclusions” and claim denial. For example, because the standard insurance services office (ISO) business owners form excludes coverage for any “contraband,” while marijuana remains federally illegal, no coverage for damage, loss, or destruction of live plants or harvested matter may exist. Similarly, while the ISO homeowner or dwelling property policies does not explicitly exclude “damage or destruction of contraband,” the “$1,500 off-premises and $2,500 on-premises business personal property limitations” limits being made whole on “large quantities of legally grown and possessed marijuana” losses. Additionally, because the farm property coverage form and homeowners’ Section I, Subsection E, Additional Coverages limit scope to $500 of live outdoor plants, it’s unclear if indoor or harvested marijuana are covered.
Moreover, some carriers simply refuse to provide coverage to marijuana-related businesses or their employees. For example, in refusing to provide life insurance to state-licensed cannabis business Terra Tech’s employees, Mutual of Omaha’s June 13, 2016, letter proclaimed it “cannot accept premiums from individuals or entities who are associated with the marijuana industry.”
However, in the Green Earth Wellness Center v. Atain Specialty Insurance decision, the U.S. District Court for the District of Colorado provided clarity regarding insurance policy coverage and enforceability despite federal prohibition.
Specifically, although the insurance application disclosed that it was a state and locally licensed medical marijuana center and grow facility, Green Earth Wellness Center had to sue Atain Specialty Insurance Co. for commercial property and general liability insurance policy benefits. In granting its policy interpretation summary judgment motion, the court ruled that Green Earth’s “fire and theft caused marijuana crop and equipment damage” claim was not barred under the policy’s “contraband” exclusion nor federal illegality. After examining the parties’ mutual intentions in agreeing to the policy and Atain’s Medical Marijuana Dispensary Supplemental Application’s numerous marijuana inventory questions, the court ruled that, before issuing the policy, Atain knew that Green Earth operated a medical marijuana dispensary that is not voided by federal law’s “nominal” prohibition.
Captive Insurance and Tips On Obtaining Canna Coverage
Despite Green Earth Wellness Center‘s encouraging ruling, insurers are increasingly scrutinizing cannabis operations with an eye toward charging higher premiums, limiting coverage and denying claims.
In purchasing and renewing commercial marketplace insurance, the best strategy is anticipating and complying with the carriers’ underwriting guidelines. For example, in applying for insurance, prepare for credit checks and criminal background checks for business owners, operators and employees (particularly if they are responsible for money and product safekeeping). Further, maintain and provide up-to-the-minute and detailed business, operational, safety and security plans (including that the medicine is a safe an approved make and model and all recommended usage procedures are being followed).
One alternative is “captive insurance,” a wholly-owned subsidiary set up by policyholders to operate as an insurer and charge actuarially sound premiums tailored to the insured’s needs.
Beyond offering more competitive prices, captive insurance provides broader coverage than commercial marketplace carriers including crop, armored car and other insurance lines that cannabis businesses need.
Instead of paying premiums to a commercial insurance company, a captive’s policyholder pays premiums to the captive insurance’s subsidiary, thereby retaining some control over the premiums’ investment and surpluses and profits, if any. As long as its underwriting is sound and losses are tolerable, the captive retains the investment income which would otherwise go to the commercial insurance company.
While shouldering the challenge of large losses, that risk generally can be managed or eliminated by ceding some or all of it to reinsurance companies. Further, because reinsurance costs are typically less than retail insurance, captives can be an effective way to access “wholesale” insurance markets that are not admitted to sell directly in the United States. •