Cultivating Change :: Insurance Trends as Cannabis Becomes Mainstream
Since we published “Budding Considerations: Cannabis-Related Insurance Issues” in the Insurance Coverage Journal of the American Bar Association’s Litigation Section in January 2019, 11 more states plus the District of Columbia have legalized recreational marijuana. In several states that have not legalized marijuana use, cannabis-infused products, such as oils or pills, are now permitted. In June 2019, Illinois became the first state to legalize the possession and commercial sale of recreational marijuana through the legislature, rather than by ballot, reflecting the strength of the trend in favor of legalization.
Not surprisingly, the insurance industry is following the trend. Estimates show that 25 (non-admitted) insurance carriers are providing coverage to cannabis-related businesses, including coverage for cultivation, dispensaries and retailers, infused products, and landlords. Insurers are expressing optimism with regard to entering the marijuana insurance market according to John Donahue, president and CEO of Topa Insurance Co., during the Insurance Journal webinar, “Cannabis & Insurance, What You Need to Know About the Budding Business.”
Initially, insurers believed claims would relate to product liability, bodily injury, failure to warn, and manufacturing defects, where people would consume a cannabis product and be injured in some way, or injure others, and a lawsuit would ensue. The industry now anticipates that claims may allege mislabeling and false advertising, including consumer class actions alleging that representations regarding the health benefits violate deceptive trade practices laws. Notably, however, one cannabis claims supervisor estimates that approximately 90% of insurance claims in the United States cannabis industry are theft related. Some underwriters now require pre-employment screening and strict security requirements, including motion detection cameras to monitor areas where the cannabis product is held, and warranties that finished product is stored in a safe or other secure storage.
In January 2020, cybersecurity researchers discovered a massive data breach affecting cannabis customers and at least three dispensaries. Initially, in the cash-only cannabis industry, technology played a lesser role. Once the business turned digital, however, new technology used for inventory tracking, cultivation and retail distribution introduced the risk of cyber attacks. In response, several cannabis insurers now offer cyber liability coverage, including Embroker, Praxis Insurance, and One Risk Group, LLC.
Currently there are two federal legislative actions aimed specifically at the cannabis industry. In November 2019, the House Judiciary panel voted 24-10 to approve the Marijuana Opportunity Reinvestment and Expungement Act (MORE Act), which was introduced by Rep. Jerry Nadler, D-N.Y. Most significantly, the MORE Act would remove marijuana from Schedule 1 of the Controlled Substances Act. In September 2019, Senators Bob Menendez (D-NJ), Rand Paul (R-KY), Jeff Merkley (D-OR) and John Cramer (R-ND) introduced a bill to Congress that would ensure access to insurance for cannabis-related businesses. Concerns still exist that the reinsurance market has not reacted as quickly as the primary insurance market.
As cannabis-related businesses continue moving into mainstream markets with the support of legislators, the insurance industry seems motivated to meet the risk-transfer needs of the blossoming industry.
About Amy Stewart Law
Amy Stewart Law assists corporate policyholders with strategic advice relating to pre-litigation claim negotiations and coverage denials, indemnity and insurance provisions in third-party contracts, insurance procurement and renewal issues, and complex and high-stakes insurance coverage and bad faith litigation. The firm was recognized for its expertise in insurance law with a Tier 1 ranking for the Dallas-Fort Worth Metropolitan Area in the 2020 Best Law Firms list published by U.S. News & World Report and The Best Lawyers in America. Contact us at inquire@amystewartlaw.com for more information.