33 states have legalized medical marijuana, and 14 allow marijuana for adult
recreational use. The trend toward legalization is expected to continue in 2020
with at least 19 other states considering adult recreational use or medical.
This is driving rapid expansion of the cannabis industry, which is expected to have
a compound annual growth rate of 14% over the next six years, reaching nearly $30 billion by 2025,
according to the U.S. Cannabis Report.
the sector is growing, insurance coverage has not kept pace with its risk
management needs. Conflicting state and federal laws have made insurance
carriers reluctant to write cannabis policies—due in large part to the U.S.
Drug Enforcement Administration still classifying it as an illegal Schedule 1
National Association of Insurance Commissioners’ Center for
Insurance Policy and Research newsletter noted that, “Insurers looking to
provide commercial cannabis insurance to this budding market should understand
its rapidly shifting landscape. They must contend with legal uncertainty,
evolving regulations, lack of data, and developing business practices. Insurers
will also need to understand how the cannabis industry’s first and third‐party
coverage needs are unique from other industries.”
carriers are slowly beginning to enter the cannabis market, navigating regulatory
complexity and gathering data to address industry demand for coverage of its unique
risks and exposures in areas such as product liability, general liability,
theft, and crop loss.
liability exposures for cannabis businesses encompass a wide range of areas,
including breach of warranty, deceptive practices, edibles, failure to warn,
label claims, misrepresentation, mold and fungus, pesticides, and vaporizers.
Claims can involve bodily injury or property
damage resulting from product misuse (particularly for many who are trying
cannabis for the first time), including illness caused by inhaled, edible, or
infused products; manufacturing or product-related defects that result in a
loss; and faulty or misused equipment, including vape cartridges, batteries,
major area of exposure concerns accidents resulting from impairment. A cannabis
cultivator, distributor, processor, or retailer may be considered liable if a
product defect results in injury after reasonable use or when label defects
fail to warn users that a product may have psychoactive effects.
recent vaping crisis also points to risk management implications all along the
cannabis product supply chain. For example, if a plastic vape pen explodes, a
lawsuit could have repercussions beyond the manufacturer of the pen. This can include
ingredient manufacturers, delivery companies, distributors, and retailers.
Seed-to-sale tracking systems also make it easy to find incident-related
parties to potentially be named in a lawsuit.
companies are experiencing fallout from the vaping crisis in the form of
increased risk exposure and coverage gaps. Insurance carriers are adding more
exclusions for vape products, specifically where the potentially dangerous additive
vitamin E acetate is present. The crisis has also caused insurance premium rate
hikes for product liability coverage.
Theft and Fraud
significant part of risk exposure for the industry relates to many cannabis
businesses being cash-only, which makes them prime targets for theft and fraud.
This risk exposure will continue as long as federal laws subject financial
institutions to criminal prosecution for working with cannabis-related
of the Secure and Fair Enforcement (SAFE) Banking Act would reduce this risk
exposure, allowing financial institutions to work with cannabis companies. This
legislation would protect financial institutions from liability and federal
prosecution arising from servicing cannabis-related businesses authorized under
banking regulations let the cannabis industry operate as legitimate businesses
with the stability and safety that would deter criminal activity, some degree
of crime and theft coverage is needed to help manage the risks associated with
a cash-based business.
businesses need the same general liability coverage as other businesses to
protect their premises and operations from lawsuits involving public contact.
However, standard general liability policies—which exclude Schedule 1
substances from coverage—were not created with cannabis businesses in mind. It
is still difficult for insurers to offer these businesses adequate general
liability as a result of the legal uncertainty associated with the industry.
loss holds another area for risk exposure in the cannabis industry due to its
differences from traditional crops, such as corn or soybeans. Fire, theft, and
sprinkler leakage are common threats most indoor crop insurance policies cover.
However, many cannabis growers experience threats beyond those and other common
issues like mold, rot, disease, changes in climate, or fertilization problems. Most
insurance policies generally do not cover these threats, resulting in growers positioned
to absorb losses.
to recent natural events, outdoor crop coverage has become increasingly scarce.
For insurance companies that do have policies, the cost is prohibitive. For
example, the California wildfires essentially eliminated any potential for
writing outdoor crop insurance for the cannabis industry. These devastating
fires highlighted the pressing need for property damage and business interruption
coverage for growers, dispensaries, and other downstream businesses whose
supply was disrupted. This lack of available outdoor crop insurance is one of
the more notable gaps in available cannabis business coverage.
more insurance carriers are beginning to write cannabis coverage, the limited
insurance options and policies with restrictive plans currently offered today
do not meet the needs of the cannabis industry. U.S. lawmakers are looking to help
cannabis companies obtain insurance products and encourage insurers to enter
this market with the passage of the Clarifying
Law Around Insurance Marijuana (CLAIM) Act, introduced by Representatives
Steve Stivers (R-OH) and Nydia M. Velázquez (D-NY). The CLAIM Act establishes a
federal “safe harbor” that protects insurers and insurance agents from federal
prosecution when doing business with the cannabis industry.
this legislation, insurers will understandably be reticent to insure businesses
operating in the cannabis sector,” says Velázquez. “This means a legal cannabis
distributor whose product is ruined from a flood or fire could lose all their
capital and their livelihood.” The bill is designed to correct these problems. As
the cannabis sector matures and new regulations are adopted, the insurance
market will evolve to provide a range of coverage that addresses the unique
risks and exposures in this sector.