September 11, 2019
More Options for Cannabis Insurance?
Two bills in Congress may resolve issues restricting insurance of marijuana-related businesses, or MRBs.
Two bills currently being considered in the U.S. Congress may expand the insurance options available to marijuana-related businesses (MRBs) that operate in states that have legalized marijuana for medical or recreational use. As discussed in the recent Insurance Thought Leadership article, “Marijuana Policy Gap: Insurers’ Uncertainty,” 33 states have legalized marijuana for medical use, with 10 of those states legalizing for recreational use. As a result, cannabis has become a multibillion-dollar industry in the U.S. and is expected to continue growing rapidly.
Nevertheless, pursuant to the Federal Controlled Substances Act (CSA), the cultivation, sale, distribution and possession of marijuana remains illegal under federal law. The conflict between the CSA and the laws of states that have legalized marijuana in some capacity has resulted in uncertainty for those interested in entering the “legal” cannabis market.
The confusion created by conflicting approaches to marijuana legalization has implications for businesses in the cannabis industry and those that service the “legal” cannabis industry. So, the insurance options available to MRBs are fairly limited, as large, admitted insurers have taken a cautious approach and largely avoided entering this market.
Many of the insurance options available to MRBs are limited to smaller, specialized insurers and the excess and surplus lines market. Excess and surplus insurers tend to be more specialized and are “non-admitted,” meaning they are not licensed by the insurance department of the state in which they underwrite risk. This is significant because excess and surplus policyholders are not protected by state insurance guarantee funds, which offer protection to insureds in the event that their insurers become insolvent. In addition, because excess and surplus insurers are not licensed by the states in which they issue policies, they are not necessarily subject to the same regulations as admitted insurers, such as regulations governing policy forms or finances. Accordingly, MRBs may face higher premiums and less comprehensive coverage.
As a result of the limited and, in some cases, cost-prohibitive coverage options available for MRBs, many remain underinsured or even completely uninsured. This can have disastrous consequences, as MRBs can face significant liability, just as any other business does. Moreover, the lack of coverage available to MRBs can leave consumers or other injured parties unprotected in the event of a claim, as it can be difficult or even impossible to collect against an uninsured or under-insured business.
To address the uncertainty and foster a more robust insurance market place for MRBs, on July 22, 2019, Sen. Robert Menendez (D-NJ) introduced a bill in the Senate titled the “Clarifying Law Around Insurance of Marijuana Act” or the “CLAIM Act” (S.2201). A similar bill was introduced in the House of Representatives just a few days later by Rep. Nydia Velazquez (D- NY), with the same name (H.R. 4074). The stated purpose is to create a “safe harbor” from liability for insurers that underwrite policies for MRBs in states where medical or recreational use of marijuana is permitted, to encourage more insurers to enter the market. Both bills enjoy bipartisan support, being co-sponsored by both Democrats and Republicans, although their prospects for passage into law remain unclear.
The Senate version of the CLAIM Act would protect insurers that engage in the “business of insurance” with a “cannabis-related business” or service provider within a state that allows the cultivation, production, manufacture or sale of cannabis from being held liable under “any federal law” including regulations. The bill defines a “cannabis-related business” as a manufacturer or producer or any person or company that engages in “any business or organized activity that involves handling cannabis or cannabis products,” including cultivating, producing, manufacturing or selling cannabis or cannabis products. The bill would also prohibit any federal agency from penalizing or prohibiting an insurer from providing insurance to a “cannabis-related business.” The text of the House bill is substantially the same as the Senate bill.
While these bills, if passed, could encourage more insurers to enter the cannabis market, potentially resulting in broader insurance options for MRBs, they may also clarify issues surrounding the enforceability of existing insurance policies that cover marijuana-related risks. After all, while some have argued that policies of insurance that cover marijuana-related risk are void as against public policy or otherwise invalid, even in states in which marijuana is legal, those arguments will become much harder to support if the federal government has carved out a “safe harbor” for insurers to underwrite cannabis risk in states in which cannabis is legal.
As such, both S. 2201 and H.R. 4074 have significant implications not just for the future of the cannabis insurance market, but also for policies of insurance that have already been issued to MRBs for cannabis-related risk. Therefore, it is important that anyone working in the cannabis industry, or servicing those who do, continue to follow these critical pieces of proposed legislation.