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What Insurance Companies may want to Consider before Insuring the Marijuana Industry

By J.B. Woods, Greenpoint Insurance Advisors, LLC  © 2017 All Rights Reserved  (This article was originally published in Trusted Choice/PIIAC of Colorado)

The most recent election captured the attention of the insurance industry when states like California, Nevada, Massachusetts, and Maine voted to legalize marijuana along with medical marijuana initiatives being approved in other states such as Florida, North Dakota, and Arkansas.  Over half of the United States has some form of marijuana law.  According to Arcview Market Research, the marijuana industry resulted in $6.7 billion in sales for 2016 and made it one of the fastest growing industries.1

With the amount of growth in the marijuana industry, most insurance brokers are inclined to believe that insurance companies would be eager to offer commercial products such as commercial liability, product liability, directors & officers, property, and workers compensation.  This has not been the case, as insurance carriers have grappled with the notion of insuring a product that is federally illegal.  The result has been disappointing, as insurance companies have eagerly entered, but then later exited the marijuana industry, as if due diligence became an afterthought.          

Further instability in the insurance marketplace occurred in May of 2015 when Lloyds of London (“Lloyds”) announced to their syndicates and surplus lines brokers, it would no longer offer insurance to the cannabis industry through its marketplace.   Lloyds, the same organization known for insuring unusual risks like the hands of Rolling Stone guitarist Keith Richards to satellites in space, decided the risk with marijuana was now outside their comfort zone.2  Up until May of 2015, Lloyds had been the dominant insurance provider not only for licensees, but ancillary companies that offered a variety of products and services to the marijuana industry.       

The memorandum from Tom Bolt, Lloyds Director of Performance Management, provided further insight as to their reason for exiting.

Bolt stated:  

Lloyd’s has considered various requests with respect to insuring marijuana or marijuana related businesses (either medicinal or recreational) in the United States and has, based upon a thorough review of all positions, determined that, unless and until the sale of either medicinal or recreational marijuana is formally recognized by the Federal government as legal (as opposed to subject to non-enforcement directives), syndicates at Lloyd’s should not insure such operations in any form (including crop, property, or liability cover for those who grow, distribute or sell any form of marijuana or the provision of banking or related services to these operations) in the United States.3

In addition, Bolt cited in his memorandum that marijuana is listed as a Schedule 1 drug through Title 21 United States Code from the Controlled Substances Act.  Marijuana is included with drugs such as heroin, 3,4-methylenedioxymethamphetamine (ecstasy), and lysergic acid diethylamide (LSD).    Bolt’s memorandum also stated that cash generated from the sale of marijuana “invariably implicates federal Anti-Money Laundering laws….”   

The marijuana industry continues to grow without federal enforcement of the Controlled Substance Act  

Since Lloyds’ exit, the marijuana industry has continued its rapid ascent, with additional states legalizing medical and recreational marijuana without federal intervention. If Lloyds was concerned the federal government would dismantle the marijuana industry, then why hasn’t that happened?     

The answer may point to a series of memorandums issued by the Department of Justice, that the Bolt memorandum appears to have considered. On August 29, 2013, Deputy Attorney General James M. Cole issued a memorandum (the “Cole memo”)  to all United States Attorneys regarding the guidance of marijuana enforcement.  The Cole memo addressed the conflict that existed between the federally illegal status of marijuana and the laws and regulations enforced by various states — such as Colorado Amendment 64, California Proposition 215, or Washington Initiative I502.

The Cole memo has been a beacon of light to the marijuana industry, helping to navigate murky waters and avoid federal intervention through enforcement of the Controlled Substance Act.  

The Cole memo states:    
 

The Department’s guidance in this memorandum rests on its expectations that states and local governments that have enacted laws authorizing marijuana-related conduct will implement  strong and effective regulatory and enforcement systems that will address the threat those state laws could pose to public safety, public health, and other law enforcement interests.  A system adequate to that task must not only contain robust controls and procedures on paper; it must also be effective in practice.4  

State marijuana regulations are crucial for preventing federal intervention

Consequently, states such as Colorado, Washington, Oregon, Minnesota, Massachusetts, and Connecticut have specific laws, agencies, regulations, and rules meant to regulate the cannabis industry.  Those regulations include the vetting of applicants, labeling, testing, and numerous operational conditions including insurance.  

For example, Massachusetts has mandated insurance requirements:

Q) Liability Insurance Coverage or Maintenance of Escrow

A RMD shall obtain and maintain general liability insurance coverage for no less than$1,000,000 per occurrence and $2,000,000 in aggregate, annually, and product liability insurance coverage for no less than $1,000,000 per occurrence and $2,000,000 in aggregate, annually, except as provided in 105 CMR 725.105(Q)(2). The deductible for such a liability policy shall be no higher than $5,000 per occurrence.5  

Massachusetts was the first state to require specific commercial and product liability limits for a marijuana licensee.  The strict and comprehensive regulations are essential for preventing federal enforcement as stated in the Cole memo, while providing some level of comfort to the insurance industry.    

Future of the marijuana and insurance industry will depend on several important factors

The ability of the medical and recreational marijuana industry to obtain commercial insurance from a stable and diverse marketplace will continue to depend on a variety factors.  Insurance carriers must carefully evaluate their distribution channels seeking experience and competent licensed brokers over short term profits.  The lack of knowledgeable underwriters and retail brokers procuring cannabis insurance is a recipe for claims being unfairly denied that may be resolved only through litigation.  The cannabis industry demands the highest level of professional standards from retail and  surplus lines brokers who acknowledge a conflict exists between state and federal law.    

Lastly, the nomination of U.S. Attorney General Jeff Sessions chosen by President-Elect Trump may dramatically change the direction of the marijuana industry through the enforcement of federal law.   

At the confirmation hearing on January 10, 2016, Sessions stated:

I won’t commit to never enforcing federal law, Senator Leahy.  But absolutely it’s a problem of resources for the federal government. The Department of Justice under Lynch and Holder set forth some policies that they thought were appropriate to define what cases should be prosecuted in states that have legalized at least in some fashion some parts of marijuana6

Sessions therefore addressed the conflict between the enforcement of federal law and lack of resources. This statement was likely a sigh of relief to the marijuana industry, as it wasn’t the harsh position many had anticipated.  

If Sessions is confirmed, his actions will speak louder than words.    

          

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Notes

Arcview Market Research, Web Home Page, Retrieved 10 Jan. 2017. https://www.arcviewmarketresearch.com/
Lloyds of London, Innovation and Unusual Risks, Retrieved 10 Jan. 2017. https://www.lloyds.com/lloyds/about-us/history/innovation-and-unusual-risks
Faulkner, J., Personal Communication, 29 May 2015
Cole, J., Guidance Regarding Marijuana Enforcement [Memorandum] Washington DC:  U.S. Department of Justice
IMPLEMENTATION OF  AN ACT FOR THE HUMANITARIAN MEDICAL USE OF MARIJUANA (8 May 2013) 105 CMR 725.000 § 725.105(Q)
C-Span, Attorney General Confirmation Hearings, Retrieved 10 Jan. 2017 https://www.c-span.org/video/?420932-1/attorney-general-nominee-jeff-sessions-testifies-confirmation-hearing

About the Author:

J. B. Woods is President of Greenpoint Insurance Advisors, LLC.   Since 2009, his agency based in Colorado has served the cannabis industry with the insurance procurement process.  Mr. Woods is a founding member of the National Cannabis Industry Association, nationally recognized speaker including Continuing Legal Education, and cited in numerous publications including the New York Times and Denver Post.  Mr. Woods was honored to be invited in 2017 to speak at the American Bar Association.   

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