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Medical marijuana is now legal in 29 states and the District of Columbia. Eight states and the District of Columbia now have legalized marijuana for recreational use. Recent polls indicate 61% of Americans believe marijuana should be legalized.
In light of these legalizations and the new attitude, policyholders, agents and insurers have been reconsidering the insurability of marijuana-based industries in the United States. Today, the trend is to allow them to be insured. Many insurers see the marijuana industry as no different than any other. In fact, many insurers believe the risk posed by the marijuana industry is similar to the risk posed by the alcohol industry and believe that both should be insured in a similar manner.
For many years, marijuana was illegal. Thus, simply put, any insurance of marijuana growing or selling operations was considered uninsurable because of policy provisions relating to illegal operations or the public policy against insuring illegal actions. Sometimes this public policy was expressed statutorily, in that a state law made it clear that an insured could have no insurable interest in a property if it was an illegal interest. As recently as 2012, case law expressed this in regard to marijuana. In Tracy v. USAA Casualty Insurance Co., heard in federal district court in Honolulu, Barbara Tracy had marijuana plants stolen from her property. She filed a claim with USAA, which denied her claim on the grounds that she lacked an insurable interest. USAA referred to the following Hawaii statute which stated: “No contract of insurance on property or of any interest therein or arising therefrom shall be enforceable except for the benefit of persons having an insurable interest in the property insured. Insurable interest means any lawful and substantial economic interest in the safety or preservation of the subject of the insurance free from loss, destruction or pecuniary damage.”
USAA argued that since marijuana was illegal under federal law, marijuana plants could not be insured. The plants were not lawful, and there was no insurable interest. The insurer never mentioned state law. The court agreed, and denied Ms. Tracy recovery. But this was 2012, not 1962. The Tracy v. USAA case raised howls of protest. In response to the Tracy decision, in Oregon, where medical marijuana was legal, a statute was passed that specifically stated that no contract would be unenforceable on the basis that the manufacture, distribution, dispensing, possessing or use of marijuana was prohibited by federal law. Washington, on the other hand, made marijuana legal.
Here is the problem: if marijuana is lawful under state law then, at least under state law, it should be insurable. However, if marijuana is still classified as a banned controlled substance under the federal Controlled Substances Act, insurers could still use illegality as a defense. Still, it will be less likely today to be successful.
The “Cole Memo” of 2013, which was issued by the Obama administration’s Justice Department led many to believe that federal marijuana laws would not be enforced in states that had legalized marijuana use. The memo hinted that as long as these states took steps to regulate possession, prohibit trafficking across state lines and keep marijuana away from minors, the federal government would leave marijuana alone. In effect, marijuana was legal on the federal level. That would seem to cure all problems regarding insurability. Now, however, a new administration has threatened enforcement of federal drug laws concerning marijuana. While it remains to be seen whether this enforcement will be carried out, could this once again change the game?
Probably not for insurance industry purposes because many agents and brokers are now insuring risks with full knowledge that they are insuring the marijuana industry. This waives any illegality defense. The 2016 The Green Earth Wellness Center L.L.C. v. Atain Specialty Insurance Co. case in a federal district court in Denver addresses this issue. Green Earth operated a retail medical marijuana dispensary and a growing facility. A wildfire damaged its operation. The insurer sought to deny coverage on many grounds, one of which was that the policy was void on public policy grounds because the subject of the risk was illegal marijuana. The court disagreed, stating that the insurer knew what the risk involved when it entered into the policy.
Moreover, it appears that no state insurance regulatory authority has prohibited issuing insurance to the marijuana industry. It appears that most American insurers now indeed do so. There is a notable holdout: Lloyd’s of London has instructed its syndicates to not write the industry because marijuana is still listed as a scheduled drug under federal law. This is a minority position and is likely to change.
Regarding first-party coverage, it appears that marijuana industries are being insured under the same forms as any other industry. There are some unique aspects, however — not as to the forms, but regarding the business. The “grow” operation is intense, needing ventilation controls, irrigation systems and special lamps. Damage to these systems can be costly. It has been suggested that since marijuana is a lucrative business that business interruption limits be kept at a high level because the potential for lost profits is great. Since marijuana is highly desirable, the risk of theft will be high, leading to a need for theft insurance with increased limits. Moreover, large amounts of cash are usually on hand at marijuana dispensaries, leading to a greater risk of robbery and more expensive coverage.
Commercial general liability insurance will also be needed and, as stated, will be directly comparable to CGL policies obtained by the alcohol industry. A major risk would be dram shop liability cases. No state has yet imputed vicarious liability to a marijuana business for an injury caused by a person to whom the business sold marijuana. However, there seems to be no logical reason why an attempt to impose this type of liability will not occur. Failure-to-warn claims will also probably occur, alleging a business failed to communicate the hazards of marijuana to a purchaser or end user. One particular area to be examined is whether there can be coverage for any raid and seizure conducted by the federal government in a location where marijuana is legal under state law but where the federal government is enforcing federal law. To date, this has not been the subject of a claim, but new enforcement actions could bring this about.
Inland marine insurance is one area where special forms are arising. The transport of marijuana is highly regulated. Once again, the highly lucrative nature of the product being transported makes its carriers a tempting target. There are now specialized clauses insuring cannabis transport, requiring strict security procedures, such as transport of cannabis only in armored vehicles, two drivers in vehicles at all times and strict criminal background checks for all drivers. Moreover, with some exceptions, the vehicles must only transport cannabis.
In sum, what was until a few years ago a completely “outlaw” business is becoming normalized. The process is not finished, and may proceed by fits and starts. But rest assured, the marijuana industry is being accepted by the insurance industry.
Stephen Pate is a member of Cozen O’Connor’s global insurance department in Houston. He can be reached at 832-214-3957 and firstname.lastname@example.org.
Projecting self-insured workers compensation losses is a complex process due to its long-tail nature and the many factors that can significantly impact the final costs of claims. A proper actuarial review can provide valuable insight and tailor estimates to each unique self-insurance program. The following discusses the top 10 considerations used by actuaries for projecting self-insured workers compensation losses and integrating them into the projection process.