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Marijuana is on the verge of becoming a big business for insurers.
As more states legalize it for medical and recreational uses, there is a growing need for insurance coverage that will protect marijuana-related businesses from the time seeds are first planted, to the quality-control labs that test the plants, down the distribution channels to when they are sold in medical or recreationally oriented dispensaries.
But there is one major roadblock to its distribution by the admitted market: It is still listed by the federal government as an illegal drug.
While a growing number of excess and surplus lines insurers are beginning to offer coverage, there is general agreement it will not be widely written by the admitted market until — or if — the federal government changes its policy.
Some observers point to its decriminalization by 29 states and the District of Columbia, including the potentially massive California market that opens up in January. They say this trend’s sheer momentum makes it inevitable that the federal government will eventually change its policy.
And when that happens, the admitted insurance industry will quickly follow, say experts.
Observers say Hannover Re S.E. may be the most active standard line insurer or reinsurer that offers coverage, although others are “nibbling” around the edges, writing it on a highly selective basis.
Lloyd’s of London withdrew from the market in 2015 because of concerns about its illegality at the federal level.
Meanwhile, there are reports of policyholders so desperate for coverage they are obtaining policies, sometimes with the help of naïve brokers, that actually exclude coverage for marijuana.
To date, eight states — Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon and Washington, plus the District of Columbia — have decriminalized marijuana for both medical and recreational purposes, while the remaining states have approved its use only for medicinal purposes.
It remains classified, however, as a Schedule 1 drug by the U.S. Food and Drug Administration, which means it is considered to have a high potential for abuse with no currently accepted medical use. And in April, Attorney General Jeff Sessions said subcommittees of the U.S. Department of Justice’s Task Force on Crime Reduction and Public Safety would “undertake a review of existing policies in the area of charging, sentencing, and marijuana to ensure consistency with the Department’s overall strategy on reducing violent crime and with the Administration’s goals and priorities.” “Everyone is walking a tightrope with regard as to how this is going to progress forward,” with the federal policy an “overriding concern,” said Tim Pietrucha, a Crystal Lake, Illinois-based producer with Arthur J. Gallagher & Co.
With matters heading toward the point where every state will have at least some type of program, even if a small one, the “decision is going to kind of be made for (the federal government) going forward,” he added, although “they’re pretty stubborn about not wanting to make that decision now.”
In the meantime, the momentum toward legalization can be slowed down, but “it’s certainly not going to stop,” Mr. Pietrucha said.
Some experts, who point to the federal government’s retreat from Prohibition in the 1920s as a parallel situation, say the lure of additional tax revenues the business generates may ultimately prove irresistible and lead it to change its policy.
The federal government may also permit its legalization in states on a de facto basis, without making any official change in policy. Should either development occur, at that point admitted markets will move from the sidelines and begin to trickle into the business, experts say.
Meanwhile, complicating the issue is that state regulations vary as to what, if anything, in the way of insurance or surety bonds is required, experts say.
“The regulators and legislators that I’ve spoken with are concerned about requiring coverage because they don’t know if anybody can actually get it,” said Brenda Wells, director of the risk management and insurance program at East Carolina University in Greenville, North Carolina.
The need of coverage is there, though.
“You are talking about extreme concentrations of value,” said Ms. Wells. A commercial entity “could easily have a million dollars of inventory.”
“The demand is not going to decrease, notwithstanding the uncertainty in the regulatory system, so the opportunity for insurers is only going to grow,” said Seth A. Goldberg, a partner with law firm Duane Morris L.L.P. in Philadelphia.
“The question is really one of risk tolerance,” Mr. Goldberg said. But at the same time, “this is an emerging market that is growing very fast and has a real need for insurance in all aspects of the business.” Hannover Re is the admitted company most actively involved in the business in the United States, observers say.
“The operations that are covered encompass almost the entire value chain from growers, to laboratories and dispensaries,” Frank Rueckert, Hanover, Germany-based general manager for Canadian and specialty business for Hannover Re, said in an emailed statement.
“The standard market carriers are sniffing around this issue. They’re all afraid to get involved,” said Ms. Wells, pointing to Lloyd’s 2015 decision to leave the market.
“They don’t want to deal with it as long as it is illegal at the federal level.” “We have seen (admitted) carriers that are very specific about” what they will write, said Patrick McManamon, managing director of Westlake, Ohio-based
wholesale broker Cannasure Insurance Services L.L.C. They may only write dispensary business, or only be willing to write general liability for certain states or certain business sectors, such as cultivators, he said.
Meanwhile, more excess and surplus lines writers are stepping in to write various coverages. In California, for instance, there are 25 surplus lines players in the state that write marijuana-related businesses, said California Insurance Commissioner Dave Jones (see related story). But product liability lines are particularly challenging to underwrite (see related story).
Because of the federal issue, “in general, there’s probably fewer players in this market, but it’s still competitive. There’s still market choices,” said John G. Clarke, senior vice president of marketing for excess lines insurer James River Insurance Co., which offers coverage.
But the cost of the insurance “still remains pretty high on the surplus lines side,” said Ian A. Stewart, a partner with Wilson Elser Moskowitz Edelman & Dicker L.L.P. in Los Angeles.
There is relatively little program business, say experts.
“Right now, there are very few options” for package policies, said Ronnie Cabral, cannabis group practice leader at San Francisco-based wholesaler Crouse & Associates Insurance Services.
One such package program is offered by San Diego-based managing general underwriter Next Wave Insurance Services L.L.C. “We have exclusive contracts with our carriers,” said Mike Aberle, vice president of sales and marketing, who would not identify the insurers.
One or two more programs may come online within the next six to 12 months, said Cannasure’s Mr. McManamon.
Meanwhile, in some cases, businesses desperate to obtain insurance have received policies through unknowledgeable brokers that explicitly or implicitly exclude marijuana from coverage, say observers.
Some insurers “are including endorsements in their policies that creates wriggle room for them,” said Rafael Haciski, a producer with Philadelphia-based broker The Graham Co. These policies will say “something along the lines” that they exclude from coverage anything that is in violation of federal law.
“It’s critical for businesses to thoroughly review their policies,” said Shawn Hauser, a senior associate with law firm Vicente Sederberg L.L.C. in Denver. “There are some brokers who are not sophisticated and not adequately advising their clients of the exclusions.”
Observers say the business has attracted an odd mix of venture capitalists and former hippies.
“There’s a lot of money coming in,” from venture capitalists who need the “stoner guys’” knowledge to “understand how the business works,” said Mr. Cabral.
But at its most basic, marijuana is much like any other business that needs insurance protection from losses, say observers.
“There’s really not a huge difference between the underwriting risk” associated with the cannabis industry and the “very ordinary commercial risks that insurance companies have been insuring for centuries,” said Marshall Gilinsky, a shareholder with law firm Anderson Kill P.C. in New York.
Marijuana-infused gummy bears anyone?