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Insurance coverage for the rapidly emerging cannabis industry is growing, but there are still substantial gaps in coverage for business operating in the sector.
While some coverage is being placed — almost exclusively in the surplus lines market — and claims have been paid, cannabis producers and related businesses can’t obtain many of the coverages that are available to traditional agricultural firms.
And even as the first admitted forms begin to be approved in California, the cannabis insurance sector will likely remain a specialty coverage.
“The market is still overwhelmingly surplus because the risks are developing. The claims and loss histories and the metrics aren’t there,” said Ian A. Stewart, a partner with Wilson Elser Moskowitz Edelman & Dicker L.L.P. in Los Angeles, where he is part of the law firm’s cannabis team working with insurers and brokers. “It’s difficult to price these policies, and it’s difficult to be locked into a price structure on an admitted basis when perhaps one needs a bit more flexibility.”
There are now approximately 25 surplus lines insurers offering coverage to the cannabis industry, Mr. Stewart said, and coverage varies from insurer to insurer.
“We are seeing tremendous interest from our members in insuring cannabis, although it is still difficult to quantify it because it is a newly legal product and we don’t have sufficient data at this point,” said Joy Erven, chief operating officer for the Surplus Lines Association of California in San Ramon. “But there is certainly a lot of discussion in surplus lines circles, because most of the coverage that is being issued is in the surplus lines market at this time.”
So much so, in fact, that the association will be offering a continuing education course on cannabis in 2019, Ms. Erven said.
There has been noticeable progress and growth in the market over the past few years, observers say.
The difference in the market from 2014 to now is “night and day,” according to TJ Frost, U.S. cannabis segment leader for Hub International Ltd. in Bothell, Washington, who added there are approximately 26 insurers participating in the cannabis sector, the majority of which are surplus lines.
“There’s more and more carriers popping up every day,” Mr. Frost added.
Still, challenges remain for those seeking coverage, sources said.
“We’re pleased with the progress, but there continue to be significant coverage gaps,” said California Insurance Commissioner Dave Jones. “Insurance for growers continues to be a challenge. Key-person coverage is a challenge. There are other coverage gaps. We continue to encourage insurers to fill those gaps.”
“I have been working since late 2016 to encourage admitted carriers and surplus lines writers to offer insurance to all aspects of the cannabis industry in California,” Mr. Jones said. “We’ve had some success in getting some 20 or so surplus lines carriers and the first admitted carrier to write coverage.” California Mutual Insurance Co. in May became the first insurer in the state approved to provide coverage to property owners who rent out space to cannabis businesses.
Some challenges remain, however, according to sources.
“The market is not sufficient to meet the needs of the class at the current time, and I don’t see that changing anytime soon,” said Kyle Burnett, regional vice president of property and head of excess and surplus property for XL Group Ltd. in New York.
“We still don’t have options on outdoor crop insurance,” said Mr. Stewart of Wilson Elser. “That’s the one huge gap that we still have.”
There has been a $1 million claim paid to a grower that suffered smoke and ash damage from the Northern California wildfires in 2017, said Mr. Jones. “Some growers have been able to find coverage, but many have not,” he added.
“As many cannabis companies know, the transportation and cargo portion of the business is still tough to insure, but there are markets out there,” Mr. Frost said.
“Cargo in particular is a challenge for the industry,” said Morgan Moore, vice president for Worldwide Facilities L.L.C., a Los Angeles-based managing general underwriter.
Mr. Frost was, however, more positive about crop insurance. “We can get outdoor crop insurance,” Mr. Frost said, adding the broker has secured up to $10 million in such coverage.
In other lines for cannabis, Hub has been able to achieve limits of $5 million on general liability with excess limits up to $10 million or $15 million, Mr. Frost said.
Worldwide sees further potential in the market. “While there remain some challenges, we are starting to fill voids where we can see premium opportunities,” Mr. Moore said. “This is what the surplus lines markets are all about.”
While the beginnings of an admitted market are forming with the approval of some surety bond and property forms in California, this will likely not move the market soon.
“Admitted paper will likely materially impact the market in a more visible way in the future,” Mr. Stewart said.
“It’s difficult for a regulated carrier to write an irregular product,” Mr. Burnett said. “Many companies would prefer to take a back seat until there is more clarity and regulation around it,” he said, adding that “from an underwriting standpoint, it’s a tough risk” and listing fire, theft and vandalism as just three of the many exposures and variables in play.
Justin Lehtonen, vice president with Worldwide in Columbus, Ohio, said that in addition to a lack of reinsurance support, challenges also come from “large insurers’ management feeling the opportunity presented by the historic growth of the cannabis industry is not large enough to justify the risk of conflict with the federal government.”
While 30 states have legalized cannabis for medical or recreational use, the compound remains illegal on a federal level in the U.S. as a Schedule I narcotic.
“What is a carrier’s obligation as a financial institution under the Bank Secrecy Act — that’s been the question,” Mr. Stewart said.
Cyber, representations and warranties, and marijuana coverages are cited by excess and surplus lines market participants as among promising areas of growth for the sector.