Risk management issues arise as hemp industry expands

Recent legislative developments that eased restrictions on hemp production have helped elements of the cannabis industry expand but compliance issues still complicate risk management efforts in the sector, a panel of experts said.

Meanwhile, wider legislative efforts that could curb potential federal prosecution of cannabis insurers offering coverage in states where the drug is legal may advance quicker than expected, they said.

The 2018 Farm Bill, which allowed for the expanded cultivation and transportation of hemp in the United States, has led to increased production of the plant and prices have plummeted, said Gary Broadbent, executive vice president and general counsel at GenCanna Global USA Inc., a Winchester, Kentucky-based hemp producer.

He was speaking during a Business Insurance webinar on Wednesday that is part of a series of webinars examining risk management and insurance issues related to cannabis and hemp.

Hemp is a cannabis plant that can produce CBD, which is used in dietary supplements and personal care products, but contains limited amounts of THC, the element that gives pot its high. Hemp fiber is also used to make rope, clothing, paper and other products.

CBD was selling for more than $40,000 a kilogram in 2014-2015 but now sells for less than $1,000 a kilogram, Mr. Broadbent said, which “has put stress on a number of folks in the hemp-producing industry.”

GenCanna filed for Chapter 11 bankruptcy protection in February.

CBD production will likely increase further when the U.S. Food and Drug Administration gives guidance on its use in food products, but that is not expected until 2021, Mr. Broadbent said.

Hemp production will also help cannabis companies expand, said Stephen Konigsberg, New York-based director of business development and general counsel at medical cannabis firm Tikun Olam USA.

“We saw hemp and CBD pretty much as the true gateway drug into building our brand. This would allow us to try to build our brand nationally while we are restricted to building our brand in individual legal states where we can only sell cannabis within those states,” he said.

But as the industry grows and hemp is transported throughout the country, companies should be aware of risk management issues, said Neil Willner, White Plaines, New York-based litigation associate at Wilson Elser Moskowitz Edelman & Dicker LLP.

Contracts should include indemnification provisions defining who has ownership over hemp and when ownership changes, he said.

“It’s very important for each party to know who has ownership of that hemp and who is responsible for it at every stage of the transfer,” Mr. Willner said.

In addition, developing state and federal regulations applying to the hemp and CBD industry complicate risk management issues, he said.

For example, requirements vary on labeling, testing and packaging CBD products, Mr. Willner said.

Insurers want to keep on top of all the requirements to ensure that their policyholders comply with the various laws and regulations, he said.

“They want to be able to know what types of licenses are required to process hemp in a state for their potential insureds, whether there’s any retail licensure requirements, whether there’s any product registration requirements,” Mr. Willner said.

But there’s little guidance or case law to refer to, he said.

Legislation that may remove clashes between state and federal law for the broader cannabis industry may advance sooner than previously expected, Mr. Willner said.

Democrats in the U.S. House of Representatives introduced an economic stimulus measure this week that included the text of the Secure and Fair Enforcement Banking Act of 2020. The legislation would provide liability protections for insurers with cannabis policyholders who comply with state laws where cannabis is legal but breach federal laws that still classify the drug as a controlled substance.

The House is expected to vote on the bill this week, but it is unclear whether it will progress in the Republican-controlled Senate.

“I don’t want to say there’s a strong chance, but there’s a chance that we could see the passage of the SAFE Banking Act into law much sooner than anticipated,” Mr. Willner said.

A recording of the full webinar can be accessed here.