A bill introduced in Congress that would allow insurers to cover cannabis-related businesses without fear of prosecution under federal law is expected to substantially ease constraints on the burgeoning sector if it makes it into law. 

The bipartisan Clarifying Law Around Insurance of Marijuana Act of 2021, which would provide a safe harbor for insurers covering risks in states where the federally banned drug is legal, could help open insurance markets for cannabis operators and companies in their supply chains, industry observers say.

“Any piece of federal legislation that explicitly recognizes the cannabis industry as legitimate would have the effect of increasing capacity significantly for the insurance industry,” said Justin M. Lehtonen, vice president at wholesale broker Worldwide Facilities LLC in Los Angeles.

Insurers and others “are looking for an opportunity to begin backing this business,” he said.

The cannabis industry “definitely needs some kind of federal order,” said Jay Virdi, Toronto-based chief sales officer for Hub International Ltd.’s cannabis insurance and risk services in the U.S. and Canada.

According to the text of the bill, which was introduced in March and is an update of unsuccessful 2019 legislation, the intention is “(t)o create a safe harbor for insurers engaging in the business of insurance in connection with a cannabis-related legitimate business, and for other purposes.”

The legislation is sponsored by Senators Bob Menendez, D-N.J., Rand Paul, R-Ky., and Jeff Merkley, D-Ore., and Representatives Nydia Velázquez, D-N.Y., and Steve Stivers, R-Ohio.

Differences between state and federal law, which still classifies cannabis as illegal despite a majority of states passing laws that legalized cannabis to various degrees, has led to confusion and friction among cannabis operators, who often have great difficulty obtaining insurance for their operations.

While some insurers offer coverage to cannabis companies in the U.S., many others are deterred by the potential for sanctions under federal law.

A spokesman from Sen. Menendez’s office called the measure “common-sense legislation” to help provide access to “basic tools” for business, including insurance. The CLAIM Act also “recognizes states’ rights,” he said.

If passed, the measure would be a boost for the cannabis insurance sector, industry experts said.

In addition to establishing the safe harbor for insurers, the legislation is the first of what should be several steps to provide a federal regulatory framework for the cannabis industry, which could include oversight and regulation, such as the Food and Drug Administration overseeing the quality and compliance of cannabis edibles, Mr. Virdi of Hub said.

The CLAIM Act is designed specifically for the insurance industry and is simple to understand, said Ian A. Stewart, a partner with Wilson Elser Moskowitz Edelman & Dicker LLP in Los Angeles.

“It allows property/casualty and other types of insurers like life to operate with a legal safe harbor” in terms of accepting cannabis-derived monies, he said.

The new legislation changes some definitions from the 2019 version, including those for “financial services” and “cannabis-related businesses” to make them broader and more inclusive, Mr. Stewart said.

Cannabis companies would benefit from increased competition among insurers, which could help drive down insurance prices, create more choice in some specialty lines and alleviate capacity and policy language restrictions in the directors and officers liability insurance market, Mr. Stewart said.

“The CLAIM Act, if it passes, is the best hope for a large increase in capacity,” said Jonathan Isaacson, a partner in Woodbury, New York with law firm Kaufman Dolowich Voluck LLP. “With the CLAIM Act and the safe harbor from the federal government, you’ll hopefully see capacity increases across the board.”

“The introduction of the CLAIM Act is great news as it could enable additional capacity from both issuing carriers and reinsurance providers for the growing cannabis industry,” said Charles Pyfrom, chief marketing officer of CannGen Insurance Services, one of the insurers currently writing cannabis business.

Insurance groups have welcomed the legislation, and “this time I think there is a palpable optimism for passage,” Mr. Stewart said.

Momentum for Congress to pass the legislation has continued to build, said Nicole Austin, senior vice president of federal affairs for the Reinsurance Association of America, in an email.

The American Property Casualty Insurance Association also supports the legislation. 

In addition, more states have a meaningful amount of cannabis-related tax revenue, said Mr. Lehtonen of Worldwide Facilities. “People from states with a significant amount of activity already in the cannabis industry want to see this moved forward.” 

“If you look at how much tax revenue is being generated by the cannabis industry, it’s amazing. The states can really benefit from this revenue,” Mr. Virdi said.