Insuring the emerging cannabis industry
New Jersey’s recent cancellation of a scheduled vote on its Cannabis Regulatory and Expungement Aid Modernization Act, which would have legalized recreational use of marijuana, leaves New Jersey among the states where only medicinal marijuana is legal, for now. Both medical and recreational use of marijuana is currently legal in ten states. Solely medical use of marijuana is legal in another twenty-three states. This legalization trend has, in turn, spurred an increase in the number of business that create and sell cannabis products. These businesses have growing insurance coverage needs.
Despite a trend towards some form of legalization among the states, the federal government continues to list marijuana as a schedule I narcotic. This conflict between state and federal law is featured prominently in the banking industry, which is subject to federal regulations and federal reporting requirements concerning illegal activity. As such, continuing criminalization of marijuana in the federal arena deters banks from serving cannabis businesses. That said, on December 20, 2018, the Agriculture Improvement Act removed hemp, a plant related to cannabis but without the psychoactive qualities, from the federal government’s list of controlled substances. This has been viewed by some as possibly paving the way for a federal delisting of marijuana, or, at a minimum, a sign that federal banking regulations will be altered with respect to cannabis.
What about the insurance industry? Unlike the banking industry, the insurance industry is regulated almost entirely by state governments, with only some exceptions. Despite this, given the current legal climate, some insurers are hesitant to offer coverage to the cannabis industry. Other insurers have moved ahead in this space.
The insurers that do, or plan to, write coverage in the cannabis market today, should proactively evaluate policy provisions that may become a basis for cannabis related coverage disputes including:
- Drugs/Controlled Substance Exclusion, which generally excludes coverage for bodily injury or property damage arising out of the use, sale, manufacture, delivery, transfer or possession of a controlled substance;
- Drug Impairment/Intoxication Exclusion, which may exclude coverage for any loss caused or contributed to by impairment or intoxication;
- Governmental Acts Exclusion, which may state coverage is excluded for loss or damage caused by or resulting from confiscation or destruction by the government or public authority;
- Health Hazard Exclusions, similar to those used for tobacco products, which will likely exclude coverage due to the health effects from the use of cannabis products. Moving forward, these exclusions should define what constitutes cannabis (i.e. both natural and synthetic) and the various delivery methods (i.e. ingestion, inhalation, use of vaporizers, etc.).
Insurers must also consider the risks unique to the cannibus industry. Cannabis businesses will continue to share similar liability with respect to workplace accidents, damage to property, and crop failure that other agricultural and manufacturing businesses face. Cannabis businesses will also face similar logistical risks along their supply chain, in the shipping of raw materials or market ready products. However, the psychoactive effects of cannabis raise the risk that insured products may be deemed mislabeled, misrepresented or otherwise harmful. Further, the popularity of cannabis-infused products increases the risk of product liability claims and safety recalls.
States that have moved toward legalization often have strong regulatory schemes allowing goods to be traced end-to-end. Maine recently joined a handful of other states in employing the services of technology company Franwell, Inc. and their cloud-based software product Metrc that will track and trace “seed-to-sale” medical and recreational marijuana. This software will allow every party along the supply chain to be identified and potentially named in litigation.
An example of a risk in the cannabis industry, which may not be inherently obvious, is the potential for exposure to data breach, due to the collection of individuals’ sensitive information. That collection of sensitive information may consist of state identification cards, credit card numbers, and health insurance information. Insurers and their policyholders should be aware that laws vastly differ across the United States with respect to data breach notification to both individuals and government entities, with differing lengths of time and varying standards under which notification is required.
Another example of risk in the cannabis industry which is not immediately evident is intellectual property, in the form of trade secrets, trademarks, and patents. Allegations with respect to intellectual property violations have already been levied in some limited circumstances in the cannabis industry, but as the industry continues to grow so will claims of this type.
Other businesses ancillary to the cannabis industry also create new insuring risks. These ancillary businesses stretch from growth to retail, and beyond – from testing facilities to professionals offering advice to cannabis businesses. Given the rapidly changing laws in this industry some businesses retain compliance departments to ensure conformity, which entails its own independent scope of risk.
Guidance can be sought as to some of these unique risks from overlapping or similar industries, such as farming, food distribution, manufacturing or pharmaceutical – but the cannabis industry nonetheless presents a rare blend of risk.
Insuring the ever-evolving cannabis industry presents unique issues. Given the current legal climate, insurers must prepare themselves for the uncertain liability and scope of damages that will arise out of insuring the cannabis industry. Even assuming the conflict between state and federal law as to legality is ultimately resolved, policy language specifically tailored to the cannabis industry will be crucial to providing the right type of coverage for customers.