With an eye to stay on top of trends and towards emerging industries. Many insurance carriers see a business opportunity in protecting the assets of medical and legal marijuana growers and dispensaries in California and elsewhere.
The cannabis industry will continue to see explosive growth and is expected to grow to nearly $15 billion over the next four years.
Standard insurers are prepared to adopt policies that spell out property and casualty coverages for legal and medical marijuana entrepreneurs, particularly now that they have seen others dip their toe in the market with success.
In states where manufacture, sale and use is legal for recreational purposes, legalization will have a profound impact on commercial coverage, workers’ comp, product and cyber liability, healthcare insurance and more.
Currently, 27 states have either decriminalized or legalized marijuana use in some form. Four states: Alaska, Colorado, Oregon and Washington, and the District of Columbia allow recreational use. In addition, recreational marijuana initiatives are expected to appear on 2016 ballots in Arizona, California, Maine, Massachusetts and Nevada.
According to a recent Gallop poll, 51% of Americans now support full legalization. In 2014, Oregonians voted to legalize marijuana by a 56 to 44% margin. More Oregonians voted to legalize cannabis than voted to retain their incumbent Democratic governor or senator in the same election.
Is this REALLY legal? Technically, it isn’t.
The federal government has greeted legalization by the states with benevolent indifference. The Controlled Substance Act categorizes marijuana as contraband for any purpose, including medical use, designating it a Schedule 1 drug along with heroin and LSD. The manufacture, distribution, or possession of marijuana remains a federal crime for which, if prosecuted, state legalization laws cannot be used as a defense.
So the question is, could an insurance carrier claim federal law over state law? And deny a claim based on cannabis as one of the losses.
The accepted rationale for denying claims for loss of marijuana includes:
- it is illegal under federal law
- a contract for an illegal item is unenforceable
- there can be no insurable interest in an illegal item
A federal judge in Colorado recently ruled that a commercial property and general liability policy issued to a medical marijuana dispensary and its cultivation facility can provide coverage for harvested marijuana that is damaged or destroyed. In the case of The Green Earth Wellness Center, LLC v. Atain Specialty Insurance Company, smoke and ash from a wildfire entered the facility’s ventilation system and damaged Green Earth’s potted pot plants to the tune of $200,000, with an additional $40,000 in damage to plants that had already been harvested and were being prepared for sale.
The policy covered Green Earth’s “Stock,” but excluded “Contraband” and “growing crops.” The court held that the potted plants were “growing crops,” so no coverage was available for their loss would be contrary to law and public policy because their cultivation is prohibited by federal law.
The policy, however, was governed by the law of the state in which the suit is brought. Thus, Colorado’s state law – which does not prohibit the cultivation of medicinal marijuana – applied. Noting the “nominal federal prohibition against possession of marijuana,” the court held that the term “Contraband” was rendered ambiguous “by the difference between the federal government’s de jure and de facto public policies regarding state-regulated medical marijuana.”
The court also rejected the insurer’s argument that coverage would be against public policy, declining to follow a 2012 decision from another district court which held that enforcing the terms of an insurance policy to cover damage to marijuana plants would be contrary to federal law and public policy. Thus, Green Earth’s claim for the $40,000 in damage to the harvested plants is headed for trial. It remains to be seen whether the ruling will be appealed.
Any Insurable Interest?
Without exception any business in any sector involves some sort of risk, and sometimes that risk can exceed the benefits of the business. Insurance is a way of managing risk. You pay a little money and in the event of a claim you get deeper pockets to foot the bill for legal fees and claim payouts.
Every business needs insurance. Landlord and lenders require insurance coverage. So do vendors. And if your business deals with the public, like every medical or recreational marijuana business does, you leave yourself open to claims and lawsuits for a variety of things from slip and fall to product and cyber liability. Insurance is a must if you plan on staying in business for very long.
Cannabis liability insurance isn’t really all that different from liability insurance in other industries. The important things to know are:
1. Liability insurance isn’t unlimited coverage. You will need help selecting liability limits and you can pay for higher limits if you so desire. If you have a big claim, once the policy limit is exhausted, the insurance company is out. That’s where umbrella policies come in.
2. A liability insurance policy will cover slips and falls or property damage but not financial obligations like monetary contractual obligations. There are bonds for that type of coverage.
3. Liability insurance policies don’t cover everything. You see words like “comprehensive commercial general liability” or just “general liability” and you think that’s all you need. Unfortunately, if you are doing something with your business that your insurance company doesn’t know about then there probably isn’t going to be coverage for it.
Recently, Lloyd’s of London ended insurance for the cannabis industry until it becomes legal at the federal level.
How is that impacting companies today and how might it impact them in the future?
Lloyds pulling out of the market has definitely shaken things up, but there is still coverage available.
It expected as more policies are nonrenewed that insurance premiums will go up.
The other insurance companies still writing cannabis coverage are facing less competition and they have less capacity for these policies, so the bottom line will increase. That also means underwriters are going to become more stringent as they quote new policies, so marijuana businesses will need to understand the underwriting requirements to keep their coverage at a reasonable cost.
New insurance companies are entering the marketplace looking for business, so cannabis entrepreneurs should look for companies coming in with rock bottom rates.
I can help you find the right coverage plan for your cannabis business. If you had to face a lawsuit, it could get expensive and you don’t want to fight that alone. Give me a call 858-216-4144 or email me a question at freddie@torinsurance.com.
This is the blog of Freddie Servin 