Like a Good Neighbor? Regulators Want Insurers to Be There for Weed Vendors

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By Brandon Ross

The California Insurance Department is rolling out the red carpet for insurance companies willing to fill a void and offer recreational-cannabis growers and retailers coverage, now that the state has legalized marijuana for non-medical use.

Recreational cannabis goes on sale Jan. 1 in California, but—as has been the case in other states that have already legalized marijuana—insurers are reluctant to offer comprehensive, affordable coverage to the burgeoning industry.

“With insurance, the bigger providers are unwilling to service marijuana companies because they’re afraid,” said Shawn Hauser, senior associate at Vicente Sederberg LLC, which represents cannabis businesses. “The businesses are often not able to get the minimum coverage they need.”

Marijuana sellers need routine commercial coverage like any business, but the industry also faces unique insurance challenges. For one thing, it is a federal crime not only to sell marijuana, but to assist in the sale—something insurers could be charged with doing by offering policies. Further, because state-legal marijuana markets have only existed in parts of the U.S. for a short time, historical loss data is relatively shallow, so premiums are hard to set with confidence.

Insurers are worried that the federal laws still treating cannabis as an illegal substance on the same level as heroin, coupled with the Trump administration’s open disdain for marijuana, could lead to federal action against those that service the industry.

“What it really boils down to is the whole issue with the federal government,” James Lynch, chief actuary and vice president of research and information services for the Insurance Information Institute, an industry group, told Bloomberg Government. “That’s the killer for the insurance industry.”

Specialty insurers called surplus line companies are offering coverage for some components of the cannabis industry, but large, commercial insurers have been less inclined to back businesses that grow and sell the product.

“The big commercial companies like Farmers, State Farm, Nationwide, AIG, [and] Chubb, are not writing as admitted cannabis carriers in California,” Dave Jones, California’s insurance commissioner, told Bloomberg Government. To help speed the process, "[w]e will approve commercial carriers’ filings within 60 days if they file forms to us to serve the cannabis industry.”

Admitted carriers are those approved to offer coverage by a state’s insurance department. They’re subject to more oversight and regulation than non-admitted carriers, like surplus line insurers, which don’t need state insurance department approval.

Expediting Reviews

California’s regulators usually take about six months to review and approve insurers’ regulatory rate filings, which include prices and the rationale for those prices, according to Susan Stapp, deputy general counsel for the department.

But the commission will expedite the review process to help fill a crucial insurance gap, Jones said.

Jones applauded the surplus line industry for stepping up.

But without state-approved commercial underwriters offering cannabis insurance, “The coverage is not as complete as it might be,” Jones said. “The pricing is probably a little higher than if we had more competition.” Jones said.

The department has received inquiries from commercial insurers about offering coverage to cannabis companies, Jones said.

Getting Insurers to the Table

The state insurance department has actively tried to get commercial underwriters to cover cannabis operations.

“I have facilitated meetings between executives in the commercial market and leaders in the cannabis industry to educate commercial underwriters about the industry,” Jones said.

“I’m leading some tours [for insurers] at some cannabis manufacturers,” Jones said, adding that he wants insurers to see how professionally, clean, and transparent cannabis manufacturers operate.

The department is holding a public hearing Oct. 19 to collect data from the cannabis industry and insurers to understand how to help fill the insurance gap.

Rapid Growth Expected

California could have $3 billion in yearly cannabis sales by 2020, Michael Gordon, CEO of Kush Tourism, a cannabis resource guide that tracks marijuana retailers, told Bloomberg Government.

“California has the potential to outpace Colorado, [Washington] and Oregon combined in terms of growth,” Gordon said.

For California, combined sales of medical and recreational cannabis are expected to grow to about $4.9 billion in 2018, $5.2 billion in 2019, and $5.8 billion in 2020, Andrew Livingston, director of economics and research for Vicente Sederberg LLC, told Bloomberg Government in an email.

“My national adult-use [recreational] market estimate for 2020 is about $9.3 billion,” Livingston said.

Federal Law a Factor

Although the lack of historical data is one deterrent to insurers, the bigger problem is the federal prohibition.

The potential for having to defend cannabis vendors from product liability lawsuits isn’t a major stumbling block for insurers, according to Carl Werner, an associate with Vicente Sederberg.

“To the extent an insurer perceives additional products liability risk in the marijuana industry, they will simply increase the price of insurance to cover that risk,” he told Bloomberg Government in an email.

"[I]f cigarettes, alcohol, fireworks, firearms, automobiles and pharmaceuticals can all be insured despite their significant risks, so can cannabis,” he said, adding that product liability case law regarding pot is “quite limited.”

Cold, Hard Cash

The biggest concern for insurers considering servicing the cannabis industry centers on the prohibitions under federal law.

For example, Lynch said, most banks won’t service cannabis companies due to federal restrictions. This means tall transactions, including the profits earned by cannabis companies and their salary payments to employees, must be handled in cold, hard cash.

Cash is easy to steal, posing further risk to insuring cannabis businesses, Lynch said.

“It’s very difficult to transact business on a cash basis,” Lynch said. “That creates complexity.”

To contact the reporter on this story: Brandon Ross in Washington at bRoss@bna.com

To contact the editor responsible for this story: Paul Hendrie at pHendrie@bna.com

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

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