Cannabis coverage constraints ease

Commercial insurance for businesses operating in the cannabis sector is becoming more accessible, with added property capacity in the market and more insurers offering coverage, according to sources.

Due to its status as a Federal Schedule I narcotic, however, coverage remains almost exclusively written on a surplus lines basis, and there are still fewer players in the cannabis space than in many other specialty coverages, they said.

That could change with a U.S. Department of Justice proposal to change cannabis to a Schedule III drug under the Controlled Substances Act (see related story below).

Meanwhile, as the cannabis industry matures, its insurance needs are growing beyond basic property/casualty lines to include coverages such as cyber and directors and officers liability.

“Capacity is far better than it was, especially on the property side. It’s not uncommon to see very large policies out there,” said Ian Stewart, chair of the national cannabis and hemp law practice at Wilson Elser Moskowitz Edelman & Dicker LLP in Los Angeles.

“There is a good amount of capacity per carrier in the cannabis property market,” said Norman Ives, Seattle-based cannabis practice leader for Amwins Insurance Brokerage LLC. In many cases, though, the capacity is “segmented” or not stackable, he said, making it sometimes challenging to assemble a coverage tower for the largest multistate operators.

For example, a policyholder may easily obtain a $50 million limit from a single source, but one that needs $120 million of limits may find capacity providers jostling for the same place in a tower and unwilling to compromise and stack limits. “You can’t always stack what you’ve got,” Mr. Ives said.

Property coverage pricing, he said, has softened for cannabis operators amid the increase in capacity and competition among managing general agents, which control access to much of the more recent capital entering the market, Mr. Ives said.

“It has improved,” said Jay Virdi, Toronto-based chief sales officer for specialty practices at Hub International Ltd., but the number of cannabis insurers is still much smaller than for other industries.

“When you compare it to any other industry, like construction or hospitality, we’re going to have hundreds of markets with many, many options and have as much capacity as someone needs to buy. But for cannabis, especially for these large, multistate operators, some of them are still underinsured because it’s just not available in the marketplace,” he said.

Capacity has expanded, but there are still comparatively few insurers that will consider writing cannabis risks, said Alex Buschmann, Fort Lauderdale, Florida-
based cannabis practice leader for brokerage Risk Strategies Co.

“Cannabis still is getting a shorter end of the stick. I can take my clients that have 500 apartment complexes on the East Coast in the United States, and I can go get 20 different carriers to set up a tower of wind coverage for that account; I cannot go get 20 different carriers to split a tower of coverage for $300 million worth of coverage on a cannabis account,” he said.

Cyber coverage is a growing topic of conversation among cannabis operators, Mr. Virdi said, but for smaller operators with finite insurance resources, it is sometimes passed over in favor of more basic property/casualty coverages.

D&O coverage remains a costly item for cannabis operators, a more daunting challenge as the industry matures and operators seek to grow.

“Directors and officers and executive lines have historically been a big premium hit,” said Ben Jennings, chief revenue officer of San Francisco-based online commercial broker Embroker Inc.

D&O coverage for the cannabis sector is “incredibly expensive,” said Dr. Craig Antell, New York-based CEO of State of Mind Cannabis Holdings Inc. The company is the parent of individual units State of Mind Flower, State of Mind Realty and State of Mind IP, “all of which have their individual insurance needs,” he said.

As a medical company with in-house pharmacists, State of Mind must comply with the Healthcare Insurance Portability and Accountability Act, making cyber coverage an essential consideration in addition to standard property/casualty insurance and other coverages.

“We’ll have patient data, so we’re going to have to have robust cyber protection,” Dr. Antell said.

State of Mind chose Hub as its broker due to its experience in the cannabis sector originating with the first state approvals on the West Coast, where much of the cannabis industry is based. “We purposely made the decision to work with established West Coast vendors,” Dr. Antell said.

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Rescheduling marijuana could reshape environment for operators

In May, the U.S. Department of Justice proposed changing cannabis from its long-standing status as a Schedule I drug under the U.S. Drug Enforcement Agency’s categorization system to a Schedule III drug.

The move would place cannabis in a category of drugs that have medical applications, such as Tylenol with codeine, rather than in its current category, which includes drugs that are deemed to have no medical value, such as heroin.

While the move would not legalize cannabis at the federal level, it could relax regulatory restrictions, including making research into the effects of the drug easier.

The proposal could have implications for the business operations and insurance coverage of the medical and recreational cannabis industries, sources said. Others, though, emphasized that the shift remains a proposal and may require substantial regulatory efforts before it is finalized, if ever.

Dr. Craig Antell, New York-based CEO of State of Mind Cannabis Holdings Inc., said a move to Schedule III would allow cannabis operators to deduct business expenses from federal income taxes, among other things.

“Schedule III will more than likely provide tax benefits to the cannabis businesses,” said Norman Ives, Seattle-based cannabis practice leader for Amwins Insurance Brokerage LLC, but “there’s still a lot of work to be done.”

Ian Stewart, chair of the national cannabis and hemp law practice at Wilson Elser Moskowitz Edelman & Dicker LLP in Los Angeles, said there has been little or no guidance from the U.S. Department of Justice or other agencies about the proposed move and what, if any regulations it might involve, placing the insurance industry in a “wait-and-see mode.”

A move to Schedule III could allow states to enter into commercial agreements with each other concerning cannabis. “It may spur states to proceed with interstate compacts, allowing interstate commerce of marijuana products between those select states,” Mr. Stewart said.

“It would definitely help the pocket and bottom line and allow some cost-saving mechanisms for our operators,” potentially allowing them larger insurance budgets, said Jay Virdi, Toronto-based chief sales officer for specialty practices at Hub International Ltd.