Most states now recognize some form of legalized cannabis. This expansion of legalization reflects a sea change in societal attitudes relating to the use of cannabis over a relatively short period of time. This is itself a story.
However, what is often lost in the story is what the state and reservation legal cannabis industry (LCI) must navigate once it is allowed to operate in a state and the related needs of such a complex and multi-faceted industry.
The LCI supply chain begins with cultivation and includes some or all of:
- Retail sales
Insurance Is Often Neither Available Nor Affordable
If necessary and appropriate insurance was widely available, each part of the LCI chain would be insured, just as any other industry uses insurance to protect against unexpected losses. Indeed, the potential for loss in the LCI cannot be ignored.
Unfortunately, necessary and appropriate insurance is often neither widely available nor affordable. And often insurance that seems appropriate for the risks includes provisions that limit or exclude coverage altogether. These gaps in the insurance industry leave LCI participants and consumers without insurance to rely on when things go wrong.
The recent vaping crisis may expose some of these gaps in coverage (although, usage of black market vaping cartridges has complicated understanding of the cause of the lung disease, which means the extent of, and even existence of, injuries that can be attributed to the LCI remains unknown).
For example, some products liability insurance sold to the LCI in recent years has actually included exclusions for bodily injury relating to cannabis products. While this may be an extreme example of an exclusion, the LCI must navigate the common problem of insurance products being sold that do not adequately cover the extent of the risk presented.
As the LCI expands, it is just a matter of time before the lack of adequate insurance results in a major loss that cannot be easily absorbed by industry participants unless something changes to expand access to insurance. This scenario could be exponentially worse from a public policy perspective if the harm of the uninsured loss was born by consumers.
SAFE Banking Act Could Expand Access to Insurance
One of the most closely watched issues in 2019 relating to the LCI has been House passage of H.R. 1595, the SAFE Banking Act. Understandably, most of the mainstream focus relating to the SAFE Banking Act has surrounded the banking issues that the act would address for the LCI.
However, one of the often overlooked aspects of the SAFE Banking Act is how it could change and expand access to insurance for the LCI if the version referred to the Senate passes and is signed into law.
The SAFE Banking Act as referred would:
- Protect insurers, agents, and brokers from being held liable pursuant to a federal law or regulation solely for providing insurance to legal cannabis businesses; and
- Protect those insurers, agents, and brokers which work with states or Indian countries that have legalized cannabis.
For those insurers, agents, and brokers eager to get into the cannabis space, this safe harbor provides reassurance that doing so will not subject individuals or organizations to civil or criminal penalties.
If the Safe Banking Act, as referred, is signed into law, it is inevitable that the available insurance market would expand for the LCI as additional insurance industry participants would finally feel adequately protected from penalties and liability to take advantage of market opportunities.
CLAIM Act Moves Needle Even Further
While the SAFE Banking Act would likely expand the number of participating insurers, agents, and brokers who participate in the LCI, the CLAIM Act (S. 2201 and H.R. 4074) would move the needle even further, essentially creating a framework where the federal illegality of cannabis would have little or no direct impact on insurers, agents, or brokers.
The CLAIM Act would prevent federal agencies from:
- Prohibiting, penalizing, or otherwise discouraging insurers from engaging in the business of insurance in connection with either cannabis-related businesses or states or territories that exercise jurisdiction over cannabis-related businesses;
- Terminating, canceling or otherwise limiting the policies of an insurer solely because the insurer has engaged in the business of insurance in connection with a cannabis-related business;
- Recommending, incentivizing, or encouraging an insurer not to engage in the business of insurance with a policyholder, or downgrading or canceling the insurance services offered to a policyholder solely because the policyholder is involved in cannabis-related businesses; and
- Taking any adverse or corrective supervisory action on policies to: (a) cannabis-related businesses, (b) individuals involved as employees, owners or operators of cannabis-related businesses, or (c) other businesses that lease real estate or equipment to cannabis-related businesses.
The CLAIM Act does not currently have the movement or focus behind it that the SAFE Banking Act enjoys, and even the SAFE Banking Act faces an uphill climb, despite bipartisan support. Many question whether Senate Majority Leader Mitch McConnell (R-Ky.) will allow the SAFE Banking Act to come to the floor for a vote. It’s also possible that, even if the SAFE Banking Act is voted on in the Senate, the version voted on may differ from the version referred to the Senate from the House.
Those insurance industry participants waiting for comfort from the federal government before wading into the cannabis space might find themselves in a state of limbo for the immediate future.
However, with federal elections in 2020, increasing bipartisan support for solutions surrounding banking and insurance for the LCI, and the expansion of the industry, it is only a matter of time before insurers, agents, and brokers have more comfort that participation in the industry can be done without risk of federal penalties or other punishments.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Robin Dusek, a partner resident in Saul Ewing Arnstein & Lehr’s Chicago office, has extensive experience with cannabis law and represents insurers, cedents, reinsurers, and pools across the country in insurance and reinsurance disputes, including in both arbitrations and litigation.