Legal Marijuana: An Insurance Perspective

The past decade has been transformative for U.S. marijuana laws. Not since the era of Prohibition has the U.S. wrestled so broadly and intensely with the cultural, judicial and economic implications of legalizing a formerly illegal substance. And while the push to reform state marijuana laws continues sweeping the country with unambiguous fervor—a late-2018 Gallup poll showed 64% of Americans favor legalization—many questions and complications remain for those in the insurance industry. Whether it’s being used as medicine or for recreational leisure, marijuana's core problem for insurers is a policy landscape where myriad state laws now conflict with the fact that the federal government still considers marijuana illegal under the Controlled Substances Act (CSA) and classifies it as a Schedule I drug with "no currently accepted medical use in treatment in the U.S." What’s more, the particulars of individual state laws are anything but uniform, and what’s considered legal in one state may be unlawful in another—even if they both allow for some degree of marijuana possession or consumption. “This has all led to a real insurance quandary,” says Brenda Wells, director of the risk management and insurance program at East Carolina University in Greenville, NC. “Do they cover it? Do they not cover it? And if they do cover it, how is it valued? These are just some of the questions they’re wrestling with at this stage. And it can get confusing.” Marijuana and Homeowners Insurance The question is simple: If a policyholder has some marijuana—or is growing it within state-mandated limits—and it’s damaged in a fire or stolen from the property, will a homeowners insurance policy cover the loss? The answer is not so straightforward. Not only are insurers nervous about covering marijuana-related losses because of the legal disparities between state and federal policy, but most homeowner policies also contain explicit exclusionary language related to controlled substances, which means that a claim for lost, stolen or vandalized cannabis may be denied if the insurer believes the loss falls within the exclusion. This can wreak havoc on the enforcement of contracts between an insurer and its clients, says attorney Richard Blau, an insurance expert and shareholder at GrayRobinson and head of the firm’s medical marijuana team. To emphasize his point, Blau cites a now-infamous 2012 Hawaii federal court ruling that said a homeowners insurance policy did not cover the theft of one woman’s marijuana plants grown for medicinal use. The homeowner, Barbara Tracy, was allowed to grow and possess marijuana for her own medical use, and after 12 plants were stolen she submitted a claim to USAA for $45,600. USAA initially agreed to pay Tracy $8,801 for the claim, but Tracy sued, claiming the plants had a far greater value. USAA argued that, because marijuana is federally classified as an illegal Schedule I substance, it was under no obligation to cover the loss at all. The court ultimately agreed with USAA, stating that even though Hawaii law permits the use of marijuana for medicinal use it is illegal under the Controlled Substances Act and therefore not subject to homeowners insurance coverage. “So on the one hand, you have a lot of insurance companies that operate in many different states, which means they arguably fall under federal jurisdiction. They’re worried their charters could be challenged under federal law,” Blau says. “But you also have what I think is the larger issue of judicial precedence that says insurance contracts are not enforceable under federal law. The good news is that… we now have an alternative line of cases where judges have ruled that as long as the claimant stayed within the scope of state law the insurance contract is valid and enforceable. But the split of judicial opinion needs to be reconciled.” See also: In the Weeds on Marijuana and WC   According to Wells, a lot of insurance companies “are reluctant to even talk” about whether they will cover marijuana-related homeowner losses, adding that “the industry in general hasn’t been handling this very well, but they need to figure out if they’re going to cover this. And if they are, they need to be prepared to pay claims like they would for anything else.” Trying to find a catchall approach to the marijuana home insurance quandary produces a staggering variety of anecdotes, opinions and legal vagaries that fluctuate from state to state and from insurer to insurer. At the end of the day, whether a loss is covered will most likely be up to the individual insurer. “Legal marijuana is one of a few Wild West issues facing property insurance right now. It’s vast, uncharted territory,” says Janet Tulsette, a Connecticut-based property insurance consultant who has recently specialized in the intersection of insurance and marijuana law. “Not only is it complicated…but it’s also so unprecedented, which means insurers are reluctant to be the first to make any bold moves one way or the other. They’re playing it relatively safe, but that makes things more complicated, not less.” As of right now, some insurers are looking to individual state laws to establish a precedent for coverage. For instance, Allstate went on the record in 2014 saying it would cover the loss of marijuana in Colorado, where cannabis is legal for both medicinal and recreational use, adding that marijuana plants grown with a state license—and not exceeding the legal state limit—would be “limited to the perils and limits under additional protection for trees, shrubs, plants and lawns.” Marijuana and auto insurance On a consumer level, the intersection of legal marijuana and auto insurance has been fairly uncomplicated thus far, and that’s because the insurance ramifications for getting caught driving high are no different than those associated with driving under the influence of alcohol. However, cannabis-related businesses are finding it extremely difficult to obtain commercial auto insurance policies that can adequately cover various auto-based aspects of their businesses, including the transport and delivery of cannabis-related products. “A lot of the mainstream underwriters are pretty old school, and their vision of a driver in this industry is like a stoner pizza delivery guy,” says Jeff Kleid, owner of the California-based Elite Green Insurance Solutions, which provides a suite of insurance products to the cannabis and hemp industries. “They think that since these men and women are delivering marijuana they must also be smoking it while they’re driving. And that couldn’t be further from the truth. This is a problem of perception as much as it is a problem of legal disparities.” Kleid is quick to point out that insurers are also reluctant to write commercial auto policies because there’s a significant dearth of claims and risk data essential to underwriting. “Insurance is a data-driven industry, and because it’s been illegal for so long there’s not enough data out there to make insurers comfortable working in this space,” Kleid says. Marijuana and life insurance As more and more Americans legally smoke cannabis for recreational and medicinal use, life insurance providers have had to grapple with its impact on the application and underwriting process. According to insurance specialist Michael Quinn, life insurance providers are wrestling with whether smoking marijuana carries the same health risks as smoking cigarettes. “Regular smokers are charged tobacco rates, which are often four times higher than those for non-tobacco users,” Quinn says. “But some insurers are deciding to treat marijuana differently.” For instance, Prudential tends to offer some of the lowest life insurance rates for marijuana users because they do not place them in the same risk pool as cigarette smokers. According to Prudential, a preferred non-tobacco rate is granted to users who smoke marijuana no more than three times per week, and insurance applicants must admit to marijuana use during the application process. Meanwhile, providers like United of Omaha offer non-tobacco rates for those who smoke marijuana no more than three times per month, while John Hancock stipulates that it considers smoking marijuana “drug use” and will not offer applicants competitive rates. “Based on your marijuana use alone, there is no telling what kind of rates you will be offered. You could technically get rates anywhere from substandard to preferred plus,” Quinn says. “However, a company like Prudential looks at the reason behind your marijuana use, and if it’s for medicinal reasons your rates will be based on the severity of your health condition, not the marijuana use alone.” Many in the industry echo this distinction. “For underwriting consideration, the first thing we must determine is whether the use is recreational, or if the proposed insured had been issued a prescription for medical use,” Pinney Insurance underwriter Mike Woods says. “If it’s for medicinal purposes, underwriting is going to be looking to the specific issue that the marijuana is being used to treat." Marijuana and business insurance As anyone familiar with the legal cannabis industry will attest, there is a lot of money to be made from insuring cannabis-related businesses. According to Fortune, the U.S.’s legal marijuana industry grew to $10.4 billion in 2018 (it was $6.5 billion in 2016) and employed more than 250,000 people. What’s more, Fortune estimates that investors will “funnel more than $16 billion into the industry” in 2019. The need for a comprehensive approach to insuring various aspects of the legal marijuana industry is becoming increasingly critical for everyone from growers to dispensary owners, and there are signs that the insurance industry is starting to pay attention. To be sure, a handful of niche carriers and subsidiaries have begun filling the gap. For instance, Brown & Brown Insurance now offers marijuana business insurance through a new company division called Cannabis Insurance Professionals (CIP), which is based out of California and licensed in all 50 states. CIP garnered national headlines last year after the company paid out more than $1 million to one of its clients whose marijuana crop was destroyed in the 2018 Thomas wildfire. “There are small private insurers trying to fill the gap, but not many. And most of these companies are non-admitted, coverage is limited and the price is expensive,” says Dawna Capps Evans, executive director of the National Cannabis Risk Management Association (NCRMA), a membership-based trade organization that provides risk management and insurance solutions for CRB owners and investors. According to Evans, the current insurance landscape leaves business owners with tough choices. “They can either purchase very costly insurance, or they can go uninsured or under-insured—which leaves assets unprotected and exposes them from a personal liability perspective—or they have to piece a plan together from many different insurers, which can be extremely time consuming,” Evans says. See also: Marijuana and Workers’ Comp   According to attorney Meghana Shah—partner at Eversheds Sutherland LLP and co-founder of the firm’s cannabis industry team—the conflict between state and federal law once again rears its head, potentially exposing marijuana businesses and their ancillary service providers (such as insurers) to federal criminal liability. “Business owners and insurers alike remain concerned about the risks associated with doing business in the cannabis industry,” Shah says. “For cannabis-related businesses, the inability to secure insurance renders them unable to protect themselves against common business risks, some of which have the potential to irreversibly cripple their business.” Adjacent to this concern is the limited access that CRBs have to the banking system. Consider, for instance, that in 2014 Colorado’s Fourth Corner Credit Union was chartered to serve the “unique financial needs” of cannabis-related businesses. But despite operating within the boundaries of Colorado’s legalized marijuana framework, the application for a master account from the U.S. Federal Reserve System was denied because of marijuana’s continued illegality at the federal level. This is just one example of how the disparity between state and federal law has forced the legal cannabis industry to operate within a cash-intensive “gray market,” bringing with it all manner of concerns, including theft, the risks of currency transportation, money laundering and cash hoarding. “The lack of banking options is a unique and significant risk for the cannabis industry right now because so much of this economy is being fueled by large, cash-based operations, and that leads to significant exposure,” Evans says. “Banking and financial institutions play a critical role in our economy, and most businesses take for granted the way they use these institutions in a secure way. Without access to safe banking in the cannabis industry, insurers are going to be very reluctant to get on board.” In an effort to address this particular problem, the House Financial Services Committee voted 45-15 in March to advance the Secure and Fair Enforcement (SAFE) Banking Act, which aims to protect banks and other financial institutions from federal prosecution when working with cannabis-related businesses operating in compliance with state laws. What’s more, the act would prohibit federal banking regulators from sanctioning financial institutions that work with CRBs and would also protect ancillary businesses—like insurance companies—from being charged with money laundering or related financial crimes. And while the SAFE Banking Act still faces an uphill battle, many in the industry are extremely optimistic about what it foreshadows. “The industry is only going to grow, and the losses associated with legal marijuana are only going to increase,” Tulsette says. “The insurance industry really needs to come up with comprehensive and substantive solutions. They can only keep their heads in the sand for so long.”