Last Updated 2/23/2022
Issue: Demand for cannabis is increasing dramatically. More than half of U.S. states have legalized some form of medical or recreational marijuana, and the demand for cannabis is increasing dramatically. The division between state and federal status makes it difficult for businesses to receive inclusive, affordable coverage and often leaves policyholders with restrictive plans.
Background: Conflicting state and federal laws, emerging standardization of business practices and rapidly evolving regulations have largely discouraged insurers from participating in this market. Cannabis is an illegal substance under the Controlled Substances Act (CSA), which classifies it as a Schedule I drug and is stated "to have no currently accepted medical use in treatment in the United States". A provision in the 2018 Farm Bill removed hemp from the list of Schedule 1 controlled substances. As such, the U.S. Drug Enforcement Administration (DEA) will not consider hemp-derived cannabinoid (CBD) a controlled substance subject to the CSA.
However, cannabis and CBD (regardless of whether its sourced from cannabis or hemp) is subject to Federal Drug Administration (FDA) approval under the Federal Food, Drug, and Cosmetic Act (FD&C Act). The FDA has not approved a cannabis drug. It has, however, approved CBD medicines for the treatment of epilepsy. Federal law currently prohibits CBD from being added to any food or drink product. On July 22, 2019, the FDA issued formal letters determining that certain CBD products were sold in violation of the FD&C Act.
Cannabis-related businesses (CRBs) face many risks and obstacles. CRBs share the same general liability and other risks agricultural and manufacturing businesses face. This includes workplace accidents, damage to property and crop failure. CRBs are especially prone to fires from both wild and internal sources. Some of the biggest risks involve theft, general liability and product liability. Companies functioning within state legality face severe banking restrictions due to federal regulations. It is estimated that approximately 70% of CRBs operate solely as a cash-only business and have no formal relationship with a bank. As a result, CRBs may be forced to handle large sums of cash, subjecting them to a higher risk of theft and increased liability. However, federal legislation - the Secure and Fair Enforcement (SAFE) Banking Act - was introduced and passed by the House of Representatives in April 2021. The SAFE Banking Act would allow CRBs access to financial institutions' products and services. It currently awaits further action in the Senate. Another piece of legislation, the Clarifying Law Around Insurance of Marijuana (CLAIM) Act, was introduced in the Senate in March 2021, where it currently awaits further action. The CLAIM Act would allow insurers to provide coverage to cannabis businesses without the threat of federal prosecution.
The popularity of cannabis-infused products, such as edibles, increases the risk of product liability and safety recalls. The psychoactive effects of cannabis raise the risk products may be deemed mislabeled, misrepresented or harmful. Standard general liability plans account for these claims in non-CRB businesses, but most insurers hesitate to provide such coverage for CRBs due to the legal uncertainties. Policy language specifically tailored to the cannabis industry is crucial in providing adequate coverage.
Individuals using cannabis also face insurance challenges ranging from legality issues to coverage deficiencies. Users may be faulted in workers’ compensation claims or subject to employment-disqualifying drug screening. In addition, insurers offering medical treatment options may have policies preventing the use of cannabis in treating a patient’s condition.
Auto insurance rates may be influenced by elevated risks associated with drivers under the influence. Complicating the situation is the lack of standardized methods for roadside detection of drug-impaired driving. Additionally, the variability of side effects and physiological reactions in each user increase the risk of misidentifying a driver’s status at the time of the incident.
Finding and securing adequate insurance coverage for CRBs can be challenging. According to a 2020 report by New Dawn Risk, there are currently only six insurers offering cannabis coverage. Additionally, because of federal laws surrounding cannabis, insurers and brokers do not formally advertise their services to CRBs. Instead, most CRB owners hear about insurance options through word-of-mouth in the cannabis community. When CRBs do find and obtain coverage, most need to pay their premiums in cash, which presents another unique obstacle most other businesses do not face. Yet another issue the New Dawn Risk report addresses is inadequate policy limits on coverage. Currently, most insurers are offering $1 million per occurrence/$2 million aggregate policies in commercial and general liability, property damage, and product liability coverage. However, insureds may need limits up to $5 and $10 million, or more.
Status: There are many legal uncertainties, unique hazards and emerging risks involved in legal cannabis-related activities. The CIPR’s May 16, 2018 Weeding through the Unique Insurance Needs of the Cannabis Industry examined many of these issues. Additionally, the NAIC Cannabis Insurance (C) Working Group was formed in 2018 to better understand the cannabis industry’s insurance coverage gaps and regulatory issues. Members will develop best practices for state insurance regulators to help them address these insurance needs. As part of this process, the Working Group adopted the Understanding the Market for Cannabis Insurance white paper in 2019. Its current focus is on collecting aggregated insurance availability and coverage gap information. The results will be compiled into a report that will be released by the end of 2021.
On June 2, 2021, the Working Group chair presented a memorandum from the Working Group recommending that the Government Relations (EX) Leadership Council membership issue letters in support and advocate for the passage of the Secure and Fair Enforcement (SAFE) Banking Act and Clarifying Law Around Insurance of Marijuana (CLAIM) Act. The proposed bills would expand insurance coverage options for businesses and remove federal barriers for insurers to conduct business with cannabis-related businesses that are legal in their respective states.
In 2022, the Working Group will be focused on many issues such as monitoring federal legislation that would protect financial institutions from liability associated with providing banking services to legal cannabis businesses; encouraging insurers to make sure insurance coverage is adequate in states where cannabis and hemp are legal; staying updated on new insurance products and trends in the cannabis space and providing insurance resources to stakeholders; creating an appendix to the Understanding the Market for Cannabis Insurance white paper; and partnering with the Producer Licensing (D) Task Force to study whether cannabis-related convictions are preventing individuals from pursuing licenses as insurance agents or brokers.
Committees Active on This Topic
The SAFE Banking and CLAIMS Act Will Transform the Cannabis Insurance Industry - Here's What to Expect (National Law Review, May 2021)
Is 2021 the year of meaningful cannabis banking reform? (JDSupra, July 2021)
Understanding the Market for Cannabis Insurance (NAIC White Paper by the Cannabis Insurance (C) Working Group & the Property & Casualty Insurance (C) Committee, 2019)
Insuring the Commercial Cannabis Industry
January 2019, CIPR Newsletter
Cannabis: From Criminality to Commercial Enterprise
November 2018, NAMIC
FDA and Marijuana: Questions and Answers
August 2017, U.S. Food & Drug Administration
State Medical Marijuana Laws
February 2018, National Conference of State Legislatures
Cannabis and Insurance Initiative
California Department of Insurance
The Marijuana Policy Gap and the Path Forward
March 2017, Congressional Research Service
National Cancer Institute: Cannabis and Cannabinoids
November 2017, National Institute of Health
Drug Impaired Driving
April 2017, Governors Highway Safety Association
July 2017, National Highway Traffic Safety Administration
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Regulatory Research Specialist