Legalized marijuana: Opportunity or time bomb? – Part 1

The legalization of marijuana across the country raises multiple issues for carriers that are determining whether to enter into this new economy.

Legalizing the use and sale of marijuana at the state level has created a myriad of rules and regulations that vary from state to state. (Photo: Shutterstock)

The number of unknowns surrounding the gradual legalization of marijuana across the U.S. far outweighs what insurers currently understand about this enterprise. For an industry that relies heavily on actuarial data to assess risk, this new venture provides little information on which to base coverage decisions or risk management strategies.

Just trying to find growth projections illustrates how much is unknown about the legalized marijuana industry. Grand View Research estimates that the global legal market is expected to reach $146 billion by 2025. The company also predicts that medical marijuana will reach an estimated value of $100 billion by 2025.

Contrast these numbers with data from Arcview Market Research and BDS Analytics, which predict that spending on legal cannabis is anticipated to reach $57 billion worldwide by 2027. New Frontier Data, which describes itself as an authority on data for the cannabis industry, predicts that the legal cannabis market will grow to $25 billion by 2025. The greatest opportunity for growth is believed to be in the area of recreational use, which is anticipated to expand by 67% by 2025.

There is a famous adage, “Follow the money,” and that’s particularly true in the case of legalized marijuana and hemp products. With 33 states, Guam, Puerto Rico and the District of Columbia legalizing some form of medical marijuana, and 10 states plus the District of Columbia adopting laws that allow its use recreationally, it is well beyond time for the insurance industry to consider what type of impact legalization will have on the various lines of business.

“Cannabis is not a new exposure,” explains Andrew Holmes, chief underwriting officer for UK-based CFC Underwriting, “but it’s the extent that it’s being legalized and decriminalized that creates new exposures for companies.”

With marijuana federally legal now in Canada and increasing its footprint across Europe, Holmes sees it as an emerging risk for insurers. “We need to understand the exposures from legal cannabis,” he says.

A challenge for insurers is the fact that the U.S. Drug Enforcement Administration classifies marijuana as a Schedule 1 drug, making its use or sale illegal at the federal level. Insurance companies, like banks, are subject to federal regulations, which pose risks to the entities providing services or collecting payments associated with marijuana products. Legalizing the use and sale of marijuana at the state level has created myriad rules and regulations that vary from state to state.

Identifying the real impacts of legalization

In an effort to connect the dots in a way that politicians, entrepreneurs and the general public have not, consider how these lines of insurance could be affected: auto (personal and commercial), property & casualty, commercial general liability, workers’ compensation, directors & officers liability, cyber, product liability, health and life.

Auto: Does legalization actually increase the number of auto accidents or not? Information from preliminary studies shows a modest increase; however, these numbers could also be due to a larger number of drivers on the road as unemployment rates and gas prices dropped. A roadside test is still not available to determine whether a driver is operating a vehicle under the influence of marijuana. A saliva test can confirm that a driver recently used marijuana, but not whether the driver is under the influence. In addition, combining alcohol and other drugs (legal or illegal) with marijuana increases the way it affects drivers and could contribute to a driver’s impairment.

Evidence shows that drivers under the influence of marijuana tend to drive more slowly and allow greater following distances between vehicles. They have fewer lane departures and change lanes less frequently. However, drivers under the influence of alcohol tend to be more aggressive, driving faster and frequently changing lanes or drifting out of their lane.

Tim Grant, senior director of underwriting, auto, for LexisNexis says there is still limited data for insurers to utilize regarding the impact of drugged driving and the company is collecting data surrounding this issue. He finds that carriers usually don’t exclude coverage for accidents involving driving under the influence; however, it may affect liability coverage for third parties. “The frequency of claims is higher than for sober drivers and in states where marijuana is not legal,” he adds. “Carriers are exposed to greater levels of risk and have to build that into their processes and underwriting.”

Property & casualty: Claims in this area could arise from incidents involving growing operations (for example, fires due to manufacturing processes, floods or environmental issues), theft, vandalism or damage, and other property-related claims. “For marijuana to grow, you need humidity, and the way you create the perfect growing environment is to artificially create the humidity and not allow it to leave the premises,” details William Mauro, director of commercial casualty product development at ISO. “This creates a mold exposure. In looking at the premises, it could lead to problems with the structure such as mold inside the walls from the operation and contamination of the product.” Creating the “warmth and sun” the product needs within the confines of a structure could result in real fire concerns because of indoor growing operations, continues Mauro.

In addition, plants need carbon dioxide to grow and it is pumped into the grow houses. “This creates a hazardous condition for humans operating in these environments,” says Mauro. “Dangerous gases intentionally involved in the operation could be an issue.”

Commercial general liability: Marijuana-related businesses have exposures similar to other commercial enterprises, but several are unique to these companies. “Since we’re talking about a plant, there is an issue with insect infestations,” warns Mauro. “Pesticides have been used for marijuana operations and could be dangerous to human beings.” The individual states are creating guidelines regarding the use of pesticides in these enterprises.

Ian Stewart, a partner with the Los Angeles office of national law firm Wilson Elser, says he has seen business disputes and unfair competition claims involving mislabeled products or items that were incorrectly advertised. “Each state has its own market regulations. The regulations cover the same things and the licenses are generally similar. However, each state has the same key points that must be followed.”

Workers’ compensation: There are multiple issues surrounding workers’ compensation: Should insurers pay for medical marijuana? If they do pay, how long should they continue to cover this expense? How does an insurer determine efficacy for an injured worker? If an employer has a zero-tolerance policy for illegal (or even legal) drugs, how does the medical use of marijuana affect that policy? What are the legal repercussions for terminating an employee who tests positive for marijuana?

Teresa Bartlett, M.D., senior medical officer at Sedgwick, explains that physicians can’t prescribe cannabis, they can only recommend it because they think a patient qualifies under state guidelines. She says the general opinion is that marijuana is not good for pain relief, and that there are other legal drugs containing some aspects of cannabidiol (CBD) that could be prescribed.

When it comes to covering the cost of medical marijuana, Bartlett shares some concerns. “Medicinal marijuana is not standardized; we don’t know the quantity, dosage or intensity of what’s being ingested. We don’t know what a person is getting or what we’re paying for.” In addition, marijuana purchases are usually on a cash-only basis, which can make it difficult to track them.

Workers’ comp issues also affect employees of cannabis-related companies. David Geller, emerging issues senior analyst with Verisk explains that there are risks of explosions and fire, and chemical exposures to pesticides and fungicides that could become issues later on down the line. Then there are issues involving drug testing. “Testing employees is difficult, but necessary if they don’t want someone working under the influence.” Workers’ comp claims for employees generally include cutting accidents suffered during the preparation phase or exposure to chemicals used during processing.

Directors & officers liability – Directors and officers of any marijuana business face the same liabilities as those in other commercial enterprises, but they could have greater exposures for product liability and other risks.

Cyber – In addition to protecting a purchaser’s personally identifiable information, many customers are purchasing marijuana products online, which gives rise to data breach exposures, said Holmes. Owners of smaller enterprises are already at risk because they may not understand the cyber risks or have the systems in place to protect their websites or keep customer information from being hacked.

Product liability – Because each state establishes its own guidelines and regulations concerning the sale and manufacture of marijuana-related products, they vary significantly. Companies that manufacture products frequently purchase supplies from growers and suppliers. The products come in different strengths and there are no federal regulations concerning labeling, so some products may not be appropriately identified for specific uses or have accurate information about the percentages of tetrahydrocannabinol (THC) and CBD they contain.

Health – A new study finds that babies exposed to cannabis in utero late in pregnancy were 82% more likely to experience a low birth weight, 79% were more likely to be born early, and 43% were more likely to spend time in the neonatal intensive care unit. In addition, the THC found in marijuana can be absorbed in a mother’s breast milk and then passed onto a nursing infant.

The Centers for Disease Control and Prevention (CDC) finds that frequent use of marijuana can lead to addiction (approximately 1 in 10 people), but says the risks may vary depending on how it is used. Although smoking can produce an almost immediate “high,” edibles take longer to digest and produce an effect, which can lead to individuals consuming more marijuana than they think, so it affects them sooner. Marijuana affects brain development, so individuals who begin using it in their teens may see an impact on their learning functions, attention and memory as their brains are still maturing.

Life – Insurers generally conduct physicals for individuals purchasing life insurance, so any recent use of marijuana would be detected, and the insurer may consider it a risk factor for coverage. There have been no long-term studies conducted to determine the effect of prolonged marijuana use on life expectancy, however, there does seem to be increasing evidence that individuals who start using marijuana in their youth develop memory issues, and can damage their bronchial passages and lungs. Regular marijuana use can also increase the risk of heart attacks and strokes in individuals of all ages according to research by the Journal of the American Heart Association.

Tomorrow we will examine some of the myths surrounding cannabis-related enterprises and take an in-depth look at one manufacturing entity to identify some of the challenges and risks facing businesses in this industry.

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