Examining the risks of legalized marijuana — Part 2

No one disputes that legalized marijuana has created new opportunities for business and insurers. However, learning to recognize these opportunities and identifying the risks requires a thorough understanding of their operations.

Part 1 of this series looked at how legalized marijuana will affect multiple lines of insurance ranging from auto, property & casualty and commercial general liability to workers’ compensation, directors & officers liability, cyber, product liability, health and life. This installment looks at some of the myths surrounding cannabis-related businesses and examines one manufacturing enterprise in-depth.

Myth busting

There are many misconceptions about those involved in growing, manufacturing and selling legalized cannabis. Some might believe that owners are more like the characters portrayed in the old Cheech and Chong movies, but nothing could be further from the truth.

Others think these companies are poorly run and have haphazard business models. In actuality, many of these owners graduated from college with business degrees and worked in other industries before entering the world of legalized cannabis. “We have a new group of entrepreneurs who operate differently from businesses started just five years ago,” shares Patrick McManamon, CEO of Cannasure, which specializes in providing insurance products for this market. “It is a highly competitive industry and there is a belief that they are making millions and millions. In reality, compliance with state regulations eats into the profit margin.”

Eduardo Provencio, general counsel for Mary’s Brands, which manufactures marijuana and hemp-derived products, concurs. “This industry is maturing pretty quickly. You see a lot more suits and blazers than tie-dye and dreadlocks. A lot of smart people are getting into this space.” He shared that the company has spent the last year bringing in people with operations and sales experience outside the cannabis industry. “New executives come in with experience from outside businesses that has to be adapted to meet federal or state regulations.”

Another myth is that legalization is somehow making cannabis more popular and causing it to proliferate. Not so, says Morgan Fox, media relations director for the National Cannabis Industry Association. “It was already popular and confined to an illicit market and people’s private lives. Now it’s controlled by legitimate businesses.”

He agrees that they’re seeing some increase in consumption by adults where cannabis is legalized. “We see older Americans trying it for the first time because the stigma has been removed, or they’re finding it useful for medical purposes and pain management.”

Seeing the big picture

Currently, there are approximately two dozen carriers offering various types of coverage to marijuana-related businesses. What are some of the specific risks, challenges and concerns for cultivators, manufacturers and dispensaries that require coverage? Here is a look at one enterprise with multiple components. Each division of the company has different levels and types of risk.

• Mary’s Brands is the colloquial term the companies used to describe the multiple entities and business lines. Founded in 2012, the company entered the medical marijuana product market in 2013. The co-founders wanted to pursue the medicinal properties of the plant, explains Provencio. The standard users for their products are usually older, first-time users, some “soccer moms” and others who are more discrete users/purchasers. Their flagship product is a transdermal patch used for pain management.

• MM Technology Holdings, licensed in Delaware, is a technology holding company that houses all of the company’s trademarks, and product technology, which are licensed to other affiliated entities of the company.

• Mary’s Medicinals is the locally owned entity that houses the company’s plant-touching products and is licensed in Colorado. It holds the recreational and medicinal-infused product state licenses, and manufactures and sells products under the Mary’s Medicinals brand name to dispensaries, who in turn sell the products to consumers.

• Mary’s Nutritionals is the entity that produces industrial hemp-derived products under the Mary’s Nutritionals, Mary’s Methods, and Mary’s Tails (a hemp product line for pets) brand names. Unlike Mary’s Medicinals products which must adhere to the stringent state marijuana regulatory regime, Mary’s Nutritionals products are produced and distributed nationally and internationally.

• Mary’s Operations is not a plant-touching entity but it supplies the non-marijuana and non-hemp components (such as the patch the marijuana or hemp product goes on) for the marijuana and hemp-product businesses.

• Mary’s Management serves as an employee-leasing entity, which provides employees for many of the company’s various affiliates.

Provencio says the company works with a broker that specializes in cannabis insurance, and finding insurers is still a challenge. The company’s premiums are generally higher than those paid by standard commercial businesses because there are fewer carriers with which to work. Some of their risks include auto liability because they have drivers who deliver their products, product liability and employee theft because they are a cash-heavy business. They use an armored car service to transfer their funds to a local credit union.

The company carries general liability, product liability and medical expense for its hemp-derived businesses, product loss, employee theft, and directors & officers liability for their leadership team.

“The problem is that there are limited options for coverage,” explains Provencio. “We really have to look at all of the exclusions and endorsements to make sure we have the coverage we need, especially with the federal regulations prohibiting protections for illegal business activities.”

He says that although the premiums are high, getting coverage has been a relatively smooth process for the company. “A lot of coverage is emerging in the product space,” he adds.

Because the company is only a manufacturer and not a cultivator, they purchase the raw materials (flowers and plant material) and extract it themselves to turn it into an oil used in their products. If needed, they will also purchase oils from suppliers. However, they’re not a retailer, so their products are only sold to dispensaries.

All incoming materials and finished products are tested in-house before they’re sent to a dispensary. “We have a science team who tests products for potency, pesticides and any other requirements the state may have,” shares Provencio. The company also sends its products out for third-party testing as required by state law.

There are numerous products available for sale at dispensaries, including transdermal patches; capsules and tablets; lip balms; lotions, creams and balms; elixirs; products for smoking, vaping and dabbing; edibles; and many more. “It’s amazing how creative the industry has become,” marvels Provencio. “It’s the craft beer of this day and age.”

The products have various levels of THC and CBD in them. A review of the products on the website for a Timonium, Maryland-based dispensary called Curio Wellness shows the percentages of THC and CBD in their products, with levels of 200%, 1000%, 1400%, 3000% and 5000% for THC or CBD.

Curio declined to be interviewed for this article, but it was difficult to find an explanation of how any product could contain more than 100% of these ingredients. “That is the whole issue. Since there is no standardized measure of THC, what is the right amount of intensity over a certain period of time?” asks Bartlett. “Each product has a different quantity and intensity. It’s hard to tell how long it impairs someone. It stays in the body for 30 days, although the impairment and intoxication decrease over time.”

Another concern is that people who work in the dispensaries may not know about the products they sell, the ingestion rates, how it will affect a user, or how long it stays in someone’s system.

For insurers who may be forced by a state to pay for medical marijuana, the question becomes: How long do we continue paying? Teresa Bartlett, M.D., senior medical officer at Sedgwick, says there is no clinical research to suggest a duration for treatment. “It’s not an FDA-approved drug where you know the side effects, efficacy and so on. Is it a lifelong commitment for the carrier to pay it forever? We know that muscle relaxers are good for 10-14 days and then the efficacy wears off. This doesn’t have any efficacy, so how do you get out from under it?”

Finding answers to these questions will involve research and a careful examination of how marijuana affects individuals of all ages, the long-term impacts and some sort of standardized means of determining the strength of the products and their short- and long-term efficacy.

Part 3 of this series will examine some of the challenges for entities like banking institutions and insurance companies that are federally regulated, but offer services on a state level. It creates an interesting dichotomy for businesses seeking to serve these new marijuana-related enterprises.

Continue to Part 3: Finding the opportunities in legalized marijuana

See more:

• Pending legislation makes insurance available to hemp growers
• N.J. near brink of legalizing marijuana, but auto insurance rates are a concern