Finding the opportunities in legalized marijuana – Part 3

The first two installments of this series examined some of the areas of insurance affected by the legalization of marijuana and took an in-depth look at the challenges facing many of these new cannabis-related businesses. While they operate similarly to other commercial enterprises, they also have very unique risks because of the nature of their companies and the value of their products.

• Legalized marijuana: Opportunity or time bomb? – Part 1
• Examining the risks of legalized marijuana — Part 2

As cash-based businesses, they have a higher risk of theft from employees and outsiders. Since many were started without bank loans or other traditional funding, the owners have a great deal invested in their company’s success or failure.

Insurance coverage and regulations

The conflict between federal and state regulations continues to be an issue for carriers, financial institutions and even the business owners themselves.

Patrick McManamon, CEO of Cannasure says they have seen an influx of carriers into the market since 2017, and he finds “there are several hundred million dollars of premium out there for carriers.” Many of those offering coverage are startups focusing specifically on this industry. However, marijuana businesses that can’t afford or obtain coverage simply operate without it.

Morgan Fox, media relations director for the National Cannabis Industry Association indicates that they’re “starting to see more boutique companies that are creating products. They see the opportunity, value and progress being made to regulate the product, and they want to be a part of it.” He also predicts that there will be more large carriers coming into the market. “Those who come in will see tremendous benefit.”

Ian Stewart, a partner with the Los Angeles office of national law firm Wilson Elser, agrees that there are opportunities for carriers, and he too expects several large commercial insurers to enter the market by the end of the year. Other carriers are not so sure.

Lloyds of London will only provide insurance at a country level and will not enter the U.S. market while marijuana is only legal on a state-by-state basis. Curt Haag, vice president of casualty underwriting for AM Trust says casualty policies have an all-encompassing exclusion for cannabis. “With the conflict between state and federal laws, insurers don’t want to have anything to do with covering marijuana until that is settled.”

At the very least, carriers operating in this space must take the time to read the regulations of the states where they are considering operating. “Any time you get into a heavily regulated industry or operate in multiple states, carriers are taking a more conservative approach to covering those exposures,” adds Robert Pizarro, vice president of specialty lines for AM Trust. “Federal law will always take precedence.”

Some carriers are concerned about interstate commerce issues when it comes to insurance premiums. To circumvent these questions they use third parties to collect premiums because carriers can’t accept money from illegal entities. This allows carriers to comply with the spirit of the law, if not the letter.

McManamon says that carriers are operating within the confines of state laws, and the federal government doesn’t have the desire to go after these entities. “Everyone has to verify that they are operating within state law,” he adds.

Interestingly, while the federal government will not legalize marijuana, it is still willing to collect its share of taxes from cannabis-related companies. In some states, like Colorado, there are also state and local taxes of 15-20% in addition to federal taxes.

For plant-touching entities like Colorado-based Mary’s Medicinals, it’s possible for the company to pay anywhere from 65-85% in taxes on pre-tax revenues. This is due in large part to Section 280(e) of the IRS tax code, which does not allow businesses that qualify for the federal definition of “trafficking” of Schedule 1 or Schedule 2 substances to deduct what would otherwise be considered ordinary business expenses. Even though these state-compliant plant-touching operations are legal in their local jurisdictions, the government views them as illegal and says they meet the federal definition of “trafficking.”

Insurers and financial institutions doing business with cannabis-related entities must ensure they are operating as legal entities. “The biggest worry is that they (carriers) have to watch for money laundering, conspiracy or aiding and abetting in drug trafficking, etc.,” says Fox. “The rescission of the Cole memo [which provided guidance regarding marijuana enforcement under the Obama administration] has not ended up in a crackdown on businesses involved in or with the cannabis industry.”

This much is clear. There is a substantial amount of money involved in cannabis-related businesses, whether it is creating, operating, insuring or taxing them. The issues for carriers will be how to define the risks, assess the real costs, create the products, and do it all within the confines of the law.

Not sure about marijuana-related terminology? Here is a primer.

Marijuana – A plant from the Cannabis sativa L. species. It is a psychoactive drug that can be smoked, consumed and incorporated into other products. It may cause depression, excitement, sleepiness, relaxation, short-term memory loss, dizziness and other reactions in individuals, and is frequently used for pain management. It cannot be prescribed by a physician, only recommended. Identified as a Schedule 1 drug by the U.S. Drug Enforcement Administration, these substances or drugs are considered to have no currently accepted medical use and have a high potential for abuse. Other drugs in this category include heroin and Ecstasy. Different parts of the plant, including the leaves, stems, flower buds and products extracted from it, can be smoked, eaten, vaporized or incorporated into a variety of products ranging from brownies to salves and lip balm.

Cannabis – Another name for marijuana, cannabis comes from Indian hemp plants. It has three primary forms: marijuana, hashish and hash oil.

Tetrahydrocannabinol (THC) – This is the active chemical in marijuana that can cause the psychological effects experienced by users. It can cause hallucinations, delusions and short-term memory issues. The effects may last several hours, but the presence of THC in the blood does not mean an individual is still impaired. Depending on how the marijuana is ingested, THC may affect an individual in 10-30 minutes or up to several hours later if taken through an edible such as a brownie or cookie. THC will show up in blood and urine tests several days to several weeks after ingestion.

Hemp – Also known as industrial hemp, this is grown for industry (commercial use) and has lower levels of THC. Its seeds can be crushed and added to oils, food and beauty products, and its fibers are used in rope, fabrics, paper and other products.

Cannabidiol (CBD) – Found in plants, it does not produce the high that THC does, but it is still used to help manage pain, reduce inflammation and lower anxiety. Reportedly, CBD can help reduce the psychoactive effects of THC depending on how much of each compound is consumed.

Dispensary – The retail entity that sells marijuana-related products to consumers. Many also offer other wellness-related services.

For more information: Industry groups react to passing of the SAFE Act of 2019