The rapid expansion in cannabis-related businesses throughout 2019 shows no sign of slowing in 2020. The 2019 Marijuana Business Factbook projects that by 2023, retail marijuana sales will reach between $25 billion and $30 billion annually — more than three times the level in 2018. And that's not all: U.S. retail sales of CBD (cannabidiol, a cannabinoid), which were expected to surpass $1 billion in 2019 (a 133% increase over 2018 sales) might eclipse $10 billion by 2024, according to projections from the 2019 Hemp & CBD Industry Factbook. Upcoming regulatory developments in the United States and Canada are set to accelerate the growth of the legal cannabis industry and create significant opportunities for insurers. Speaking at Clyde & Co's annual Financial Institutions, Directors and Officers Conference in London in October, Prachi Shah, a senior counsel at the global law firm, noted that "everyone involved in production, distribution and sales in the cannabis industry will need to comply with the regulatory requirements. Failure to do so would present risks to these businesses and their boards and management. This presents huge underwriting opportunities for insurers to provide D&O [directors and officers] coverage as well as other insurance classes including property, fidelity/crime and product liability." One trend is that more businesses are requesting higher limits commensurate with their growth, says Erich Bublitz, vice president of cannabis insurance, Admiral Insurance Group, a Berkley Company. "We saw substantial growth during 2019 that increased in pace throughout the year," Bublitz says. "This was evident in the written premiums and also in the number of agents and brokers involved in insuring cannabis. There is clearly a demand for coverage, which is also driving growth in terms of expertise in the industry." According to Ian Stewart, a partner with the law firm of Wilson Elser Moskowitz Edelman & Dicker LLP, one factor responsible for the increase in the cannabis market in 2019 is that as time goes on, there is less uncertainty. He notes that the Obama administration created a fairly stable environment with the Cole Memo, which said that the U.S. Department of Justice (DOJ) would not enforce the federal prohibition in states that had legalized marijuana in some form and had implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale and possession of marijuana. When Attorney General Jeff Sessions rescinded the memo in January 2018, multiple carriers withdrew from the market. "In the last two years, however, we have seen a more stable situation, and now we have the benefit of two years of hindsight," Stewart says. "Corporate boards are being educated around the context of legalization. Reasonable businesses are willing to take risks even though marijuana is still federally illegal." John Deneen, commercial underwriting manager at Burns & Wilcox, also reports a tremendous expansion in the cannabis space in 2019, driven primarily by the booming hemp and cannabinoid market segment following the passage of the 2018 Farm Bill. A provision in the bill took hemp off the Schedule 1 list; the U.S. Drug Enforcement Administration (DEA) doesn't consider CBD derived from hemp to be a controlled substance. CBD is prohibited by federal law from being added to food and beverage products for human consumption, but the U.S. Food and Drug Administration (FDA) has approved one cannabis-derived and three cannabis-related drug products, which are available only with prescriptions from licensed healthcare providers. |

New players

"States with more mature marijuana markets have seen increasing consolidation, with the big players acquiring additional licenses and locations," says Deneen. He is also seeing increasingly sophisticated operators entering the cannabis space, especially on the hemp/CBD side. The new entrants coming from the food, supplement and pharmaceutical industries expect to see coverage in line with what was available to those other industries. With the expanding market comes increased awareness on the part of businesses about their exposures and the need to cover those exposures. Financial risk is better understood, and the result is that there's more interest in coverage and the need to find the right coverage. "Price was previously the primary driver in decision-making. There is clearly a move to focus more on quality of coverage," says Bublitz. Stewart observed that growth in the cannabis insurance market in 2019 was "somewhat fragmented," with most in property, commercial general liability and workers' compensation. "The market has grown in terms of the number of carriers offering cannabis insurance, higher limits and better excess coverage. Where we have not seen growth is in specialty products such as D&O, EPLI [employment practices liability insurance] and cyber," he says, noting that policies in the cannabis market are expensive, and limits are generally not adequate. Deneen has seen healthy competition, with increasing numbers of players in product liability and property. But professional lines continue to be underserved, with limited options for cyber, crime and management liability. "While the E&O [errors and omissions] market has become increasingly competitive for certain segments — for example, budtenders, medical professionals, testing labs and business consultants — other professionals still find it impossible or prohibitively expensive to procure adequate coverage," he says. Professionals advising on cannabis genetics, recipe formulations or other technical aspects of cannabis operations have difficulty finding adequate protection for their professional advice. "I don't think the question is whether coverage is difficult to find, I think the question is how much good coverage is available," Bublitz says. "We expect significant differences in coverage, but because most lines are E&S [excess & surplus], the quality of coverage falls on a broad spectrum." In the product liability line, he sees coverage that includes a full health-hazard exclusion, which eliminates most material exposure for cannabis products. The cannabis industry is evolving at an unprecedented rate, and so are the industry-specific risk factors. "The operators of CBD businesses seem to view product liability coverage as a critical risk management tool in a way that hasn't been typical in the marijuana space," Deneen observes. Product liability is the most "meaningful" area of liability that Bublitz is seeing. "The marijuana of the 1960s and 1970s is not the cannabis of today," he says. Marijuana was considered "high THC" (tetrahydrocannabinol, the main psychoactive compound in marijuana), at only a 5% THC content. However, today there are products that exceed 80%. "The cannabis market is creating new products, new strains, and new delivery mechanisms at an incredible pace, and the product liability that comes from these new products is potentially significant," he says. "More companies are buying coverage than before, and those that are buying are considering higher limits." One area of product liability risk Stewart believes will increase comes from the growing prevalence of licensed onsite consumption. "Businesses like pot cafes are opening in Hollywood, the San Francisco Bay area, Las Vegas and Colorado, and they'll eventually head east. These operations set up the potential to have catastrophic risk scenarios," he cautions. This would be similar to the situations that can arise when people "bar hop," become impaired, and kill someone in a motor vehicle accident. "We haven't seen that 'poster child' case yet in the industry but as it becomes more common, the stage will be set, and we could see more product liability litigation," Stewart says. Processors and manufacturers are most interested in product liability coverage at this point, Bublitz notes, as they have the most direct exposure. "However, we're starting to see the other parts of the seed-to-sale chain recognize the product exposure. [Medical marijuana] dispensaries are beginning to recognize that by selling a product they, too, have exposure. We think we'll see the recognition of exposure increase in the dispensary space over the next year." One potentially significant risk area for cannabis product liability is presented by contaminants. "The vaping crisis has focused a lot of attention on vape products in general, and specifically on contaminants and adulterants," Deneen says. "The uncertainty surrounding the causes of vape-related illnesses demonstrates how little research exists about the long-term impacts of vaping. The majority of vape illnesses appear to be related to black-market products, but it's difficult to conclude whether vape products are generally safe." |

Claims landscape

The cannabis industry itself is relatively new — at least the legal cannabis industry, Bublitz points out. "Many cannabis companies are new business operators, and so we see employee risks. Workers' compensation and EPLI are areas we feel are underappreciated in the cannabis insurance market." Patrick McManamon, CEO of Cannasure Insurance Services, confirms that workers' compensation is an issue for cannabis businesses. "We have observed several incidents around cuts; for example, workers have cut their fingers off. In one case, a gentleman who wasn't properly trained cut his private parts when he was trimming on his lap." Other workplace injuries reported include back injuries and chemical injuries. "I've seen property damage due to hail and wildfires, slip-and-fall claims in retail spaces, and product liability from a tooth chipped on an edible," Deneen says. Although the liabilities resulting from cannabis itself are uncertain and potentially huge, it's critical not to lose sight of the more traditional exposures that cannabis businesses face, he adds. Stewart also points to property-loss claims from fires as well as product contamination, which can occur either outdoors or indoors. And he has observed D&O claims from management making poor decisions that harm the company. "There's a dynamic in the cannabis market right now where companies have to choose whether they'll be fully compliant with regulations or chase revenue growth," he notes. When cannabis companies move into new states, they have to identify new vendors and create new supply chains, Stewart explains. "We see companies making decisions that get them in trouble with the states. Many are not covered by insurance. Publicly traded companies may violate disclosure requirements." Cannabis companies also can have issues pertaining to a state's department of transportation and border protection. There have been situations in which a company is legally moving a truckload of hemp across the border but drug-sniffing dogs think it smells like marijuana. Companies can also run into water issues; for example, if they're using federal waters to raise their product, they may have to establish that it's not an illegal grow. McManamon has seen claims of theft and vandalism, fires at cultivation facilities, and auto claims from companies with delivery services. "These are the same risks as for other delivery services," he points out. According to Stewart, most claims are for ancillary product liability and mislabeling — litigated matters that involve the product but not bodily harm or injury. |

Class action cases

"Most of the class action suits have to do with mislabeling or other quality control problems," Steward says. "The amount of CBD on the label may be different from what is found from testing the actual product. There are different terms, such as full-spectrum, broad-spectrum, CBD isolates or just CBD. Consumers are confused by all these different descriptions. Sometimes CBD products contain THC, and sometimes they don't." Under the Farm Bill legalization of hemp, the level of THC is supposed to be 0.3% or less. Broad-spectrum CBD is supposed to have all the cannabinoids except THC. But there could be amounts below detection levels, and consumers could fail a drug test at work, lose their job, and sue the company. "We see those types of lawsuits, and lawsuits that follow the FDA prohibition on health and disease claims," Stewart says. In October, the U.S. Federal Trade Commission and FDA sent a joint warning letter to a Florida company, Rooted Apothecary, for making unsubstantiated medical claims about the CBD products it was selling. Among its claims, the company stated that its products treated autism, attention-deficit/hyperactivity disorder, Parkinson's disease and Alzheimer's disease. |

Highly regulated industry

A big challenge for insurers is that state regulatory environments vary, requiring adjustments to account for those differences. "No two states have the same regulatory environment for cannabis," Bublitz says. "That means the industry has to address those differences in terms of both coverage and underwriting." Another challenge is the constant change, particularly of ever-emerging risks. "If there is a product better suited for the surplus lines market, I don't know what is," Bublitz says. "New risks are identified on an ongoing basis, and how we as an industry can address those exposures is an evolutionary process. Carriers can't enter the space and expect to write the business the same way for an extended period of time. This market requires vigilance in updating coverages, rates and guidelines." Many concerns still prevent carriers from jumping into the cannabis insurance market, including the Schedule 1 issue and reputation risk around that, says Stewart. The good news is that reputation risk is a much lesser concern than it was a few years ago. "We can fairly characterize reputation risk as a minor factor now," he says. "More important factors are that cannabis is a relatively new product with unique characteristics and risk; there's a lack of data and a lack of underwriting knowledge. Carriers need to make sure their people are educated, and that doesn't happen overnight." Educating policyholders and agents about the policy restrictions and nuances of coverage available is a big challenge, says Deneen. "Carriers are constantly developing new products and broader coverage, so it's imperative to make clear that the current offerings are not defined by restrictions and limitations that may have previously been in place," he says. Of the many challenges facing the cannabis insurance market, the greatest might simply be the unknown. "There is no real history and no credible results with which to work. Carriers that want to be in this space need to have expertise in related areas in order to make informed underwriting decisions. Otherwise, they're just throwing darts at the wall," Bublitz says. For example, Admiral Insurance uses its history in nutraceuticals, e-cigarettes and liquor liability. |

Be flexible and agile

Focus on what the regulations will be, not just what they currently are, advises Deneen. "Many regulators are learning as they go, so it's critical to take a flexible approach that can evolve with shifting regulations. You need to be flexible, knowledgeable and diligent to win in this space." The "green rush" mentality — viewing the cannabis industry as a source of easy money — is outdated, Deneen stresses. "It can be a lucrative space to work in, but it's also increasingly competitive. Agents and brokers must have extensive market knowledge and add value for their customers to differentiate themselves," he says. "Stay educated and pay attention to the news." Cannabis isn't a market you can just jump into, Bublitz warns. "You have to have expertise in similar areas to understand the risks. This market requires a meaningful commitment to properly evolve the coverage." Carriers need to be willing to take on more risk than they otherwise might because there isn't a long history in the marijuana space and because the exposures are changing. The result is that carriers need to be large enough to take the exposure and nimble enough to change with the evolving needs of the cannabis insurance market. Specialize and make an investment, Bublitz advises agents and brokers. "As with carriers, this isn't an area where you can dabble and be successful. The cannabis industry needs help understanding its exposures and how insurance can help mitigate the risk. Agents and brokers need to understand the cannabis industry to make that happens," he stresses. "If you're a retail agent who isn't specializing in cannabis, make sure you're partnered with a wholesaler who is, so they can guide you through this complicated market." Stewart advises insurance professionals to perform due diligence and make sure their insureds are operating legally. "Visit the grow sites and manufacturing facilities. Know your customers. Make sure risks are reasonable and manageable." Finally, keep in mind that it is still illegal to support the cannabis market with money from outside the U.S. "The DOJ position to not prosecute when cannabis is legal in a state does not extend to money being brought into the country," Bublitz warns. "Foreign carriers are at significant exposure of running afoul of violating federal law, including money-laundering laws." |

The legal landscape

Currently, cannabis is legal for medical use in 33 states plus the District of Columbia, Guam, Puerto Rico, and the U.S. Virgin Islands, and it may be used legally for recreational purposes in 11 states and the District of Columbia. Granted, cannabis is still illegal at the federal level, categorized in the Controlled Substances Act (CSA) as a Schedule 1 drug, having "no currently accepted medical use and a high potential for abuse." However, the Secure and Fair Enforcement (SAFE) Banking Act, which passed in the House of Representatives with significant bipartisan support but has yet to be voted on by the Senate, would protect financial institutions and insurance companies from federal prosecution if they provided services to legitimate marijuana businesses (companies operating lawfully, where medicinal or recreational adult use is legal at the state or reservation level). In July 2019, the Clarifying Law Around Insurance of Marijuana Act (CLAIM Act), was introduced in the U.S. Senate and the House. The act would prohibit a federal agency from penalizing or otherwise discouraging insurers from engaging in the business of insurance with a cannabis-related business, or from otherwise terminating or canceling the policies of an insurer solely because the insurer engaged in the business of insurance in connection with a cannabis-related business. Additionally, under the CLAIM Act, with respect to "[e]ngaging in the business of insurance within a State, political subdivision of a State, or Indian country that allows the cultivation, production, manufacture, sale, transportation, display, dispensing, distribution, or purchase of cannabis," an insurer that engages in the business of insurance with a cannabis-related business, and the officers, directors and employees of that insurer may not be held liable pursuant to any federal law solely for engaging in the business of insurance. "Legal cannabis is not going away — this industry is worth billions of dollars. But up to this point, its businesses have struggled to gain access to critical financial services," says Katelin O'Rourke Gorman, a partner at global law firm Clyde & Co. "While the SAFE Act passed the house with more Republican support than expected, it is still unclear whether it will pass the Senate. Should it be passed into law we would see banks, credit unions and insurers rush to the market in states where cannabis has been legalized." In such an event, Lloyd's of London, which currently allows the underwriting of cannabis risks in Canada, may revisit its policy to allow entry into the U.S. market, Gorman points out. "When the timing is right, this would be a wise move. Although the U.S. insurance market for cannabis is currently behind Canada, it has the potential to be much, much bigger." |

Predictions for 2020 and beyond

Insurance professionals agree that the growth of the cannabis market is likely to remain a strong trend. Deneen expects robust growth to continue throughout 2020 as new states start to legalize marijuana sales and the hemp/CBD market continues to mature. Stewart doesn't see a huge breakthrough in the specialty markets unless the Safe Banking Act gets voted upon and approved in the Senate. If the act passes, then larger carriers with more appetite to write specialty lines will likely enter the market, and the industry will see additional growth across all lines. "We see large states poised for legalization, such as New York, New Jersey, and possibly Connecticut and Pennsylvania, which could move the needle in the cannabis insurance market." Bublitz says, "I think the genie is out of the bottle, and legalization will continue with little impact from the 2020 elections. It will likely come from a 'drip process' where activities related to marijuana are decriminalized." He expects banking will be the first area to become fully legal. The current DOJ stance to not prosecute cannabis in states where it is legal will likely become law. "Marijuana will become de facto legal without congressional members having to take a vote on removing it from the Schedule I list," he concludes. See also: |

• 13 P&C insurance concerns related to legal cannabis
• Cannabis has BigLaw seeing green but top firms are skipping the party
• What employers need to know about the U.S.'s evolving marijuana laws