Exploring the impact of legalized cannabis on P&C insurance

Medical cannabis is currently legal in thirty-eight states in the United States. This legalization has changed the landscape of several industries, including insurance.

Now, property insurance providers must adjust their coverage rates if cannabis is grown or sold at a covered property due to considerable risk.

The legalization of cannabis has increased the rates and risks of providing these companies with insurance. General liability and casualty insurers are also affected by the increased risk from cannabis legalization.

This article examines the challenges property and casualty insurers face, how they can combat them, and how new laws and regulations can help cannabis businesses and insurance companies in creating a successful cannabis industry.

Property insurance

Property insurance protects physical assets, including buildings, machinery, and stock. Due to the unique hazards of the cannabis sector, getting property insurance for a cannabis company may be difficult.

Cannabis-related businesses are at an increased risk of crime and theft and must share the same basic insurance policies as any agriculture business.

However, the possibility of fires and other property damage brought on by the production and cultivation operations is a challenge for insurers. Most of these incidents occur due to the extensive electrical lighting and large quantities of water involved in grow operations. The energy-intensive nature of indoor cannabis cultivation contributes to a greater danger of accidents and consequential property damage, ultimately increasing insurance premiums.

What to do?

Insurance firms must adjust to the new environment as the cannabis industry develops. Carriers may offer specialized cannabis insurance that allows business owners to partner with an expert from the industry. These specialized insurers know the particular hazards in the cannabis sector and provide tailored plans and solutions after closely observing a company’s operations. Property insurance providers must adjust their premiums if cannabis is grown or sold on the property, as it becomes a high-risk property.

Casualty insurance

Casualty insurance offers liability coverage for third-party property damage and physical harm, which is especially important for the cannabis industry because of the dangers that might arise from usage and impairment.

Due to cannabis not being legal countrywide, cannabis businesses cannot access banking services and work mostly in cash.

Around 70% of cannabis businesses are cash-based. As a result, these businesses are forced to work with large sums of cash, making them more prone to theft and burglary, which increases general liability costs.

The popularity of cannabis products such as edibles, also boosts liability because the effects of these products can vary from customer to customer. The increased risk of selling these THC-infused products also makes insurers hesitant to provide insurance to cannabis businesses.

How to insure cannabis businesses for liabilities

The dynamic nature of cannabis laws presents additional difficulties and to navigate all these challenges, insurers may:

1.       Update plans regularly

Insurers must keep current and modify their plans when regulations change and new rules are implemented. This flexibility is essential to ensure that organizations and people are adequately covered as they negotiate the complicated legal issues surrounding cannabis.

An insurance company in Washington found out that the cannabis business they were insuring had a $50 million risk outside the state of Washington. One small loss could turn the entire enterprise into a loss.

A quick review of the business’s books allowed the insurer to eliminate this risk and protect their own and the business’s long-term success. So, regularly check the firms you insure and keep up to date with their activities and expansion.

2.       Get your data

There is a severe lack of data regarding cannabis businesses because it is a new industry. Providing accurate prices to clients proportional to the services offered is another huge task.

Cannabis businesses are hesitant to provide true information about their business due to the fear of federal authorities knowing their business details. It is important to ask the right questions to make the decision-making process easy for your underwriters.

Laws and regulations

The legalities surrounding cannabis are the primary reason why cannabis insurance remains difficult for both business owners and insurance companies. The SAFE banking act passed in 2021 allows cannabis businesses to access financial institutions such as banks and their services. This act permits legitimate cannabis-related firms to participate in banking services and deems all money they deposit into banks as lawful.

The passing of this act has made it much easier to insure businesses nationwide as it decreases the cash flow problem that cannabis businesses face. However, the nationwide implementation of this act awaits final approval.

The CLAIM Act has also been introduced to the Senate and awaits further approval. If approved, the CLAIM Act will allow insurers to provide coverage to cannabis businesses without the risk of being prosecuted.

Cannabis insurance is a newer specialty that allows marijuana businesses to provide safe cannabis to consumers and become legitimate businesses.

The legalization of marijuana has affected the property and casualty insurance industry. Traditional insurers are changing their underwriting procedures to facilitate this expanding industry, while specialized insurers are developing to meet the unique demands of cannabis-related enterprises.

Isaac Bock is the managing director and head of strategy for AlphaRoot, a cannabis-based insurance company. With six years of experience in the industry, his focus is on building relationships as he realizes people are who they surround themselves with. Contact him at info@alpharoot.com.

ALM has created the six-part Cannabis Insurance Coverage Specialist (CICS) designation, which addresses insurance issues surrounding cannabis, risk management, insurance claims, real estate, workers’ compensation and banking. To purchase the designation or individual courses or to learn more, visit www.coveragespecialist.com/CICS or contact Johanna Abshear at jabshear@alm.com. 

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