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The Emerging Cannabis Industry and Its Insurance Issues

Procuring insurance for businesses engaged in the cannabis industry can be challenging. Indeed, while cannabis businesses are legal under the laws of most states, cannabis remains a Schedule 1 substance under the Controlled Substances Act of 1970, which means that, under federal law, it is illegal to manufacture, sell or distribute cannabis. It also is illegal at the federal level, under some circumstances, to engage in monetary transactions involving cannabis products. level. Needless to say, many insurers have been reluctant to sell insurance to cannabis businesses for a variety of reasons, not the least of which is the chance that the selling of insurance might be considered an illegal monetary transaction.

The inability to procure insurance could make it too risky, if not impossible, for a cannabis business to operate. To address this problem, a bipartisan group of U.S. senators recently introduced the Clarifying Law Around Insurance of Marijuana Act (CLAIM Act), which is meant to prevent legitimate businesses from being cut off from the insurance market. Specifically, the legislation is designed to provide a legal safe harbor for insurance companies by easing the federal restrictions around selling insurance to businesses engaged in all stages of the cannabis industry, from the growers to the retailers.

If signed into law, this will be welcome news for the cannabis industry and will signify yet another step in the direction of normalcy and acceptance. And, more fundamentally, it should help many businesses procure the insurance that they need to operate. In anticipation of what should be an expanded insurance marketplace, this article provides an overview of some basic exposures that any cannabis-related business might face, along with the corresponding products that could respond to those exposures.

Property Loss and Business Interruption

Given the risk of fire in greenhouses, property loss and business interruption insurance should be considered. These policies typically only cover sudden, fortuitous losses arising either from “named perils” or “all risks,” depending on the policy type. They are meant to cover losses arising from fires, some natural disasters, and any other mishaps that cause damage to the policyholder’s property, including such things as a lost power to a greenhouse or irrigation system that damages the crop.

These policies do, however, have some key exclusions which could limit coverage, such as exclusions for mold, mildew, bugs, and grower error, all of which all very real risks to a cannabis grower. In addition, the policies might exclude coverage for “contraband, or property in the course of illegal transportation or trade,” an exclusion which should not apply if a grower keeps its business confined to a state in which cannabis is legal to grow. If, however, the crop were to be transported across state lines, even if to another state in which it is legal, federal interstate commerce laws might be deemed to apply (pursuant to which cannabis is illegal), thereby theoretically bringing any mishap along the way within the contraband exclusion’s scope. It is possible that the CLAIM Act will limit an insurer’s ability to rely on this exclusion.

Products Liability

The chemicals that are responsible for cannabis’ psychoactive effects are called cannabinoids, and they are unique to the cannabis plant. Some of these psychoactive effects can cause loss of memory, some impact on cognition and psychomotor performance, and increased anxiety, among other things. While scores of consumer products are alleged to have adverse health effects, cannabis might attract undue attention due to its historical reputation as psychoactive drugs and its inconsistent legal status under state and federal law. In addition, given the uncertainties with respect to regulatory oversight or standard, the manufacturers of certain cannabis products, such as “edibles,” might find themselves as targets in claims alleging product impurity or other hazards alleged to cause injury (e.g., some studies suggest that CBD oil raises the levels of the blood thinner coumadin in blood, which could cause bleeding).

Comprehensive General Liability (CGL) policies are meant to cover these types of risks—the risk of claims alleging bodily injury from the use of a product. While CGL policies generally will broadly state that they cover bodily injury claims, like all insurance policies, exclusions may come into play that insurer will argue limit the scopes of coverage. Companies engaged in the cannabis industry might find that their insurers are relying on, or at least considering, three particular exclusions that purport to exclude coverage for: failure to comply with applicable law; health hazards; and carcinogens. These three exclusions are all reflections of insurers’ unease with what is unknown about the emerging cannabis industry.

Data Breach

The most obvious tech-related risk arises from the fact that dispensaries typically collect personally identifiable information (PII) from their customers, such as that which is derived from a driver’s license (name, address, birth date, etc.), phone numbers, and possibly email addresses. In addition to the general privacy concerns that anybody would have about the disclosure of personal data, it is very likely  that dispensary customers would not only be concerned if their PII were disclosed, but they also might not want anybody to know that they are dispensary customers at all. Accordingly, a data breach in this context poses a unique concern.

Cyber liability insurance is supposed to provide coverage for the costs of mitigating any data breach and for any liability arising from the release of customers’ PII. Cyber liability insurance may, however, be challenging to procure notwithstanding the CLAIM Act. Indeed, cyber liability underwriters will undoubtedly pursue an extremely rigorous review of the company’s data security controls, including the types of data security professionals that the company uses and the plan that the company has in place for responding to a data breach.

Theft

The cannabis industry also faces risks of employee theft. For growers, there is a that dishonest employees may cut leaves and stems from growing plants, diminishing the size of the crop. And, given that most dispensaries trade in cash as opposed to credit cards, there is an obvious enhanced risk of employee theft.

These are the precise types of risks that commercial crime policies are meant to cover. Many insurers may, however, find the risk to be too great and will refuse to underwrite them or, if they do agree to sell a policy, they will do so only at a very price and that coverage might still be substantially limited by exclusions. For example, an insurer might exclude coverage for growing plants, which they might view as too easy to steal, and limit coverage to other property in a grower’s operations, such as lights or other equipment. And, for dispensaries, they might try to attach an exclusion for the theft of cash but be willing to insure against the theft of the actual products being sold, provided there are strict inventory controls. While it is not likely that the CLAIM Act would address these limitations, it at least should open the door for more businesses to procure some insurance protection.

Stock Drop

A company’s directors and officers owe a fiduciary duty to their shareholders to manage the company as diligently as possible and hopefully increase the value of the shareholders’ investments. If any perceived negligence, recklessness, or other malfeasance in the discharge of those responsibilities causes, or allegedly causes, a decrease in share value, a shareholder can bring a lawsuit against the directors and officers, or the company, seeking to hold any or all of them liable for that loss.

The cannabis industry may be especially vulnerable to these lawsuits due to both the lack of established standards regarding the production of cannabis products as well as the regulatory uncertainty concerning the legality of cannabis products, both of which could give rise investigations or litigation that ultimately cause the business to falter and the value of its stock to decline. Indeed, shareholders recently have filed a rash of lawsuits against publicly traded cannabis companies that have experienced declines in share value, alleging that the directors and officers have made misleading statements about such things as clinical trial results or have failed to properly navigate the regulatory labyrinth, among other things.

Claims such as these, in which investors are alleging a loss of share value, are the types of claims that D&O policies are meant to cover. Indeed, D&O policies cover actual or alleged “wrongful acts,” and any claims alleging that a company or its directors or officers mislead or otherwise neglected their responsibilities to investors should fall within the scope of that definition.

Conclusion

The cannabis industry faces many of the same categories of risks as other businesses, but it also has its own set of circumstances which pose their own set of challenges. While these challenges must be recognized and addressed, they should fall within the scopes of traditional insurance products. Hopefully, the CLAIM Act, or similar legislation, will open up the insurance market to more of the cannabis industry, so that more underwriters become familiar with the risks attendant to this industry and procuring necessary insurance coverage becomes routine.

“The Emerging Cannabis Industry and Its Insurance Issues,” by Robert P. Jacobs was published in The Legal Intelligencer on May 19, 2021.

Reprinted with permission from the May 19, 2021, edition of The Legal Intelligencer © 2021 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.