By: Gloria Gonzales, Business Insurance March 2018

SCOTTSDALE, Ariz. — Captive insurers can fill the numerous gaps that exist in insuring the cannabis industry, but owners need to be fully aware of the problems that could arise, including possible federal prosecution and civil forfeiture.

“If there ever were an industry that could benefit from the use of captive insurance vehicles, it’s this industry,” Joseph Holahan, Washington-based attorney at law with Morris, Manning and Martin L.L.P., said at the Captive Insurance Companies Association’s 2018 conference in Scottsdale, Arizona, on Tuesday. “It’s a risk that’s difficult to place.”

California has taken steps to encourage insurers to write cannabis businesses. In November 2017, Stockton, California-based Golden Bear Insurance Co. became the first admitted market to write marijuana coverage in the state, with the company able to write commercial general liability, premises liability and crime and theft coverage for cannabis operations in anticipation of marijuana being decriminalized in California for both medical and recreational purposes on Jan. 1. In February, California approved the state’s first surety bond program for the cannabis industry issued by Mayfield Heights, Ohio-based Continental Heritage Insurance Co.

Products liability is a key exposure for cannabis operations and difficult to cover in the commercial markets, said Greg Fanoe, consulting actuary with Merlinos & Associates Inc. in Atlanta.

“It’s an exposure that a lot of carriers are very afraid of,” he said. “A lot of the elements of products liability are based on legal precedent.”

For example, there are concerns about labeling laws and someone consuming edible products and then getting an accident, Mr. Fanoe said.

“Labeling on edibles doesn’t have to be that different from labeling of other food products,” he said. “The best analogy people I see most people draw is to the dietary supplement industry, especially as it existed prior to 1994,” when the federal government adopted a law to define and regulate dietary supplements. “Prior to then, the legal environment was very uncertain. It still is in many ways.”

Crop insurance is another important coverage, Mr. Fanoe said.

“It’s very difficult to find crop insurance for this product due to lack of good data,” he said. “A lot of insurance companies are kind of wary to write it. It’s a very high catastrophe-prone line.”

Indoor crop insurance is available on a limited basis, said Camille Dixon, director of community programs and policy initiatives for the California Department of Insurance in Sacramento.

“Outdoor is not available,” she said. “We do want the industry to have outdoor insurance. We thought we might have some insurers that were interested in writing it, but then the wildfires in California” happened, and that interest went away.

Despite the approval of the two admitted carriers, the bulk of insurance for cannabis is on the surplus side, Ms. Dixon said.

“We do not approve the rates for surplus lines,” she said. “They are filling many of the gaps, but they don’t fill every gap. And, of course, because of limited availability, it drives up the price.”

For example, products liability is available, “but it’s hard to find,” she said. Generally, policies are available in the range of $1 million to $5 million, but excess coverage is not available, Ms. Dixon said. Workers compensation coverage for cannabis businesses is available because California has an insurer of last resort for the risk, she said.

“The market continues to change, but our message is that we want the insurance protection for the cannabis business,” Ms. Dixon said. “They’re like any other business.”

Medical marijuana is legal in 29 states and the District of Columbia, while recreational marijuana is legal in nine states, according to nonprofit information provider

The effort by states to allow for the use of medical or recreational marijuana was complicated in February when the U.S. Department of Justice issued a memo on federal marijuana enforcement policy telling all U.S. attorneys to enforce the Controlled Substances Act, which classifies marijuana as an illegal drug. The announcement reversed an Obama administration stance — known as the Cole Memorandum — that told states the federal government would not enforce the Controlled Substances Act when it comes to marijuana.

“If you look at it from the national perspective, the federal government doesn’t have the resources to go after every state that has enacted some sort of cannabis law,” Ms. Dixon said.

In addition, the Rohrabacher–Farr amendment, also known as the Rohrabacher–Blumenauer amendment, prohibits the department from spending funds to interfere with the implementation of state medical cannabis laws. That law has been extended several times since its passage in 2014 but is set to expire on March 23. But the law applies to medical marijuana, not recreational cannabis, Mr. Holahan noted.

Owners who want to cover cannabis exposures in their captives must be aware of the legal risks, he said.

“There are substantial risks and a lot depends on whether federal prosecutors want to prosecute,” Mr. Holahan said.

There is also a risk under civil forfeiture laws, so insurers and service providers “can be putting assets at risk,” he said.

“We’re not aware of any federal action against an insurance company or a bank for making or insuring the cannabis industry,” Ms. Dixon said. “It’s definitely a matter of how much risk you are willing to take on, but for those who are willing to take the risk I think there are a lot of opportunities to do business with the cannabis industry.”

Captives can be used to fill gaps and cover risks that surplus line carriers may exclude or place limits on, Mr. Fanoe said.

“The presence of traditional insurers moving in does not have to diminish the need for captive insurance,” he said.

There are at least three captives either writing cannabis coverage or applying to do so, and regulators are more willing to consider allowing captives to write the coverage, although some regulators have flatly rejected the possibility, experts say.

But California warns that “buyers should beware” when purchasing insurance either through traditional insurers or captives, Ms. Dixon said. “We do no vetting.”

Captives have “a pretty good starting point” for most coverages when developing rates as analogies can be drawn to similar types of operations in lines such as property and workers comp, but products liability and crop insurance are more difficult, Mr. Fanoe said.

“We don’t really know how the courts are going to decide certain types of product liability claims,” he said. “But that’s true of lots of coverages that people do write. The legal landscape is always changing, so that doesn’t have to impede things too much. Crop is harder because every crop is different.”

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