Cannabis Industry And Insurance: California’s Next Trend

Photo Credit: California Department of Insurance

The cannabis industry has garnered a lot of hype. But the plant’s federal illegality hinders it from functioning as a legitimate line of business. The most common example of this is the lack of financial assistance available to the industry.

Another crucial service withheld from cannabis businesses is insurance. Dave Jones, California’s Insurance Commissioner, has aimed to change that since the beginning of 2017. After a year and a half of encouraging insurers to write insurance for the legal cannabis industry, various forms of protections are now available to cannabis businesses.

On June 4, Commissioner Jones announced the approval of the first Cannabis Business Owners Policy (CannaBOP) in California. Crafted by the American Association of Insurance Services, the CannaBOP program is a package consisting of property and liability coverage for dispensaries, processors, manufacturers, distributors, cannabis storage facilities and other relative businesses operating in the state. As of now — even with the new program in place — the majority of cannabis businesses have no choice but to absorb the cost when something goes awry, which can mean losing millions of dollars. No other legalized businesses or industries face that kind of financial risk.

“My objective is anytime a consumer walks into a cannabis retail facility or a vendor enters into a contract or delivers goods to a cannabis business, or anytime someone invests in or operates a cannabis business, insurance is in place to cover risks,” Commissioner Jones said in a phone interview, “just as there is in any other form of business in California.”

But the CannaBOP isn’t the only major announcement this month regarding insurance coverage for the cannabis industry. In May, Commissioner Jones approved California Mutual Insurance Company as the first provider in the state to add lessor’s risk coverage for property owners who are exposed to risks from renting to tenants who use the space for commercial cannabis-activities. The lessor’s risk coverage policy provides liability and property insurance for commercial property owners who lease building space for cannabis labs, product manufacturing, cultivation, and dispensary operations.

“Things are moving in a positive direction [in California],” said Commissioner Jones. “But there’s a lot of room for more carriers to come into the market. I’m doing everything I can as the regulator of the largest insurance market in the U.S. to encourage insurers to provide coverage for the cannabis industry.”

The motivation behind this most recent push for coverage followed reports stating that the Trump Administration would refrain from using federal law enforcement against legally operating cannabis businesses in states with medical and adult-use cannabis laws.

“I sent a letter to the 1,300 licensed insurance companies in California informing them Trump had told a senator from Colorado that his administration would not take steps to enforce federal law against cannabis industries in the states that have a legalized cannabis industry,” Jones said. “So I wanted to make sure insurance company executives were aware and encourage them to come into the market, and begin writing coverage plans.”

The commissioner says he believes there’s a misplaced concern, particularly among insurers, about federal law enforcement intervention. In the states with state-level cannabis laws — where insurance is being written for those industries — the Federal Government has yet to seize premiums from insurance companies coming from cannabis businesses, he explains. “Trump’s most recent announcement should provide additional assurance to businesses. So we’re continuing to encourage the progression of the market, and we want to see a broadening of the insurance provided.”

An interesting aspect of the bubbling cannabis insurance trend is how it plays into California’s new law. As of Jan. 1 — the official implementation of the Medicinal and Adult Use Cannabis Regulatory and Safety Act (MAUCRSA) — all cannabis businesses are required to show proof of a $5,000 surety bond in order to get a state license. Surety bonds are required by the licensing agencies as a way to guarantee the behavior and compliance of licensees. It’s also a way to guarantee payments related to the cost incurred for the destruction of cannabis goods and materials in the event of a violation of the regulations. If a company’s product was contaminated, for instance, a surety bond would cover the costs of destroying or properly disposing of the product, as canna-goods — by law — can’t be thrown in the trash.

But at the onset of the MAUCRSA, the only way cannabis businesses could get a surety bond was through a surplus line insurer. Often called the “safety valve” of the insurance industry, these providers fill coverage gaps in the marketplace by insuring the high-risk companies that are usually declined by the standard underwriting and pricing processes of insurance carriers.

On Feb. 21, however, Commissioner Jones announced the approval of the first surety bond program for the cannabis industry. Continental Heritage Insurance Company became California’s first approved insurer to offer surety bonds to legal marijuana businesses. The commissioner explains he hopes other providers will follow the lead of the insurers who now provide coverage to the legal cannabis industry.

The California Department of Insurance is modeling this effort to get insurance for the cannabis industry on the success they experienced with getting insurers to write coverage for ride-sharing companies and drivers.”We’re doing many of the same things now we did a couple years ago when ride-sharing began to expand in California,” the commissioner said. “There used to be no ride-share coverage. There are now 14 commercial carriers writing ride-share insurance for the market, and we’re confident we’ll have the same success in the cannabis insurance space, too.”

Commissioner Jones has had an undeniable impact on the creation of cannabis insurance in California. But, as he readily admits, there are still major gaps in coverage. Crop insurance for the cannabis industry, he points out, is an area that needs to be filled. Although, after the Northern California wildfires last October that scorched homes, vineyards and pot farms, some headway’s been made regarding coverage for cultivators. “We saw the first major payout of a claim to a cannabis grower by an insurer,” Jones said. “The insurer paid out over a million dollars, which is very encouraging. It shows there’s some crop insurance available in some cases, and insurers are paying claims.”

Some coverage is better than no coverage. But until the cannabis industry has the same insurance options that every other business and industry has, much work still remains to be done. California is on the path to making that happen, however. “There is still a continuing challenge,” Commissioner Jones said. “But I’m doing everything I can to demonstrate that I stand firmly behind providers writing insurance for the cannabis industry, and want them to do this.”