As Illinois and Missouri undertake the process of licensing businesses in their newly legalized cannabis industries — recreational in Illinois and medical in Missouri — they have the advantage of taking what has worked and shedding what hasn’t in the pioneering marijuana legalization states that have gone before them.
Illinois’ legislature this year approved legislation allowing for the legalization of recreational cannabis, becoming the 11th state to do so. An amendment to legalize medical marijuana was approved last year in Missouri, making it the 33rd state to allow some form of medical cannabis. The programs in both states are slated to begin next year.
“While some may say they are late to the game, I say that states that are now stepping up to the cannabis legalization plate have several states to learn from,” said Chris Sullivan, a risk management advisor with St. Louis, Missouri-based Powers Risk & Insurance, who specializes in the cannabis industry. “So, while we’re not pioneers, we’re able to see what’s working and not working.”
The approach Illinois took to legalization was different than other states, according to Larry Conrath, a senior vice president in the Chicago office of Chubb International and leader of the broker’s cannabis sector for the Midwest. “They’re trying to learn the lessons of the other 10 states before them in terms of how they legalized recreational marijuana. This was the first one where it was done without an actual ballot initiative. It was done through the legislature.”
Illinois also has the benefit of having had legalized medical marijuana for several years, and at first, licenses for recreational business will only be issued to those who already have a medical marijuana license.
Lawmakers negotiating legalization of the recreational niche in Illinois tried to make sure that concerns of all interested parties were addressed and to fashion a way of providing assistance to those who have been adversely affected by previous laws criminalizing pot possession, Conrath said.
Insurance Issues and Obstacles
When it comes to insuring cannabis-related businesses, whether medical or recreational, there are a number of issues and obstacles that need to be addressed and those concerns are not limited to states with newly legalized marijuana systems like Illinois and Missouri, both Sullivan and Conrath acknowledged.
The cannabis industry is an emerging market and as such “there’s not a lot of historical data, and insurance policies are designed around historical data. An insurance company needs to know — what is their exposure to loss? How much premium do they need to collect to offset that exposure? Right now, you do see pricing all across the board. And it’s not just the better coverage that is more expensive,” Sullivan said.
“Sometimes it’s just because an insurance company has decided they want to get into this space and they made their rates at a point they feel is very safe. For them to feel safe, it might be a lot more expensive than other options that are available,” he said.
With some exceptions, coverage is primarily available in the surplus lines market and policy forms “vary greatly from insurance company to insurance company. Frequently these are not ISO policy forms. These are heavily manuscripted policy forms,” Sullivan said.
“It’s a nascent market, but a pretty well-developed market by the same token,” Conrath said. There are insurance products that address most of the issues presented by this emerging market. But capacity is limited and “there are very substantial gaps in coverage and exclusionary language,” he added.
Because the data is limited, insurers are heavily reliant on front-end underwriting, Sullivan said. That’s where knowledgeable agents and brokers who have taken the time to educate themselves in this space come in.
Brokers “need to take some time to get involved in the industry and to spend some time with businesses in the cannabis industry that are already up and running,” Conrath said. “You just need to spend time with the client, and it might not just be a quick 45-minute meeting. It might mean going out and visiting their facilities and seeing how their business runs and then also, frankly, spending time reading the policies that are put in front of you.”
There are numerous hurdles to overcome in securing coverage for marijuana businesses, Sullivan said. “It’s common knowledge that the policy terms are exclusion heavy. A lot of people feel as though that they need to accept that [but] what’s important [for those involved] is to push for better policies. Explore options. Present a risk profile to underwriters as to why the analysis of their business should be visited. That’s how we push the industry forward.”
For instance, a product liability policy could include an exclusion for cannabis impairment. Just as a bar or restaurant can have an exposure to alcohol impairment lawsuits, a business that sells cannabis has an “exposure to cannabis impairment lawsuits if someone as a result of their cannabis impairment causes first party bodily injury and property damage. If you’re a cannabis business and your product liability policy has a cannabis impairment exclusion I don’t know why you would buy that insurance policy. So, it’s important for a cannabis business to align themselves with an insurance professional that has set out to challenge the status quo of the cannabis insurance industry,” Sullivan said.
A policy might also exclude “liability resulting from foreign products, namely Chinese vape batteries. Naturally, all the batteries are coming from China. … Sometimes you’ll see an insurance policy that specifically names the manufacturers” of those batteries, he said. A workaround in that case might be, “as long as the insured is obtaining the Chinese made batteries from a local distributor, getting a certificate of insurance from that distributor that names their business as an additional insured on their insurance product liability.”
Limits of liability are also a challenge. Insurers may be reluctant to extend limits of liability to the amount the business thinks it needs. If, for instance, a cannabis operation wants $5 million of excess liability over its product liability policy, “insurers want to see proof of insurability. The same goes for the lost revenue, the business income,” Sullivan said. By taking a more proactive approach, by showing the underwriter exactly how the business is going to get to the income level for which they are requesting coverage “you might be able to get higher limits of liability, he said.
Each business segment, such as the growers, the processors and the dispensaries, has its own unique risks, Conrath said. But coverages like general liability, product liability, property insurance and crime insurance span across the supply chain.
Beyond the traditional insurance policies, for growers there’s a need for crop insurance. “A lot of these facilities are indoors in a controlled environment. But there are still risks to that crop and obviously people are putting a lot of money into the growth of the crop,” he said. That coverage is not available from the federally sponsored crop insurance programs but it is available in the private market.
Other possibly overlooked risks may be transactional representations and warranties. Marijuana business owners and their agents alike must be aware of all the contractual obligations, and understand the supply chain and who has a contractual obligation, Conrath said.
“Securing cargo coverage for cannabis in transit is very difficult,” Sullivan said. “It’s possible to secure coverage but you have only so many carriers that want to take a look at this. A lot of those available options, they only allow for lower property limits.”
Conrath said another often overlooked risk is executive liability. Directors and officers coverage “is extremely critical and especially for these companies that have done reverse mergers into the Canadian stock exchange. … The exposure from investors in a growing business … is pretty substantial and we’ve already seen some large D&O claims out there.”
Such risks don’t just apply to large risks but to smaller startups as well, he added. “Private company D&O is a critical part of this, and it can be often overlooked,” along with coverages like employment practices liability, he said.
Securing the appropriate coverage for marijuana businesses entails more than simply submitting an application, both Conrath and Sullivan said.
“Just a simple narrative of operations isn’t going to warrant quotes from all available options, all available insurance companies. You need a business plan, you need a summary of operations in that business plan, but also an organization chart, a pro forma with predicted revenues or estimated and projected revenues for the next three to five years. They want to know who are the key staff and how will [the business] will stay in the know with compliance and regulation,” Sullivan said.
Brokers need to be “able to proactively address the risks with the client, identify those risks,” Conrath said. They “have to be able to identify the critical underwriting issues from the insurance company’s side” and have those conversations with the client. A deep knowledge of the insurance available as well as the insurance exposures is critical in order to “most effectively present that story to the underwriter,” he said.
A State of Change
Sullivan said he sees something new every day in the cannabis space. He speculated that “it’s going to be that way for the next 20 years. As soon as we see marijuana removed as a schedule 1 narcotic, there will be movement. As soon as a state legalizes recreational marijuana, there will be movement. As soon as there is a federal play in marijuana in some…