Just like big banks, big insurance carriers have largely shunned the cannabis industry, worried about blowback from federal authorities and risk-adverse investors.
“Many insurance companies flat out do not have an appetite for any business related to cannabis,” said Brian Marblestone with the San Carlos brokerage firm Stratton Agency.
California Insurance Commissioner Dave Jones wants to change that, with both consumers and business owners at risk if there isn’t sufficient coverage. So he’s holding a series of meetings aimed at educating major carriers and convincing them to start insuring the multibillion-dollar industry.
Jones hopes that shift will happen soon. California regulators want all marijuana businesses to carry at least $1 million of liability insurance if they aim to be eligible for a license to operate once the state starts handing them out Jan. 1.
That’s not a standard requirement. While California requires businesses in some industries to prove they have insurance, in many industries the requirement for insurance comes from other parties — banks or landlords. But Jones said emerging industries and ones that carry a higher risk sometimes merit state-level mandatory coverage.
Jones said he’s been monitoring availability of insurance to the medical marijuana industry since he was sworn into office in 2011.
Cannabis businesses have been getting coverage almost exclusively from the surplus line market, which includes carriers that are approved but not licensed by the state to provide coverage for companies that have been turned down by major insurers. Those surplus line policies tend to be more expensive and have stricter requirements than licensed carriers, he said.
“I’m a big believer in competition,” Jones said. “Through competition we get better pricing, better quality and more choice in products.”
It was encouraging to hear the state’s top insurance regulator offer state support for major carriers entering the market, said Ian Stewart, an attorney with the firm Wilson Elser in Los Angeles who specializes in cannabis law.
Licensed carriers are “actively looking at cannabis,” Stewart said, with “teams in place” working to ensure they’re ready to jump in when the climate is right.
But Stewart said he doesn’t think it’s quite there yet due to the uncertainty caused by the Trump administration, with threats of a crackdown on state-legal cannabis programs under Attorney General Jeff Sessions having “cooled the interest.”
Then there’s the fact that the legal cannabis industry is so new, Marblestone said.
“Insurance companies are conservative in nature,” he said. “Before entering any new market, they want to have the law of large numbers on their side, meaning they are able to study the trends and loss ratios of the different classes of business in the industry. This way they establish pricing models to rate the business according to the risk while still remaining profitable.
“With an emerging market like cannabis, the law of large numbers is not available.”
Many times, Marblestone said he’s helped cannabis business owners secure insurance coverage from a willing carrier. The business owner then presents proof of that coverage to their landlord, who passes it along to their own insurance company. But once that carrier sees the landlord has a cannabis business as a tenant, they drop the landlord’s insurance policy.
Cannabis business owners such as Derek Peterson, CEO of Irvine-based Terra Tech, also report getting turned down for personal life insurance due to their profession.
Ask an Attorney: Can insurance companies deny coverage because of cannabis?
Even if they can find a carrier willing to take them on, Marblestone said convincing cannabis business owners to jump through all the required hoops – which are often particularly cumbersome under surplus line carriers – is not always an easy task.
“Many of the ‘ganjaprenures,’ especially growers, have had to be extremely secretive about their operations for as long as they have been operating in fear of criminal prosecution,” Marblestone said. “We experience difficulty sometimes in convincing the business owners to be transparent and forthcoming with as much information as possible to properly protect their business.”
But if they want a state license, they soon won’t have a choice but to get insurance coverage.
Draft regulations recently put out by the state’s Bureau of Marijuana Control lay out insurance coverage requirements for distributors, the “middle men” who will be responsible for buying cannabis from cultivators or manufacturers and selling it to dispensaries. And Jones said they expect similar requirements to be rolled out for all categories of cannabis licenses, from growers to sellers.
Along with liability insurance, Stewart said he hopes to see the state also require product liability coverage, which protects companies in case their products injure the public through widespread contamination, incorrect labels or other issues.
The public has until June 12 to comment on regulations for cultivation, manufacturing, transportation, distribution and retail. And people can submit feedback until June 20 on draft rules for testing.
Marblestone said business owners shouldn’t wait for state mandates to kick in to get insurance coverage. He said processing cannabis policies already takes longer than other types of policies, and he expects a flood of new applications to soon further bog down the system.
“In reality we’re already dealing with a huge influx of submissions,” he said. “If you’re in the cannabis business and just starting to think about obtaining insurance, you are behind the eight ball already.”
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