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Natural disasters spotlight lack of insurance options for cannabis industry

The devastation recent natural disasters inflicted on legal cannabis businesses is bringing into sharp relief the lack of comprehensive insurance coverage available to the multibillion-dollar industry.

In September, hurricanes damaged nascent medical cannabis operations in Florida and Puerto Rico. The wildfires that swept through Northern California this month ravaged large portions of the region well-known for cannabis cultivation, with numerous growers in the midst of preparing for statewide legalization and the implementation of adult-use marijuana sales in January 2018.

Despite the fact that 29 states, Washington, D.C. and the territories of Puerto Rico and Guam have legalized cannabis in some form, it remains federally illegal. That makes it extremely difficult, if not impossible, for most of the marijuana businesses affected by those disasters to access crop insurance, emergency bank loans, and disaster relief assistance available to other agriculture sectors.

Meanwhile, marijuana’s legal limbo has also scared away many major insurance companies from offering their services to the cannabis industry. For instance, Lloyd’s of London, a giant in the specialty insurance and reinsurance market, stopped insuring all cannabis operations in 2015, “unless and until the sale of either medicinal or recreational marijuana is formally recognized by the Federal government as legal.”

While the investors, owners and employees of cannabis businesses affected by recent natural disasters are largely on their own as they recover and rebuild, their plight is spurring efforts and innovations to ensure the cannabis industry can obtain effective and comprehensive insurance coverage.

In California, where many such businesses have spent tens of thousands of dollars to become compliant with new state laws, state insurance commissioner Dave Jones is campaigning to get large commercial insurance companies to write policies for the legal cannabis sector. He is modeling the state’s efforts on previous initiatives he spearheaded that helped convince auto insurers to cover ride-sharing drivers.

“Cannabis businesses face insurance availability and insurance gaps, which means that cannabis customers, workers and business owners won’t have access to insurance to help them recover if there are accidents, injuries, property damage, or any of the things commercial insurance typically covers,” Jones said Oct. 19 in a statement.

During a recent public hearing on the issue in Los Angeles, Jones noted that there is some insurance available for cannabis businesses via surplus line insurers: firms that offer policies to high-risk ventures that other insurers are unwilling to cover. But that insurance is limited in scope and so far there are no admitted commercial carriers writing insurance for the cannabis industry in California, according to the California Department of Insurance.

Industry analysts, meanwhile, say there are smaller companies — and even subsidiaries of some of the big players — that have been quietly extending insurance policies to legal cannabis companies. However, they recommend that the cannabis companies that do have insurance take a closer look at their current policies.

As the market matures, insurers have demonstrated a greater willingness to cover cannabis businesses, Michael Sampson, partner at Reed Smith LLP, a national law firm headquartered in Pittsburgh, told The Cannabist. In Northern California, for example, a policy holder who suffered a structural damage may well be covered under a property policy, he said.

Sampson cautioned that there’s always the risk that an insurance company will take an adverse position against a claim from a cannabis company.

“Thankfully, that’s what the courts are there for,” he said.

Jason Horst, a San Francisco-based insurance coverage and litigation attorney who represents policy holders in the cannabis industry, told The Cannabist that many insurance professionals have good intentions and have been writing out policies meant to “provide effective insurance coverage” to legal cannabis businesses.

The problem, he said, is how the insurance companies choose to interpret “any ambiguities or problematic language that is built into the policies that they’ve written.”

And when there are big claims, he added, “It’s not likely to be the folks with whom the (cannabis) industry has worked most closely who are making decisions about how to interpret policy and what position to take, on whether to pay the claims.”

Horst expects the recent natural disasters affecting the legal cannabis industry will be a “landmark moment” regarding how legal marijuana businesses look at the issue of insurance coverage.

“I think if there are several major claims come of this, the way the insurance companies respond is certainly going to impact the confidence the industry has in the value of insurance coverage,” he added, “which is already fairly low.”

At the same time, Horst said, there have been calls for the cannabis industry to create its own group of so-called “captive” insurance companies — insurance firms that are completely owned and operated by the companies they insure.

“One of the things that is unique and special about this industry is, more than likely any other, is a commitment to collective success,” he said. “And there are ways for the industry to join forces to improve some of the policy negotiation dynamics that currently exist.”