As the legal use of cannabis for both medical and recreational purposes spreads to more states with each election cycle, commercial insurance for cannabis operators is finally becoming easier to obtain and afford as more insurance companies move into the sector.
Line sizes for property coverage have increased and professional coverages, such as directors’ and officers’ liability insurance, have fallen in price, experts say. Still, contract language continues to be a problem in a sector dominated by manuscript policies and specific lines may see challenges, such as crime policies.
The wider availability of coverage and lower pricing is a relief for buyers in a sector that was chafing under high prices and limited supply as recently as two years ago.
Since 1996, when California became the first state to legalize medical marijuana, the medical use of cannabis has been legalized in 39 states and the District of Columbia. Recreational or adult use of cannabis has been approved in 21 states and DC
Cannabis remained completely illegal in just four states — Idaho, Kansas, South Carolina and Wyoming — as of January, according to third-party administrator DISA Global Solutions.
“Our capacity for any product line typically doubles annually to keep up with demand,” said Charles Pyfrom, director of marketing for Livermore, Calif.-based general underwriter CannGen Insurance Services LLC.
Line sizes are also increasing, he said. CannGen previously offered property limits up to $30 million, but in the past year has offered limits on certain risks close to $100 million per location, he said.
“It’s growing,” Pyfrom said, adding that buyers have become more sophisticated and risk-focused.
The supply of insurance for the cannabis sector is growing between 80% and 100% per year, and the increased capacity has increased competition and helped moderate pricing, said Michael Hall, vice president of Golden Bear Insurance Co. in Stockton, California.
Prices for property and liability coverage have dropped as much as 50% from two years ago, when tight availability led to high prices, he said.
The high pricing in turn attracted more insurers to the sector, leading to greater supply and ultimately lower prices and profit margins for insurers.
Product availability has also increased. Golden Bear launched its D&O program in January 2022.
“Two years ago, there were two markets that were writing directors and officers of cannabis companies,” Hall said, adding that the number of D&O insurers in the cannabis sector has more than doubled.
In August 2021, CannGen launched its CannGenPro division, which offers management and professional liability insurance to the cannabis sector.
Embroker Inc. added cannabis insurance to its offerings because it’s a “dynamic, entrepreneurial space” similar to the tech startups that make up the core of its business, said Ben Jennings, chief revenue officer for the San Francisco-based online commercial broker.
Embroker targets single-state pharmacies with less than $5 million in annual revenue for its digital offerings, which can be quoted and bound online, and serves larger, multistate carriers through its brokerage business, Mr. Jennings. Coverage includes property, general liability, D&O, workers’ compensation and employment practices liability insurance.
Reinsurance capacity for cannabis risks has also been expanded, although barriers remain.
Mr. Hall estimates there are eight or nine reinsurers in the market, up from just one or two a few years ago. Interest in the sector is most acute among smaller reinsurers and the reinsurance market overall is somewhat more difficult than the primary market for cannabis operators, he said.
Reinsurance growth is also limited by the conflict between state and federal laws.
“The macro view of reinsurance capacity is that the dominance of reinsurers will remain on the sidelines until the federal government reclassifies cannabis, removes it entirely from the Controlled Substances Act, or legislation is passed to establish a federal safe harbor for the insurance and reinsurance industry,” said Matthew Stanwood , Boston-based senior client manager at Lockton Re, the reinsurance brokerage unit of Lockton Cos. LLC.
Stanwood added that new reinsurance capacity is limited and “generally focused on supporting specific industries.”
Risk management is becoming more prevalent in the cannabis sector, said Stephanie Bozzuto, a partner with Acrisure LLC and co-founder of Cannabis Connect Insurance Services, a unit of the brokerage firm.
“It’s very common in property lines,” she said, with mandatory features like a safe, a vault or cages that meet US Drug Enforcement Administration standards for controlled substances, known as “DEA cages.”
“Many industries require safeguards to expand coverage,” she said.
Bozzuto, who joined Acrisure when it acquired Cannabis Connect in 2018, said limited insurance capacity is no longer the pressing issue it was a couple of years ago, although there are still limitations in states like Florida where properties are vulnerable to catastrophes in all industries face difficult market conditions.
Other sources noted that the cannabis sector, like many other businesses, also faces restrictions and exclusions related to wildfires in the western United States.
Some areas specific to cannabis coverage are still difficult, said Jay Virdi, Toronto-based director of specialty sales at Hub International Ltd., which is responsible for Hub’s cannabis specialties. For example, sublimits in criminal policies for cannabis companies can be as low as $5,000. “These limits are very low,” he said, especially amid increased criminal exposures.
Ian Stewart, chair of the national cannabis and hemp law practice at Wilson Elser Moskowitz Edelman & Dicker LLP in Los Angeles, said crime coverage can be a challenge because almost all cannabis insurance is provided through custom insurance forms, and the forms have different definitions of inventory and goods from a theft perspective .
“The harvest, the harvested plant material, finished goods ready for sale — each has different storage requirements,” and there is little consistency in policy language and definitions for each item, he said.
A growing challenge for the cannabis sector could come from an increase in product liability suits, with many focusing on labeling, sources said.
“There is certainly an increase in lawsuits based on under- or over-reporting of cannabinoid content on labels, and associated claims of consumer fraud and false advertising around labeling and testing,” Stewart said.
For example, a lawsuit against Ironworks Collective Inc. and Stiiizy LLC filed in the Superior Court of California in Los Angeles alleges violations of various consumer protection laws, misrepresentation and unjust enrichment.
Although the number of lawsuits so far has been limited, cannabis operators should consider product liability risk when evaluating their insurance needs, Pyfrom said. More widespread testing of products should become available as the industry grows, he added.