Paying Claims and the CLAIM Act

Blog Post by the CCIA Risk Management Commitee

The only thing worse than not having any insurance when you need it, is thinking you’re insured after a catastrophic event only to find out you are in fact without coverage. In the cannabis industry, insurance carriers and brokers are continually working to educate consumers and improve their product offering to lessen the likelihood that either of these scenarios play out.  In this blog post we share some examples of cannabis carriers actually paying out insurance claims and take a deeper look into some proposed legislation that may clear the way for greater market competition, stability and claims payment predictability.

For context the cannabis insurance market is a vastly different landscape when compared to that which the greater business world operates in.  The number of carriers actively writing cannabis touching businesses is much smaller relatively speaking, and products in the market are generally more restrictive from a coverage and limit capacity perspective. Currently, because major insurance companies could face penalties under federal law for engaging with state-legal cannabis companies, most traditional carriers will not entertain offering coverage to the burgeoning industry.

One unfortunate common misconception is that insurance companies covering the cannabis industry are reluctant to cover claims. Certainly, there have been instances in the relatively short history of cannabis business insurance where carriers and policy holders have been at odds over coverage disputes. This is not an uncommon occurrence in any industry, though in cannabis carrier’s initial stages it was a more common occurrence than anyone would have liked. However, since the beginning the insurance community has continued to adapt and products have evolved in a consistently positive direction.

According to one major national insurance carrier writing most basic lines of business insurance, who understandably tracks this information very closely, claims payments have been regularly increasing in frequency and severity. In the fall of 2020 alone, there were 48 claims reported to this carrier, only 4 of which were denied. The 44 claims that were paid totaled over $1.4M in recovery for policy holders, including one claim that was over $200,000. The number one peril covered is theft- representing over 56% of claims, followed by fire and wind. Fires related to extraction tend to have the largest claims due to the high value and condensed nature of the oils being produced. Dispensaries and grow operations are likely to have claims that touch multiple coverage elements within a standard Commercial Package policy, with thefts leading to damaged property, loss of inventory and business interruption. Product Liability also continued to be a hot area, with mislabeling of product’s potency, dose and ingredients being a major driving factor.

Insurance products are governed by the law of large numbers. The absence of sizeable historical datasets creates another challenge to insuring the industry. The more access and statistics carriers accumulate, the better they can forecast losses and accurately calculate fair premiums commensurate with the risks.

One encouraging indicator is a number of new recent entrants into the cannabis insurance market. This slow-moving development is creating more competition and pressure on legacy carriers while driving innovation using technology to improve offerings. Potential movement on the Federal level with respects to proposed legislation could also inject new life.

In March of 2021 United States Senator Bob Menendez introduced a bipartisan bill that would help the cannabis industry gain much-needed wider spread access to insurance called the Clarity Around Insurance of Marijuana Act (CLAIM Act). Menendez, a senior member of the Senate Banking Committee and chairman of a subcommittee underneath the Banking Committee that oversees insurance, introduced the bill with bi-partisan support. The CLAIM Act would prohibit penalizing or discouraging insurers from working with the legal industry, as well as prohibit the termination of policies simply because the business deals with legal cannabis, as long as that business is following all the rules and regulations in their state. If this bill is signed into law, it would remove major obstacles that are currently keeping many insurers on the sidelines. More participation in the market would create more competition, driving breadth into the insurance product offering in the industry.  The demand for broader insurance coverage is widespread, and an increase in suppliers of insurance would theoretically drive pricing down. This would be a welcome turn of events for an industry that has suffered from limited supply since the beginning.

The CLAIM Act would also ease the burden of owners and operators of property or equipment rented to the cannabis industry. Historically landlords and property owners have been reticent lease space to cannabis companies due to the ramifications that would follow when their insurer becomes aware of the operations. Under this ruling this barrier to entry would be removed, allowing wider access to higher quality facilities, and more centrally located spaces.

When taken into consideration along with the more publicized SAFE Banking act, which would clear the way for financial institutions to provide banking services to legitimate cannabis businesses, real meaningful change could be on the way.

As the industry continues to mature, the momentum is pointing in the right direction for financial institutions, like insurance companies and their broker representatives, to provide improved products and solutions to cannabis businesses. In the meantime, it is always recommended that buyers work with experienced professionals in the industry to point out potential gaps and maximize the breadth of coverage available. Policyholders need to be vigilant in making sure that business operations are adhering to warranties made on the application and conditions of coverage laid out in the policy. The CCIA Risk Management Committee is dedicated to supporting and protecting the stakeholders of the cannabis community. 

Authors and Contributors from the CCIA Risk Management Committee

Brian Marblestone, VP, Property & Casualty, ABD Insurance Services

Doug Esposito, Risk Management Committee Co-Chair and Cannabis Practice Leader, Assured Partners

Ian Stewart, Attorney at Law, Wilson Elser Moskowitz Edelman & Dicker LLP

DISCLAIMER

The information provided in this Blog Post is not intended to constitute legal advice and therefore should not be relied upon as such. Instead, this White Paper is exclusively intended for general informational and educational purposes. Given the dynamic nature of the industry, this Blog Post may not constitute the most up-to-date legal or other information. Use of this document does not create an attorney-client relationship between the reader and any individual at CCIA or CCIA as a whole. Operators should contact their attorney to obtain advice with respect to any particular legal matter. No reader of this White Paper should act or refrain from acting on the basis of information without first seeking legal advice from counsel in the relevant jurisdiction. Only a retained attorney can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation. For specific legal needs please contact an attorney. Should you need an attorney recommendation CCIA has several resources, please contact info@cacannabisindustry.org for more information.