As more and more states have continued to decriminalize medical marijuana and legalize recreational marijuana, it has become a much larger potential market for insurers. In 2017, legal marijuana sales amounted to $9.7 billion in 2017, and the international market is expected to grow to $31.4 billion by 2021.
However, insuring the cannabis market has not always been the easiest task. Marijuana remains illegal on a federal level, and because of this many large insurers (such as Lloyd’s of London) have opted not to engage with the market. For those who do choose to cover cannabis-related risks, the unique risk profile of the industry combined with the heavy restrictions and lack of legal and insurance precedent make this a difficult sector to insure. However, insurance captives could be the answer to this dilemma.
Joe Holahan, an attorney at Morris, Manning and Martin, said about captives, “The cannabis industry fits the profile of an industry that captive really was designed to serve. When you place risks through captive insurance you have the opportunities to shape the coverage the way you want it to be. Cannabis business owners can use the captive for self-insurance and to access international reinsurance markets where there may be a greater appetite to underwrite the risk.”
A type of captive known as closely-held captives (CICs) are a viable fit for the cannabis market because CICs are licensed insurers allowed under certain provisions to cover affiliated businesses but not the general public. Because of this, they allow greater control over the coverage’s terms and conditions, and avoid the issue of the enforceability of insurance contracts. As the legal marijuana industry is a newer one, there is not an extensive precedent of coverage, and existing coverage (particularly crop insurance) comes with many coverage gaps. Captives allow these businesses to cover their current gaps that may be excluded by conventional coverage.
Products liability is another coverage that is difficult to obtain for cannabis businesses. These policies are available but difficult to find, and do not provide excess coverage.
However, this solution is far from perfect. As mentioned above, marijuana is still prohibited at the federal level under the Controlled Substance Act. In addition, there is the public policy argument. Because marijuana is technically illegal, insurers can potentially argue that insuring these risks is against public policy, and policies and claims would become void as a result.
At this time, this sector simultaneously presents insurance risks while representing a growing and largely untapped market for traditional insurers and captive insurers alike. Ultimately, it will be a matter of time to see how the cannabis industry continues to develop, and whether the legal restrictions remain.
Caitlin Morgan Captive Services provides clients with captive insurance solutions supported by years of experience in establishing the successful formation and implementation of a wide range of captives. To learn more about how we can help you, please contact us at (317) 575-4440.
Sources: Captive Insurance Times, Risk & Insurance, Business Insurance