How the CLAIM Act will affect insurers
Insurers providing coverage to marijuana-touching businesses could find safe harbor under the CLAIM Act.
Editor’s Note: A webinar addressing the legal and insurance issues related to the legalization of cannabis will be held on Thursday, Sept. 19 at 2 p.m. ET. Register here.
By the end of 2019, the cannabis industry* is expected to employ more than 200,000 people and could be worth as much as $48 billion in the United States. By almost any means of measuring growth, the industry will expand by more than 30% in 2019 alone. However, despite the headlines proclaiming cannabis “legal” in a growing number of states, cannabis, in fact, remains illegal at the federal level — it is categorized as a Schedule I drug by the U.S. government, meaning a drug “with no currently accepted medical use and a high potential for abuse.”
In 2013, the Obama administration declared a (mostly) hands-off approach for the enforcement of cannabis-related offenses. The Cole Memorandum, issued by the Department of Justice, declared that it would not prioritize the enforcement of federal anti-cannabis laws in states that had “legalized marijuana in some form and…implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale, and possession of marijuana.” However, this memorandum was reversed by the Trump administration under former Attorney General Jeff Sessions. Though current Attorney General William Barr has stated he “would not go after” marijuana companies, the DOJ has not issued a formal statement confirming this.
Given this uncertainty at the federal level, insurers have been wary of entering into the cannabis supply chain out of fear of criminal or civil liability. Thus, insurance remains relatively difficult to access for large swaths of the industry. Even Lloyd’s of London, known for its willingness to write many types of risks, issued a directive in 2015 stating that it would not support insurance of state-legal cannabis operations in the United States until cannabis becomes federally legal. According to a March 9, 2019, Special Report by A.M. Best, there are currently only about 25 carriers, mostly non-admitted, covering the industry.
In this landscape, cannabis businesses must navigate their own risk management needs, along with compliance with state and local laws, while being forced into limited — and often quite expensive — policy choices, if they are lucky enough to find coverage at all. The lack of insurance is a real, not hypothetical, problem. For instance, no insurer has been identified that is willing to write crop insurance for any Delaware cannabis growers. Even when an insurer exists, it may not write the limits that a cannabis business actually needs. On top of all that, policy wording often contains exclusions (such as for “illegal” operations) that leave coverage unclear.
Recognizing the need for expanded insurance offerings for the cannabis industry, both the U.S. House and Senate have introduced nearly identical bills, both dubbed the CLAIM (“Clarifying Law Around Insurance of Marijuana”) Act, which creates a “safe harbor for insurers engaging in the business of insurance in connection with cannabis-related business.” The House version also includes a GAO study to determine women and minority participation in the cannabis industry.
The CLAIM Act would prevent federal agencies from:
- Prohibiting, penalizing, or otherwise discouraging insurers from engaging in the business of insurance in connection with either cannabis-related businesses or states or territories that exercise jurisdiction over cannabis-related businesses;
- Terminating, canceling or otherwise limiting the policies of an insurer solely because the insurer has engaged in the business of insurance in connection with a cannabis-related business;
- Recommending, incentivizing or encouraging an insurer not to engage in the business of insurance with a policyholder, or downgrading or canceling the insurance services offered to a policyholder solely because the policyholder is involved in cannabis-related businesses; and
- Taking any adverse or corrective supervisory action on policies to: (a) cannabis-related businesses, (b) individuals involved as employees, owners or operators of cannabis-related businesses, or (c) other businesses that lease real estate or equipment to cannabis-related businesses.
More generally, the legislation would protect insurers from being held liable pursuant to any federal law or regulation for their provision of insurance to the cannabis industry.
The CLAIM Act would solve what is arguably the most challenging aspect insurers face in regards to the cannabis industry: the fear of legal penalties for providing insurance to cannabis-related businesses. Many insurers are interested in the opportunities presented by the newly emerging cannabis market but the risk of federal legal ramifications outweighs all other considerations. Unless and until cannabis becomes federally legal, the protections of the CLAIM Act, if passed, would reassure insurers that entering the cannabis space would be a business decision like any other — i.e., one necessitating the consideration of the pros and cons to determine whether insuring cannabis businesses fits within their desired portfolio of risks.
Robin Dusek, a partner resident in Saul Ewing Arnstein & Lehr’s Chicago office, has extensive experience with cannabis law and represents insurers, cedents, reinsurers, and pools across the country in insurance and reinsurance disputes, including in both arbitrations and litigation. She can be reached at firstname.lastname@example.org.
* The “cannabis industry” refers to companies involved in the marijuana business where medicinal or recreational adult use is legal at the state or reservation level.