Cannabis laws in Canada, the United Kingdom and the US vary significantly and insurers must be aware of the nuances.
Cannabis. Marijuana. Pot. Not only is it known by a wide variety of names, but it's also subject to an equally wide variety of regulations, which vary significantly from one region to another. With legislation surrounding its production, distribution, sale and possession changing rapidly, insurers have the difficult task of assessing not only the physical and business-related risks of cannabis-associated underwriting but also the legal implications. Following, we examine the current legal environment — and associated insurance implications — in Canada, the US and UK, to see what the laws currently state, and how the insurance industry is responding accordingly.
The Cannabis Act, which came into force on October 17, 2018, is Canadian federal legislation which legalizes the recreational use of cannabis in every province in Canada. It put into place a new, strict framework for controlling the production, distribution, sale and possession of cannabis in Canada.
Each province and territory has its own rules for cannabis, including determining how cannabis is distributed and sold within its jurisdiction. The provinces make law with regard to legal minimum age, where stores are located and how stores are operated, where adults can buy it, where adults can use it, and how much adults can possess.
At this time, it is unlawful to sell cannabis-infused products such as beverages and edibles. However, it is anticipated that the sale of cannabis-infused beverages and edibles will become legal in late-2019. Beverage companies are already in the midst of discussions with Canadian cannabis producers to develop beverages that are infused with cannabidiol, commonly referred to as "CBD".
There are a number of issues to note when insuring cannabis risks in Canada. For example, with respect to personal lines insurance, will cannabis plants be considered "personal property" or will claims for plant theft and damage fall under the "tree, shrub, and plant" portions of a homeowners policy? Personal cultivation is a peril that is currently excluded in a standard homeowners policy and can no longer be covered by the "criminal activity" exclusion. In-home cannabis production comes with inherent risks, which can result in increased water consumption or damage, mold and fire damage claims.
Cannabis products present interesting product-liability insurance questions since the effects of cannabis are not uniform nor widely-known. Cannabis is excluded under the Canada Consumer Product Safety Act. While producers and processers must be licensed and appoint quality-assurance persons to test cannabis products, there may be health and behavior hazards that have yet to present themselves until widespread consumption and its effects are ascertained.
With regard to commercial insurance, there are over 100 licensed cannabis producers in Canada. Producers require specialized property and equipment. How will plants and finished products be treated in insurance coverage? In addition, the transportation of cannabis creates the potential for loss exposure with cannabis currently being transported directly from licensed producers to the end user by Canada Post, or private courier companies. There is a potential for increased risk of theft and damage to the product while in transit. Specialized cargo coverage will be required.
Canadian consumers must be wary of their personal information being accessed through cyber-attacks as cannabis companies may face privacy breaches. The Ontario Cannabis Store has already suffered a privacy breach in which the company's delivery tracking tool was used to gain access to the personal information of 4,500 customers.
In the United States, the legal landscape when it comes to cannabis reflects a federal-state divide. Though federal law criminalizes even the possession of marijuana and considers the substance highly addictive and lacking in medicinal properties, many of the states have decriminalized marijuana, and almost all states have legislatively approved marijuana for medicinal use.
Banks and credit-card companies have been wary of providing services to businesses dealing in cannabis for fear of running afoul of money-laundering laws and banking regulations, however, there are fewer concerns for insurers. Indeed, in California — the largest state in the union — the state's insurance commissioner has actively recruited insurers to begin issuing insurance policies specially approved for cannabis growers and retailers. Today, at least five different California-admitted insurance carriers are offering policies specifically designed for the needs of cannabis businesses.
As of 2019, almost half of the 50 US states have either legalized or decriminalized marijuana, and almost all have permitted its medicinal use. Possession and commercial sale of marijuana have been deemed legal in nine US states, and by the end of 2019, almost one-quarter of Americans will be able to legally purchase marijuana in their home state. Other than Idaho, Nebraska, and South Dakota, every state has recognized marijuana's medicinal benefits and legalized cannabis or CBD oil in some form.
The distribution and even possession of marijuana is still technically a crime under federal law. But with state and federal legislators and even federal courts beginning to recognize the shift toward nationwide legalization of marijuana, insurers have begun to issue policies specifically designed to cover risks for cannabis growers and retailers. California, in particular, appears to be a ripe area for insurers. With an estimated population of 40 million, California is the largest state in the country and the fifth largest economy in the world by GDP. Some analysts predict annual sales of $6 to $7 billion in annual cannabis sales, and legislators are currently mulling reducing the 15% sales tax upon cannabis sales to 11%.
In 2017, California's insurance commissioner, Dave Jones, launched an initiative to encourage commercial insurance companies to write insurance designed for the cannabis industry. In October 2017, he held a first-in-the-nation public hearing to identify insurance gaps faced by the cannabis industry. Since that time, California's Department of Insurance has approved cannabis industry-targeted insurance policies and programs including a product-liability and product-recall program, lessor's risk coverage, workers' compensation insurance, and surety bond programs.
Today, admitted insurers offering cannabis-industry-focused programs include North River Insurance Company, United States Fire Insurance Company, White Pine Insurance Company, Golden Bear Insurance Company, California Mutual Insurance Company, Continental Heritage Insurance Company, and Atlas General Insurance Services. Furthermore, the commissioner has approved the American Association of Insurance Services' Cannabis Business Owners Policy, which provides a package policy containing both property and liability coverage for qualifying California cannabis dispensaries, storage facilities, distributors, processors, manufacturers, and other businesses participating in or supporting the California cannabis industry.
Following public outcry over the cases of two children with severe epilepsy who were unable to receive cannabis oil in the UK, the government legalized the use of medicinal cannabis as of November 1, 2018. However, the production and possession of cannabis for recreational use remains illegal.
This, it seems, creates a dichotomy for UK underwriters. The UK's money laundering laws are found in sections 327 to 329 of the Proceeds of Crime Act 2002 (POCA), which criminalize doing virtually anything with criminal property.
Criminal property is property which constitutes or represents a person's benefit from criminal conduct if one knows or suspects that it is so (s. 340(3)). Criminal conduct is conduct which would constitute an offense in any part of the UK if it occurred there (s. 340(2)).
Cannabis production remains a criminal offense in the UK unless specifically authorized for medicinal purposes by a license. Plainly, the UK licensing regime does not apply abroad, so cannabis production abroad cannot, by definition, be authorized by the Secretary of State. POCA doesn't provide a solution to this issue, but it is hoped that law enforcement agencies in the UK would take a common sense approach to investments in locally regulated medicinal cannabis businesses abroad.
Investing in cannabis production for recreational use abroad is more problematic because the production, supply and possession of cannabis for personal use remains "criminal conduct" for the purposes of POCA. Any property that represents a benefit from the criminal conduct is, in turn, likely to be criminal property.
A UK business could make an "authorized disclosure" to the National Crime Agency before dealing with the fruits of an overseas cannabis business, but this only provides a defense in relation to a specific act or transaction, rather than carte blanche. Lloyd's has taken the view that writing Canadian cannabis risks does not amount to an offense under s. 328 POCA. But until the National Crime Agency or other authorities provide stronger comfort to businesses in the UK, the issue will remain a concern.
Securing coverage from key insurance markets will continue to be problematic. While fully unregulated possession and distribution of marijuana may never happen, insurers must understand the legal and risk management implications. With legislation changing rapidly, insurers have the difficult task of determining the impact on underwriting and responding to these issues appropriately.
This article was first published in Claims Magazine.
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