Regulatory Compliance More Accessible For Cannabis, Hemp Insurance Market

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Wilson Elser Moskowitz Edelman & Dicker LLP

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More than 800 attorneys strong, Wilson Elser serves clients of all sizes across multiple industries. It maintains 38 domestic offices, another in London and enjoys more extensive international reach as a founding member of Legalign Global.  The firm is currently ranked 56th in the National Law Journal’s NLJ 500.
Ian Stewart (Partner-Los Angeles) authored the article "Regulatory Compliance More Accessible for Cannabis, Hemp Insurance Market," published...
United States Cannabis & Hemp

Regulatory compliance is the single most important risk management tool for any cannabis or hemp company and its insurer. Companies that make compliance a strategic priority significantly reduce their potential liability and the risk of litigation. Those companies that cut corners on compliance present a higher risk for fines, license revocation, property and product liability risks, recalls, and lawsuits with customers, competitors, and vendors.

From an insurance underwriting perspective, it is critical to understand the extent to which any cannabis or hemp company makes regulatory compliance a business imperative. This is particularly true when one considers the impact of expected changes to the regulated marijuana industry and the hemp-cannabinoid product market over the next year or two.

Below are these anticipated changes and proposals for a newly accessible solution from compliance platform Simplifya for insurance entities that seek the ability to perform regular license verification, license monitoring, compliance audits, and other risk mitigation for numerous licensed operators across multiple jurisdictions.

The Future of Cannabis Regulatory Compliance

The most significant development in federal marijuana policy over the past 50 years happened in August 2023, when the Department of Health and Human Services (HHS) recommended that marijuana be reclassified from Schedule I to Schedule III within the Controlled Substances Act. The recommendation is now under review by the Drug Enforcement Administration (DEA). Because the DEA has never rejected a scheduling recommendation by HHS, many expect that the DEA will soon begin the rulemaking process needed for the transition to Schedule III.

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Although there should be a positive long-term impact on cannabis property, commercial liability, product liability, and specialty risk exposures after marijuana is removed from Schedule I, we should expect a tumultuous transition during which those risks may increase. There are several reasons for this.

Removing Schedule I criminal exposure may result in an increase of unregulated marijuana products and turmoil in the cannabis product market, much like the explosion of intoxicating hemp-derived products seen in the wake of the 2018 Farm Bill. The new competition could well result in pressure on some licensed operators to cut corners around expensive regulatory compliance.

Even as a Schedule III drug, marijuana will remain a controlled substance subject to strict controls around its manufacture, distribution, and use. Any lack of clarity as to how enforcement decisions will be made by the DEA or the Food and Drug Administration (FDA) will result in an unacceptable environment of uncertainty that in some ways is worse than the status quo for underwriting purposes.

A change to Schedule III also will facilitate a transition to the broad interstate commerce of cannabis products. During this transition, existing state regulations will continue to be enforced unless and until a comprehensive federal regulatory plan is created that allows for continued state oversight and control, similar to the way alcohol is regulated. In the meantime, the collision between interstate commerce and intrastate cannabis regulatory structures will result in a period of increased confusion as companies attempt to realign their operations to stay compliant in an uncharted regulatory environment. This additional legal uncertainty can only adversely impact cannabis companies and their insurers.

The Future of Hemp Cannabinoid Regulatory Compliance

In the absence of federal guidance, the states continue to take disparate approaches to regulating ingestible CBD products and the newer class of intoxicating hemp products that contain delta-8 THC and other hemp-derived THC isomers. Innovations in these intoxicating products are happening faster than state lawmakers can respond, with the states variably allowing, banning or restrictively regulating the products. Hemp cannabinoid risk management today is best described as a confusing "know your state" patchwork of state laws. Meanwhile, a widening rift between the hemp and cannabis industries has resulted in lawsuits around the country brought by cannabis and hemp companies accusing each other of unfair practices, illegal monopolies, and other violations.

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This all comes while negotiations have been under way for the 2023 Farm Bill, which may dramatically change how intoxicating hemp products are defined and regulated at the state and federal levels. Issues to be addressed in the 2023 Farm Bill include clarifying various definitions, increasing the 0.3% THC threshold, closing so-called "loopholes" created by the 2018 Farm Bill, distinguishing between "industrial hemp" and "cannabinoid hemp," and naming a federal agency responsible for regulating consumer safety.

Provisions of the 2018 Farm Bill have been extended through September 2024. This means that the issues discussed above will remain unresolved for many more months.

Regulatory Compliance Solutions for the Insurance Industry

The complexity and pace of change within the cannabis and hemp regulatory environment can leave carriers, underwriters and brokers feeling overwhelmed. Until recently, there has been no efficient and cost-effective option for insurance entities that need to regularly perform license verification, license monitoring, compliance audits and other risk mitigation for numerous licensed operators across multiple jurisdictions. Some underwriters and brokers handle underwriting due diligence on an individual-insured basis by locating license/permit information through the state or local regulator, which is time-consuming and can result in incomplete information. Others rely on the often inefficient assistance of expensive consultants or attorneys.

The leading provider of compliance tools for the cannabis and hemp industries is Simplifya. While the company has an array of tools germane to the industry, Simplifya Verified is a cannabis and hemp license verification tool that makes compliance monitoring across jurisdictions efficient and easily accessible to the insurance market. Taking risk mitigation one step further for insurers is Simplifya Protect. Licensed cannabis operators that use Protect for operational compliance as a part of their own risk-mitigation strategy and governance have a significantly reduced risk profile. To facilitate broader risk mitigation for insurers and insured clients, Simplifya Protect is now available at a fraction of the previous cost for insurers willing to absorb or pass on the cost.

Given the uncertain future regulatory environment discussed above, there is a likelihood that cannabis- and hemp-related insurable risks will increase during a tumultuous transition period while companies adjust to a new operating environment. Regulatory compliance should remain a key aspect of underwriting due diligence for any cannabis or hemp risk. Although each insurance entity must determine what due diligence strategy works best for its specific business operation, we are encouraged that a compliance platform such as Simplifya is becoming more accessible to the cannabis and hemp insurance market.

Originally published by CLM Magazine.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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