| SCENARIO 1 |
It’s the year 2028 . . .
Cannabis is decriminalized.
Sarah is the owner of Sarah’s Green Boutique, a dispensary in Oregon. She opened her first medical dispensary in 2014, and expanded her business to offer recreational products the following year. She’s worked diligently to build community support and develop strong relationships with local cannabis farms and product manufacturers. As a result, her business has thrived and over the years, she’s opened two more locations in the state.
Decriminalization Doesn’t Mean Legalization
When Sarah entered the cannabis business over a decade ago, just a handful of states had legalized the sale of cannabis, and public perception of cannabis was wary at best. Now, in 2028, the majority of states have legalized cannabis for either medical use, recreational use, or both, and the federal government recently passed legislation decriminalizing cannabis.
Despite this progress, Sarah—and other cannabis business owners like her—are frustrated. With decriminalization, possessing and using cannabis is no longer a criminal offense, but it still remains federally illegal, which hampers legitimate businesses like Sarah’s Green Boutique.
“Decriminalizing cannabis would remove a lot of the fear and stigma associated with cannabis and break down boundaries in a way that would allow the industry to prosper more within the confines of state regulation.”
Interstate Commerce and Business Funding Remain a Challenge
Sarah’s Green Boutique has flourished, and Sarah has ambitions to expand into neighboring states. However, due to federal restrictions and differences between individual states’ legislations, it’s tricky for a business to operate in multiple states. Cannabis grown in one legal state can’t be transported to another and every state has different regulations around what can be sold, how, and in what amounts.
Larger multi-state operators (MSOs) have gotten around these restrictions by opening legally-distinct business entities in different states. This allows them to sell products in multiple states, under the same brand name, while complying with individual state regulations.
But a large operation like this feels out of reach for a smaller-scale business owner like Sarah, who has struggled to secure capital. Because cannabis operations are still technically illegal according to the federal government, many banks and traditional investors just aren’t willing to risk doing business with her.
Decriminalization Alone Won’t Significantly Impact Insurance
Securing comprehensive and reasonably-priced insurance for her business is also challenging for Sarah. Compared to when Sarah first opened up shop, there are a lot more options, but it’s limited to a handful of carriers with tight restrictions and limited coverage.
Technically, since it’s still not legal, the federal government could prosecute insurers who provide coverage to cannabis businesses. As a result, most carriers—especially those in the admitted markets—aren’t willing to work with cannabis operations.
Although decriminalization won’t automatically prompt admitted markets to join the cannabis game, additional legislation might. If the Clarifying Law Around Insurance of Marijuana (CLAIM) Act, for instance, were pushed through, we’d quickly see a shift in the insurance market. The CLAIM Act, first introduced in March 2021, would allow insurers to offer coverage to cannabis businesses in legalized states, without the threat of federal prosecution.
“Mainstreet, admitted national insurance carriers won’t touch anything cannabis-related until it’s legalized or a bill is passed that provides them protection for doing business with cannabis operations. Even if cannabis were decriminalized, there’s just too much at risk for them. And they don’t need to take that risk.”
More Specialty Insurers Enter the Space
Although the more mainstreet insurers remain wary, there are specialty carriers who see the growing cannabis industry as an area of opportunity. As more states create their own cannabis legislation, new cannabis businesses will begin popping up, and existing MSO operators will attempt to gobble up the expanding market share. When they do, cutting-edge insurers will be there to serve the need. Coverage, however, will come at a significant cost, compared to what’s available to traditional businesses.
Many of the Same Risks Remain
Although Sarah’s Green Boutique is likely to find some kind of coverage somewhere—they pay much higher premiums than the average business and they face tight underwriting guidelines.
All businesses are at risk for things like product defects or mislabeling, theft, and workplace accidents. For cannabis businesses like Sarah’s Green Boutique, however, these risks can look a bit different. There’s always a chance that a customer may have a bad reaction to a product Sarah offers. Even worse, Sarah could, unknowingly, sell a product that is contaminated and makes the customer sick. In cases like these, the customer could sue, and Sarah’s Green Boutique could be held liable for medical expenses and costly legal fees.
Most cannabis businesses don’t have traditional credit card functionality because banks and financial institutions are reluctant to work with cannabis operations. As a result, Sarah and other cannabis operators keep more cash on hand than a typical business. This puts Sarah’s Green Boutique at a greater risk of theft and increased liability.
“If decriminalization does lead to more cannabis business locations and more sales, then we can expect to see an expansion of insurance capacity and a desire for excess liability coverage; especially for auto, workers compensation, and general liability products. I’d also expect to see more insurance markets, and they’ll have to compete either on price or coverage. It will create a more competitive insurance environment, which will benefit insureds, first and foremost.”
The Industry Remains Optimistic
The good news for Sarah and her business, however, is that as more specialty insurers continue to enter the cannabis space, capacity will also continue to increase and the competition will begin to nudge down premiums.
In short, Sarah’s cannabis operation in 2028 looks very similar to how it did just five years ago. Still, she is hopeful decriminalization is a sign that full federal legalization is on its way.
“If cannabis is federally decriminalized, you can expect to see a lot more chatter among carriers about potential product offerings. Carriers not already involved in the marketplace will likely see that as a sign that legalization is on the horizon, and they’ll be thinking about how they’ll start writing cannabis coverage in the future.”
The Jencap Cannabis Insurance Team
Jencap’s cannabis experts have devoted their careers to difficult-to-place risks. We have boots on the ground in every major cannabis market, fully understand the unique challenges of cannabis businesses, and stay on top of current state and federal legislation. Our fully customized, home-grown insurance solutions span every class of cannabis business and ancillary services—from the farm to the shelf.
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