| SCENARIO 3 |
It’s the year 2028 . . .
Cannabis is Federally Legal
Master Green Garden is iconic in its home state of California. Founded in 2019, Master Green Garden is one of the largest cannabis growers in the state, with just shy of a million square feet of cultivation space. The majority of Master Green Garden’s product grows in energy-efficient greenhouses, where they’re able to continuously plant and harvest cannabis year-round.
In addition to selling a carefully curated line of products directly to consumers under the Master Green Garden brand, the company also has a booming business-to-business operation. They sell their well-known brand wholesale to California cannabis retailers and offer a variety of white-labeled cannabis products that businesses can sell under their own packaging and name.
After almost a decade in business, Master Green Garden is moving into unchartered territory: Just a few months ago, the federal government officially ruled cannabis as fully legal in the United States.
An Industry Ripe For Change
Now that cannabis is no longer on the government’s list of banned and controlled substances, the industry will be able to enjoy the benefits that other mainstream businesses take for granted, like access to banking, traditional tax advantages, inter-state commerce, and more easily-accessed insurance.
This new-found freedom, however, isn’t without its challenges.
“With legalization, a lot of traditional business opportunities would open up to cannabis operations. They could apply for trademarks, file for bankruptcy, access more banking options, and write-off expense deductions. Legalization, in theory, should makes business more efficient and able to run more like mainstream industries.”
The Struggle for Standardization
Up until recently Master Green Gardens, like all other cannabis businesses across the country, operated in a legal gray area. Although these businesses had state-issued licenses to operate within the borders of their respective states, cannabis was still regarded by the federal government as illegal. This created a patchwork of legislation from state to state, with little consistency and no opportunity for business between states.
With federal legalization comes the long-term goal of consistent industry practices and guidelines. Similar to alcohol and tobacco, the federal government has set parameters that all states must adhere to—such as who can buy and sell cannabis and in what amounts. But beyond that, there’s still a lot of work to be done to establish a standardized framework for the cannabis industry across all states.
At some point, there will be a system where every cannabis company knows exactly what they’re supposed to put on their label and what they’re supposed to test, and where and how they can sell their products. But that will take many years to sort out.
“Let’s say there is a law that gets passed that says we’re [legalizing cannabis]. It could take years for the government to issue regulations and decide how to implement requirements for testing, labeling, and licensing. It could take years.”
Even Positive Change Can Be Overwhelming
Although long-term standardization will take time, cannabis businesses will still have to grapple with how they’ll adjust their business operations to comply. For some businesses, that lift will be too great—especially if their states weren’t appropriately prepared to handle the new federal legislation as it rolls out.
Even states that legalized cannabis early on have struggled to keep up with the demands of managing and regulating cannabis operations. Many states tucked cannabis regulation under the purview of their existing liquor boards. However, the knowledge and experience needed to inspect restaurants and bars doesn’t necessarily translate to inspecting dispensaries or cultivation and processing facilities.
In the wake of federal cannabis legalization, the already overburdened state boards are now drowning, making it difficult for cannabis businesses (and business hopefuls) to fully understand what they need to stay compliant.
“We need to start educating the states now on what happens [if cannabis is fully legalized]. When it goes federally legal, they’re really going to be drinking out of Niagara Falls. [If they aren’t prepared,] they’re going to be working to keep up versus working to stay ahead.”
The Medical and Recreational Divide
The government has announced they have long-term plans to bring the medical cannabis market under stricter regulations and approval guidelines, similar to other pharmaceutical-grade products. But no one knows exactly how this will look, which has cannabis businesses that operate in the medical market understandably concerned.
Will they be able to transition their businesses to comply with whatever changes the government makes? Or will medical products only be available for purchase at pharmacies? Is it better to abandon the medical market entirely and attempt to transition their business to recreational? What does this mean for businesses in states that have historically been medical-only?
Don’t Bet The (Cannabis) Farm
Master Green Garden has been itching to expand their market reach outside California. Up until now, they’ve throttled their possible production capacity, to avoid outpacing demand and winding up with more than they can sell. When cannabis was federally illegal, they were constrained to selling their product within the state of California. But now that cannabis is fully legal within the United States, they’ve set their sights on how they might expand into other states and sell their product across borders.
States like Wisconsin, for instance, entered the cannabis market much later than California and lack natural growing environments for high-yield cannabis production. While a business could choose to build a completely indoor grow facility in a climate, operations like Master Green Garden in sunny California can produce more at cheaper costs, allowing them to offer lower prices. Indoor grow facilities can be expensive to heat and light, and businesses have to mark up their products accordingly.
Master Green Garden, and large growers like them, see a great opportunity to corner the market in states just building up their cannabis infrastructure by ramping up their own production and shipping across the country.
“The minute interstate commerce opens up, I think the small-time operator states, who can’t produce volume and quality at scale will quickly dissipate, because the consumers buying preference will be towards those that are best in class for quality, potency and consistency. If they live in Massachusetts, and they can buy Great California Humboldt Cannabis, they’re going to do that.”
More States, More Options—and More Liability
What Master Green Garden may not initially realize, however, is the complexity of shipping across states. Although federal legalization makes interstate commerce possible, it’s not as simple as throwing boxes of product in a truck and driving off.
Even within the federal regulations of free trade, the government could require special licensing to ship between states. When it comes to transporting products from state to state, legal compliance and insurance coverage go hand-in-hand. Businesses will need to comply with licensing requirements—as well as any other state and federal shipping, or motor carrier regulations—before insurance companies will provide coverage.
In addition, shipping product from California to Wisconsin, for example, introduces a lot more liability and risk than shipping from So. Cal to San Francisco. Insurers will want to know how companies will track and trace products from one state to another and how Master Green Garden plans to mitigate risk across a dozen different states. This will be particularly challenging during the time when the nation is trying to establish some sort of standardized set of practices and each state is still managing things somewhat differently.
Not all Insurance is Created Equal
When Master Green Garden first began its operations almost a decade ago, they struggled to find sufficient insurance. Over time, more specialty and boutique carriers entered the cannabis market, willing to take on the risk of a profitable business in an evolving new industry. This gave Master Green Garden more options, but premiums remained high and policy terms weren’t as favorable as those offered to more traditional, mainstream businesses.
Now that cannabis is federally legal, Master Green Garden will be able to shop around a bit more. Large commercial insurance companies in the admitted markets will step in with their own cannabis insurance offerings, ready to write new business. The increase in overall market capacity is good news for cannabis businesses. More competition in the insurance space means more coverage options, more favorable terms, higher limits, and better prices.
However, the savvy cannabis owner knows that in an industry as complex, dynamic, and nuanced as cannabis, it pays to seek out expertise. While the larger commercial insurance companies may have strong, nationwide brand recognition, they aren’t necessarily experts in cannabis—especially compared to the smaller, legacy carriers who have been working within the cannabis industry for many years.
“In a scenario where cannabis is descheduled, the surplus lines, markets, and carriers will continue to dominate the space. The industry will be slow to trust admitted carriers until they can demonstrate a robust understanding of the market.”
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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