Captives an option as marijuana sector seeks coverage

SCOTTSDALE, Ariz. — Captive insurers can fill the numerous gaps that exist in insuring the cannabis industry, but owners need to be fully aware of the problems that could arise, including possible federal prosecution and civil forfeiture.

“If there ever were an industry that could benefit from the use of captive insurance vehicles, it’s this industry,” Joseph Holahan, Washington-based attorney at law with Morris, Manning and Martin L.L.P., said at the Captive Insurance Companies Association’s 2018 conference in Scottsdale, Arizona, on Tuesday. “It’s a risk that’s difficult to place.”

California has taken steps to encourage insurers to write cannabis businesses. In November 2017, Stockton, California-based Golden Bear Insurance Co. became the first admitted market to write marijuana coverage in the state, with the company able to write commercial general liability, premises liability and crime and theft coverage for cannabis operations in anticipation of marijuana being decriminalized in California for both medical and recreational purposes on Jan. 1. In February, California approved the state’s first surety bond program for the cannabis industry issued by Mayfield Heights, Ohio-based Continental Heritage Insurance Co.

Products liability is a key exposure for cannabis operations and difficult to cover in the commercial markets, said Greg Fanoe, consulting actuary with Merlinos & Associates Inc. in Atlanta.

“It’s an exposure that a lot of carriers are very afraid of,” he said. “A lot of the elements of products liability are based on legal precedent.”

For example, there are concerns about labeling laws and someone consuming edible products and then getting an accident, Mr. Fanoe said.

“Labeling on edibles doesn’t have to be that different from labeling of other food products,” he said. “The best analogy people I see most people draw is to the dietary supplement industry, especially as it existed prior to 1994,” when the federal government adopted a law to define and regulate dietary supplements. “Prior to then, the legal environment was very uncertain. It still is in many ways.”

Crop insurance is another important coverage, Mr. Fanoe said.

“It’s very difficult to find crop insurance for this product due to lack of good data,” he said. “A lot of insurance companies are kind of wary to write it. It’s a very high catastrophe-prone line.”

Indoor crop insurance is available on a limited basis, said Camille Dixon, director of community programs and policy initiatives for the California Department of Insurance in Sacramento.

“Outdoor is not available,” she said. “We do want the industry to have outdoor insurance. We thought we might have some insurers that were interested in writing it, but then the wildfires in California” happened, and that interest went away.

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