Alexandra Berg IRUA Scholarship Essay Insurance Implications of the Legalization of Marijuana Overview Insurance for marijuana products and exposures have great potential as emerging lines of business. Legal marijuana has grown into a substantial industry and represents a largely untapped market for insurers. Legal marijuana can be insured for a wide range of exposures including liability exposures, property exposures, and inland marine exposures. Consideration should also be given to issues involving workers compensation and employment practice liability. There are some concerns regarding the legality of marijuana possession and sales at the federal level; however, insurance contracts involving marijuana should remain enforceable in states where marijuana is legal for medical or recreational purposes. Market Growth The legal marijuana industry is a rapidly growing market. Marijuana is currently approved for medicinal purposes in 23 states and the District of Columbia. It is also approved for recreational use in Colorado, Washington, Oregon, Alaska, and the District of Columbia. Because of the increase in states allowing the use of marijuana, the legal marijuana market in the U.S. has increased by 74% between 2013 and 2014, making the industry worth approximately $2.7 billion. This trend is expected to continue; market values are predicted to reach roughly $3.5 billion in 2015 (Kavilanz, 2015). Insurance
companies have the opportunity to insure the various loss exposures faced by business owners in the legal marijuana industry. 3 main categories of exposures are clear: liability, property, and inland marine, with workers compensation and employment practice liability also being considerations. Coverage can be provided for dispensaries, growers, and any other business involved in the cultivation or distribution of marijuana products. Legal Considerations Major consideration must be given to the legality of the marijuana industry. While twenty-three states and the District of Columbia currently allow marijuana to be legally distributed for medical or recreational purposes, the federal government still lists marijuana as a Schedule 1 drug, which makes its distribution illegal (Lacourse, 2014). Schedule 1 drugs are said to have no currently accepted medical use and a high potential for abuse. With the conflicting laws regarding the legal status of marijuana, concerns of the validity of a contract insuring this property arise. Contracts for illegal items are void so according to federal law, any contract involving marijuana is not enforceable in court. The McCarran-Ferguson Act grants states the right to regulate insurance; this means that in states that have legalized marijuana, contracts involving the manufacturing, possessing, or distributing are valid contracts at the state level. State statutes have granted insurable interest to legal quantities of marijuana (May, 2015). Some changes in federal law are beginning to occur. As part of a 2014 spending bill, the Obama administration said that they will not raid medical marijuana
dispensaries that are operating legally under state law. In addition to this, the Compassionate Access, Research Expansion, and Respect States Act of 2015 has been brought to congress. This act, along with several other changes, is attempting to move marijuana from a Schedule 1 drugs to a Schedule 2 drug. This act would also amend the Controlled Substance Act so that it does not apply to any person who is compliant with state law. While changes and attempts of changes in the law have been occurring recently, consideration must still be given to the conflicting legal status of marijuana at the state and federal level. Liability Exposures Liability policies are generally written on an all-risks type coverage, so everything that is not specifically excluded must be covered. Because of this, policies should be carefully written and analyzed to determine what affect, if any, may be caused should marijuana be made completely legal. Consideration should be given to the differences in exposures and exclusions for medical and recreational use marijuana. Product liability is a significant loss exposure faced by business owners, including those in the marijuana industry. Insurance companies should allow product liability policies to provide coverage for liability arising from the manufacturing/cultivation, design defects, and defective warnings or instructions related to the various marijuana products created and sold by business owners. Damages that may be paid under this coverage include medical costs, compensatory damages, pre- and post-judgement interest, and costs associated with the duty to defend the insured. Product liability coverage could be provided under
a Commercial General Liability policy, but coverage would only extend under Coverage A if the claimant alleges that bodily injury or property damage occurred due to the insured s product or completed work (Bonner, Introduction to the General Liability Policy). Another option is to exclude marijuana liability under Commercial General Liability policies; instead, marijuana liability coverage could be provided under a separate policy similar to liquor liability policies. These policies would cover damages the insured is legally obligated to pay due to the insured supplying marijuana products to patrons (Bonner, Products-Completed Operations Coverage). Similar to coverage provided to bars serving alcohol, dram shop liability coverage may also be provided to protect marijuana business owners against liability resulting from serving intoxicated or underage patrons (Toops, 2011). Dram shop liability insurance protects bars, restaurants, and other establishments that provide alcohol from any lawsuits that may arise due to third party liability. For example, a dispensary may provide marijuana to someone who then uses the substance before driving. If the person goes on to drive his or her car into a house, dram shop liability insurance would protect the dispensary from any third party liability that may arise from the situation. Other types of liability coverage would be more standard to the current policies that are offered. Premises liability can be offered under a Commercial General Liability policy to cover any accidents that occur to a third party at the insured s premises. Any coverage for damages arising out of employer s liability, workers compensation, or similar laws would be excluded under a Commercial General Liability policy so these coverages would have to be provided on a separate basis. Cyber liability policies may
also be offered, particularly for medical marijuana dispensaries that have patients medical records. Cyber policies can be offered in the same policy format that would cover any type of medical provider. Business Owners Policies (BOP) would not allow for dispensaries to be covered due to the fact that there is an exclusion for pharmacists. Any dispensaries that are distributing medical marijuana would fall under this exclusion. If an insured is operating a dispensary that does only sells marijuana for personal use and therefore is not a pharmacy, coverage may be available. Personal umbrella liability policies currently would not cover any liability arising from marijuana-related incidents. The policy specifically excludes liability for a controlled substance. Personal umbrella policies may, in the future, cover marijuanarelated issues if the substance is ever legalized by all states and the federal government, however. This means that insurance companies should begin to look at how marijuana may be covered under personal umbrella policies so premiums can be adjusted to properly reflect the amount of risk. Property Exposures Property exposures for the marijuana industry can be covered under typical commercial property policies. A commercial property policy would provide coverage for the building, equipment, fixtures, and other forms of covered property that are damaged by a covered peril. Many commercial property policies exclude or limit the coverage for damage to trees, shrubs, or plants (Insurance Information Institute). If an insured in the marijuana industry sustains a loss by a covered peril, most of the products being sold would have limited to no coverage. Endorsements will have to be placed in the
policy in order to increase coverage for the marijuana plants or a separate policy for plants would have to be provided so the insureds property is properly covered. Under the Farm Property Coverage form, there is currently no coverage for marijuana plants grown for business purposes and/or sale. In terms of marijuana for personal use, however, the issue is not as clear-cut. If the insured were growing a legally approved amount of marijuana for medicinal use, the Farm Property Coverage form seems to have no exclusion for any damage to this property if the damage is caused by a covered peril. For outdoor plants, a limit of $500 per plant would be in place. Indoor plants do not appear to have the same limitation applied, therefore, their value should be covered in full should a loss occur. Business Owners Policies exclude coverage for contraband. That means that at this time, marijuana plants would not be considered covered property. If marijuana is considered legal, the Business Owners Policy would exclude coverage for marijuana plants grown outdoors. There is a small coverage extension that allows for some coverage, however. There would be a limit of $1,000 per plant or tree. No more than $2,500 would be available for any single loss. Even with this coverage, there are few covered perils. The perils include fire, lightning, explosion, riot or civil commotion, and aircraft. The small number of covered perils and low limits of coverage may not adequately protect the insured. This issue would have to be discussed with each insured to determine their specific needs. Furthermore, Business Owners Policies have an exclusion for land and growing crops. There is some ambiguity in the language that makes it unclear whether this exclusion applies only to outdoor crops or if it also applies to crops grown indoors.
Since courts tend to favor the insured in litigations involving ambiguity in policy language, insurance companies may want to make this exclusion more clear. Insurance companies should also clear up any ambiguity regarding plants that are already harvested. While the insurance company may see harvested plants as crops, an insured can easily claim that the harvested plants are no longer crops and instead are inventory. Business Personal Property coverage forms are virtually identical to Business Owners Policies. Business Personal Property coverage forms limit coverage to $250 per item and $1,000 per occurrence, though many of the coverage issues are the same as those discussed for the Business Owners Policies. Since Business Owners Policies are generally for small businesses and risks that are fairly homogenous and low risk, insurers may not want to provide coverage for marijuana dispensaries under this type of policy. Homeowners policies are potentially affected by the legalization of marijuana as well. Homeowners policies would not cover property that is grown for business purposes. This would mean that any marijuana plants being grown for sale would not be covered. There is coverage for business personal property that may cover harvested marijuana for sale, though. Homeowners policies provide coverage for offpremises business personal property with a limit of $1,500 and on-premises business personal property with a limit of $2,500. There is also coverage for plants that are not being grown for business purposes. Because of this, marijuana plants being grown for personal use may be covered. Covered perils include fire, lightning, explosion, riot or civil commotion, aircraft, vehicles not owned or operated by a resident of the premises, vandalism or malicious mischief,
and theft. If a covered cause of loss occurs, a homeowners policy would pay up to five percent of the limit of liability that applies to the home for all trees, plants, or shrubs with a $500 limit per plant. Homeowners may want to consider increasing their limits in their policy if they plan to grow marijuana for personal use because a fully mature marijuana plant can be worth substantially more than the per plant limit that is provided. Insurance companies should begin to think about if they would be willing to increase limits for this purpose. Risk controls should be in place to limit property loss exposures. If marijuana is being grown indoors, there is significant risk of fire, mold, and water damage due to the high energy lamps, watering devices, and other equipment used to grow the marijuana plants. Inspections of the building should occur before the policy is written, and conditions involving ongoing risk control should be in place to ensure that proper safety precautions are in place. Inland Marine/Transportation The transportation of marijuana creates a complicated loss exposure. Transit coverage is the most likely coverage to apply to this market because it covers shipments within the continental U.S., and it covers property being shipped by insureds in their own vehicles or by carrier. Due to the complex legal issues surrounding marijuana sales and production, insureds will likely use their own vehicles to transport goods. Current insurance policies should only be provided for shipments that do not cross state borders because of the varying marijuana laws between states. Although
transit insurance excludes the shipping of contraband or illegal goods, coverage may be provided in states in which marijuana is legal (Endicia). Policies written for the transportation of marijuana should take into account the increased likelihood of theft of these goods by increasing the premium to reflect the increased risk or by listing theft as an exclusion. Policies should also include an exclusion for losses related to the legal involvement of governmental authorities such as the DEA. With raids and seizures of goods by the government particularly the federal government this exclusion is necessary to limit damages paid by insurance companies. While the Obama administration has been lenient in terms of federal involvement and enforcement of marijuana distribution laws, there is no telling what the next presidential administration will do so insurance companies should begin entering this market with exclusions against raids. Workers Compensation Compulsory coverages such as workers compensation are still required for business owners in the marijuana industry so standard coverage would apply. Medical marijuana may be covered under workers compensation in states that have legalized the substance. Court rulings in favor of paying for medical marijuana under workers compensation coverage include Creole Steele v. Ricky Stewart and Cockrell v. Farmers Insurance and Liberty Mutual Insurance Company in Louisiana and California, respectively, so payments for workers compensation may increase in certain states (Marsh, 2014).
It should be noted that there are not enough legal cases that have been ruled on to allow the insurance industry to accurately determine what a court will decide in the future regarding if workers compensation insurance has to pay for medical marijuana. Workers compensation is state mandated insurance and is therefore regulated by each individual state; court rulings have tended to side with the laws of the state that the court is ruling in. In states where medical marijuana has been legalized, courts have often determined that the insurance company must pay for the medical marijuana prescribed to an employee even though marijuana is not legal on a federal level. There are also issues concerning if there should be coverage for employees who are injured on the job while under the influence of marijuana. While workers compensation covers injured employees regardless of fault, the use of marijuana may increase the frequency of injuries. This would be especially true in labor-intensive industries such as construction and manufacturing. Premiums may increase for insureds if marijuana is legalized for recreational use and employees are using the substance shortly before, or while at work. Employment Practice Liability Insurance With the increase in use of marijuana and an unclear legal environment surrounding it, employers must be careful to avoid any lawsuits that may be brought against them by employees. Employment practice liability insurance would cover employers from employee lawsuits, including allegations of discrimination, wrongful termination, sexual harassment, wrongful discipline, failure to employ or promote, and deprivation of career opportunity. This could become an issue for several reasons.
Employees may argue that they need an area within the workplace to use their medicinal marijuana. If they are not allowed to use marijuana at work but they have a prescription for it, it could be viewed as discrimination against whatever disability or illness they are being treated for. Even if a court rules in favor of the employer and determines that no discrimination occurred, the insurance company will still have the duty to defend and, therefore, will have legal costs to pay for. A similar issue would arise if an employee was denied a job or fired for failing a drug test at work. Many companies try to have drug-free workplaces. Since marijuana is not considered a drug in some states, but is still classified as a controlled substance at the federal level, an employee who tests positive for marijuana would disrupt the drugfree status of the company. Thought should be given to whether or not certain classifications of employees should be held to a drug-free standard such as doctors or other medical professionals who cannot be impaired while working. This may cause discrimination or wrongful discipline issues that could trigger coverage under an employment practice liability insurance policy. Since marijuana can stay in a person s body for a longer period of time than substances such as alcohol, it may also be hard for insurers to claim that an employee came to work under the influence of marijuana on a particular date. Conclusion Insurance companies should begin to prepare for the changing legal status of marijuana. Analysis and data collection must occur before any policies are written, and the legal department should be involved in all decision-making for any liability, property,
or transportation policies that may be issued. Insurance companies need to also be aware of the legal decisions made regarding workers compensation and employment practice liability insurance. The legal department should be closely involved with any and all claims that have to do with marijuana so as to be in accordance with the latest court rulings. Bad faith claims will be unlikely at this point if a marijuana related claim is denied due to the unclear legal status of the substance, but insurers should be careful when denying such claims. The rapidly growing marijuana market has the potential to be a very profitable new line of business that should not be overlooked. By preparing for the dynamic risks involved in the marijuana industry now, insurance companies will be poised to begin writing policies as soon as the legal environment is determined to be stable enough for business.
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