Insurance Companies, Not Laws, Are Preventing Widespread Cannabis Insurance

Not long ago, the marijuana industry had some of the best insurance coverage in the world.

Cannabis firms were doing business with Lloyd’s of London, one of the oldest names in the underwriting world, until May of 2015, when the firm abruptly quit. Existing policies would not be renewed, and new policies would not be taken, Lloyd’s announced in a May 29, 2015 letter to its partners.

Lloyd’s cited the most obvious and well-worn justification as reason why — the age-old conflicts between state and U.S. federal law on marijuana — but observers in the insurance world were still left scratching their heads at the suddenness, and at the reasoning. Something was off.

At the time, the Obama Administration’s Justice Department had announced it would not prosecute financial institutions offering services to licensed businesses in states with medical-marijuana laws.

It seemed insurers were in the clear. Did Lloyd’s receive a secret, off-book warning from the feds, or did the firm reassess risk and decide insuring marijuana simply wasn’t profitable? “Nobody knows,” Sacramento, Calif.-based Mike Aberle, senior vice president of Next Wave Insurance Services, told Insurance Journal at the time.

“That’s the really curious part right now,” he said. “Nobody really knows what’s going on except the guys in London.”

It’s worthwhile to revisit this incident when considering the situation now, following the deadliest and potentially most costly fires in California history.

Damage is still being assessed and the full extent won’t be known for months, but it’s obvious the fires in Sonoma, Mendocino and Napa counties have dealt a considerable blow to the still-emerging marijuana industry in the region.

At least three dozen marijuana cultivation operations have been burnt out completely or withstood damage from smoke and ash possibly tainted with toxic chemicals like benzene. And unlike the thousands of homeowners whose houses and personal effects were reduced to ash, most cannabis businesses did not have any kind of insurance coverage.

“We’ve lost millions of dollars of product for sure,” Ned Fussell, CEO of Santa Rosa-based CannaCraft, one of the state’s biggest producers of cannabis oil and vape-pen cartridges told Marketplace. “And we have no insurance.”

Most reporting on this situation has repeated a similar line: marijuana businesses aren’t eligible for insurance covering their crops, their harvests, their equipment and their buildings. That’s not wholly true.

It’s not entirely accurate to say that marijuana growers can’t get insurance. They can. It’s just not very good — and it’s not necessarily affordable. That’s not the insurance companies’ fault — and it’s not the federal government’s fault, either. Not directly.

Before the fire, some measure of coverage was available to marijuana businesses, but it was limited and it was expensive, and it wasn’t available from any of the major commercial carriers active on the state’s regulated insurance marketplace — obvious problems brought up by California state Insurance Commissioner Dave Jones numerous times before the blaze. (Warning: insurance wonkiness ahead.)

As Jones noted in June, the coverage that was available was bought on what’s called the “surplus-line market,” an insurance exchange for high-risk ventures already rejected for coverage by mainstream, major carriers.

This was a known problem and one state authorities and the marijuana industry were both trying to correct — to no avail.

For months, Jones has been publicly exhorting carriers to enter the state-regulated insurance marketplace and cover marijuana, and has gone to great lengths to do so.

He’s organized tours of weed businesses for insurance executives. He’s reminded them than cannabis is a $6 billion business now, and could be a $25 billion business in four or five years. There are great gobs of money to be made, Jones is saying to anyone who will listen.

But then and now, major insurance companies have declined.

“Insurance companies are conservative in nature,” Los Angeles-based attorney Ian Stewart explained to The Cannifornian at the time. “Before entering any new market, they want to have the law of large numbers on their side, meaning they are able to study the trends and loss ratios of the different classes of business in the industry. This way they establish pricing models to rate the business according to the risk while still remaining profitable.”

Put another way: The cannabis sector wanted insurance. And the state’s regulated insurance marketplace, which oversees and sets ground rules for policies covering Californians’ cars, homes, lives, boats — you name it, welcomed the largest insurance companies and others to underwrite marijuana operations, but it was the insurance industry who decided weed was too costly, too difficult or too new to underwrite — a negative declaration never made officially, but made collectively.

Then the fires came, a worst-case scenario that made the scope of the problem obvious — if not its causes.

Jones believes that marijuana operations can be insured in the same way he convinced auto insurance companies to start writing policies for Uber and Lyft drivers. Maybe he’s right — but he’s yet to make an argument compelling enough to make the first big firm take that first giant step.

TELL US, do you think insurance companies should support cannabis companies?