Rapidly changinglegislation is creating challenges for insurers when determiningunderwriting and coverage risks around the globe. (Photo:Shutterstock)

Cannabis. Marijuana. Pot. Not only is it known by a wide varietyof names, but it's also subject to an equally wide variety ofregulations, which vary significantly from one region to another.With legislation surrounding its production, distribution, sale andpossession changing rapidly, insurers have the difficult task ofassessing not only the physical and business-related risks ofcannabis-associated underwriting but also the legal implications.Following, we examine the current legal environment — andassociated insurance implications — in Canada, the U.S. and U.K.,to see what the laws currently state, and how the insuranceindustry is responding accordingly.

Canada

The Cannabis Act, which came into force on October 17,2018, is Canadian federal legislation which legalizes therecreational use of cannabis in every province in Canada. It putinto place a new, strict framework for controlling the production,distribution, sale and possession of cannabis in Canada.

Each province and territory has its own rules for cannabis,including determining how cannabis is distributed and sold withinits jurisdiction. The provinces make law with regard to legalminimum age, where stores are located and how stores are operated,where adults can buy it, where adults can use it, and how muchadults can possess.

At this time, it is unlawful to sell cannabis-infused productssuch as beverages and edibles. However, it is anticipated that thesale of cannabis-infused beverages and edibles will become legal inlate-2019. Beverage companies are already in the midst ofdiscussions with Canadian cannabis producers to develop beveragesthat are infused with cannabidiol, commonly referred to as"CBD".

There are a number of issues to note when insuring cannabisrisks in Canada. For example, with respect to personal linesinsurance, will cannabis plants be considered "personal property"or will claims for plant theft and damage fall under the "tree,shrub, and plant" portions of a homeowners policy? Personalcultivation is a peril that is currently excluded in a standardhomeowners policy and can no longer be covered by the "criminalactivity" exclusion. In-home cannabis production comes withinherent risks, which can result in increased water consumption ordamage, mold and fire damage claims.

Cannabis products present interesting product-liabilityinsurance questions since the effects of cannabis are not uniformnor widely-known. Cannabis is excluded under the CanadaConsumer Product Safety Act. While producers and processersmust be licensed and appoint quality-assurance persons to testcannabis products, there may be health and behavior hazards thathave yet to present themselves until widespread consumption and itseffects are ascertained.

With regard to commercial insurance, there are over 100 licensedcannabis producers in Canada. Producers require specializedproperty and equipment. How will plants and finished products betreated in insurance coverage? In addition, the transportation ofcannabis creates the potential for loss exposure with cannabiscurrently being transported directly from licensed producers to theend user by Canada Post, or private courier companies. There is apotential for increased risk of theft and damage to the productwhile in transit. Specialized cargo coverage will be required.

Canadian consumers must be wary of their personal informationbeing accessed through cyber-attacks as cannabis companies may faceprivacy breaches. The Ontario Cannabis Store has already suffered aprivacy breach in which the company's delivery tracking tool wasused to gain access to the personal information of 4,500customers.

Ascannabis is legalized across the globe, the legal issues vary fromcountry to country and sometimes from one state to another. (Photo:Shutterstock)

United States

In the United States, the legal landscape when it comes tocannabis reflects a federal-state divide. Though federal lawcriminalizes even the possession of marijuana and considers thesubstance highly addictive and lacking in medicinal properties,many of the states have decriminalized marijuana, and almost allstates have legislatively approved marijuana for medicinal use.

Banks and credit-card companies have been wary of providingservices to businesses dealing in cannabis for fear of runningafoul of money-laundering laws and banking regulations, however,there are fewer concerns for insurers. Indeed, in California — thelargest state in the union — the state's insurance commissioner hasactively recruited insurers to begin issuing insurance policiesspecially approved for cannabis growers and retailers. Today, atleast five different California-admitted insurance carriers areoffering policies specifically designed for the needs of cannabisbusinesses.

As of 2019, almost half of the 50 U.S. states have eitherlegalized or decriminalized marijuana, andalmost all have permitted its medicinal use. Possession andcommercial sale of marijuana have been deemed legal in nine U.S.states, and by the end of 2019, almost one-quarter of Americanswill be able to legally purchase marijuana in their home state.Other than Idaho, Nebraska, and South Dakota, every state hasrecognized marijuana's medicinal benefits and legalized cannabis or CBD oil in some form.

The distribution and even possession of marijuana is stilltechnically a crime under federal law. But with state and federallegislators and even federal courts beginning to recognize theshift toward nationwide legalization of marijuana, insurers havebegun to issue policies specifically designed to cover risks forcannabis growers and retailers. California, in particular, appearsto be a ripe area for insurers. With an estimated population of 40million, California is the largest state in the country and thefifth largest economy in the world by GDP. Some analysts predictannual sales of $6 to $7 billion in annual cannabis sales, andlegislators are currently mulling reducing the 15% sales tax uponcannabis sales to 11%.

In 2017, California's insurance commissioner, Dave Jones,launched an initiative to encourage commercial insurance companiesto write insurance designed for the cannabis industry. In October2017, he held a first-in-the-nation public hearing to identifyinsurance gaps faced by the cannabis industry. Since that time,California's Department of Insurance has approved cannabisindustry-targeted insurance policies and programs including aproduct-liability and product-recall program, lessor's riskcoverage, workers' compensation insurance, and surety bondprograms.

Today, admitted insurers offering cannabis-industry-focusedprograms include North River Insurance Company, United States FireInsurance Company, White Pine Insurance Company, Golden BearInsurance Company, California Mutual Insurance Company, ContinentalHeritage Insurance Company, and Atlas General Insurance Services.Furthermore, the commissioner has approved the American Associationof Insurance Services' Cannabis Business Owners Policy, whichprovides a package policy containing both property and liabilitycoverage for qualifying California cannabis dispensaries, storagefacilities, distributors, processors, manufacturers, and otherbusinesses participating in or supporting the California cannabisindustry.

United Kingdom

Following public outcry over the cases of two children withsevere epilepsy who were unable to receive cannabis oil in theU.K., the government legalized the use of medicinal cannabis as of November 1, 2018. However, the production and possessionof cannabis for recreational use remains illegal.

This, it seems, creates a dichotomy for U.K. underwriters. TheU.K.'s money laundering laws are found in sections 327 to 329 ofthe Proceeds of Crime Act 2002 (POCA), which criminalize doingvirtually anything with criminal property.

Criminal property is property which constitutes or represents aperson's benefit from criminal conduct if one knows or suspectsthat it is so (s. 340(3)). Criminal conduct is conduct which wouldconstitute an offense in any part of the U.K. if it occurred there(s. 340(2)).

Cannabis production remains a criminal offense in the U.K.unless specifically authorized for medicinal purposes by a license.Plainly, the U.K. licensing regime does not apply abroad, socannabis production abroad cannot, by definition, be authorized bythe Secretary of State. POCA doesn't provide a solution to thisissue, but it is hoped that law enforcement agencies in the U.K.would take a common sense approach to investments in locallyregulated medicinal cannabis businesses abroad.

Investing in cannabis production for recreational use abroad ismore problematic because the production, supply and possession ofcannabis for personal use remains "criminal conduct" for thepurposes of POCA. Any property that represents a benefit from thecriminal conduct is, in turn, likely to be criminal property.

A U.K. business could make an "authorized disclosure" to theNational Crime Agency before dealing with the fruits of an overseascannabis business, but this only provides a defense in relation toa specific act or transaction, rather than carte blanche.Lloyd's has taken the view that writing Canadian cannabis risksdoes not amount to an offense under s. 328 POCA. But until theNational Crime Agency or other authorities provide stronger comfortto businesses in the U.K., the issue will remain a concern.

Securing coverage from key insurance markets will continue to beproblematic. While fully unregulated possession and distribution ofmarijuana may never happen, insurers must understand the legal andrisk management implications. With legislation changing rapidly,insurers have the difficult task of determining the impact onunderwriting and responding to these issues appropriately.

Aaron J. Sussman ([email protected]), a senior associate in Clyde& Co's Los Angeles Office, represents insurers in resolving andlitigating disputes arising from first- and third-party insurancecoverage. Charles Kuhn ([email protected]), a partner in Clyde &Co's London office, specializes in defending corporations andindividuals in complex financial markets and white-collar crimecases. Keith Geurts ([email protected]) is the head of Canada'sAnti-Corruption group at Clyde & Co Canada, leading aspecialized group of lawyers whose practices involve regulatory,criminal and quasi-criminal matters.

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